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for income-producing real estate include mortgage interest, property tax, repairs and maintenance, legal fees and insurance and management costs.

allows you to deduct a portion of what you paid for a property (excluding the land) from your taxable income, spread over the years of its useful life. The IRS considers useful life to be 27.5 years for residential property.

Beyond deductions, as a real estate investor with rental income, you may be able to avoid paying FICA (Federal Insurance Contributions Act), the 15.3% income tax that funds Social Security and Medicare, on that income. That’s because the IRS considers rental income from investment property (but not from property owned as a business) to be passive and thus exempt from FICA. The distinction between rental income from an investment or a business can be subjective; it’s best to consult a tax professional.¹

Another tax planning strategy is to open a Self-Directed IRA (SDIRA), which works similarly to a regular IRA but lets you invest in assets outside of traditional financial markets, such as in real estate. You can move funds from an existing IRA or 401(k) into an SDIRA without incurring penalties, then use those funds to buy property. While anyone technically can open an SDIRA, these accounts are complex and often involve unregulated investments. Because of the specific rules and potential risks involved, SDIRAs are generally more suitable for experienced investors, and it’s essential to consult with a professional before you employ this strategy.²

Additionally, managing your property investments through a limited liability company (LLC) can simplify tax planning. An LLC allows pass-through taxation, a process by which any gains or losses by the company flow directly to your personal income, meaning they will not be taxed twice. Moreover, with an LLC, you can deduct 20% of the company’s profits from your personal income tax, under a provision of the 2017 tax law called qualified business income (QBI).³

Property investments can also help you optimize estate planning. When you put your real estate investments into a standard living trust, for example, a trustee (such as an adult relative) manages their distribution after your death. Broadly speaking, there are two types of living trusts: a revocable trust can be changed by you, at any time, and an irrevocable trust that cannot. All trusts avoid probate, which is the public administration of an estate and costs time and money. An additional advantage of an irrevocable trust is that your beneficiaries will avoid estate tax on their inheritance.

Another option is a family limited partnership, which gradually transfers ownership of your investment properties to family members during your lifetime. You retain general partner status, which allows you to oversee periodic tax-advantaged distributions to your heirs. There are also estate tax benefits, as the value of your property is calculated at the time you create the partnership and will not include future gains.

Keep in mind that trusts and partnerships are complex solutions that require the help of financial and legal professionals.

Selling investment property can trigger a big tax bill for capital gains, up to 23.8% depending on your income. And your heirs could be faced with steep estate taxes on your real estate holdings. Fortunately, the IRS provides some relief in both cases, as long as you plan carefully.

If you sell investment property, you can use what’s called a 1031 exchange to defer taxes on those gains. This IRS rule allows you to postpone taxes by reinvesting your sale proceeds in a similar investment property, provided you comply with the IRS timeline and other criteria.⁴

When it comes to estate tax planning, the IRS uses a rule called stepped-up basis. This rule values your real estate holdings at their current value at the time of your passing, regardless of what you originally paid. Should your heirs sell those investments, they would only pay inheritance tax on any gains since your death.

With savvy planning, you can make real estate a tax-efficient and profitable piece of your portfolio, with many benefits passed on to your heirs. An experienced financial advisor who takes the time to understand your situation and your goals can be a valuable asset and source of guidance along the way.