Is a 1031 exchange worth the complexity?

For most investment property sales, absolutely. Deferring $100,000+ in capital gains and depreciation recapture tax allows you to reinvest the full proceeds and compound returns over time. The complexity is manageable with experienced counsel.

Can I do a 1031 exchange on my primary residence?

No — 1031 exchanges apply only to investment or business property. However, Section 121 provides a separate exclusion of up to $500,000 in gain on primary residence sales. In some cases, properties that have been both investment and personal use can benefit from both provisions.

What properties qualify for cost segregation?

Any commercial property, rental property, or building used in a trade or business. Properties purchased, constructed, or renovated in the current or recent years benefit most from cost segregation due to bonus depreciation rules.

How do opportunity zones work in 2026?

You can still invest capital gains in qualified opportunity zone funds to defer recognition. The original deferral benefit (basis step-up) has partially expired, but the exclusion of gain on the opportunity zone investment itself remains available for investments held 10+ years.

Should both spouses be involved in real estate for REPS?

Only one spouse needs to qualify as a real estate professional. However, both spouses' real estate activities can be counted on a joint return if the qualifying spouse materially participates in the rental activities.

Do you work with out-of-state real estate investors?

Yes. We represent real estate investors with properties across the country. While we're based in San Diego, real estate tax strategy applies regardless of where the property is located. We coordinate with local counsel when state-specific issues arise.

Tax Strategy

Real Estate & Investment Tax Strategy
Build Wealth. Keep It.

Real estate and investment income are taxed differently — and the strategies for minimizing that tax are specialized. We help investors and property owners keep more of their returns.

Sam Brotman, J.D., LL.M.|Last updated April 2026

Key Takeaway

Real estate investors who structure their portfolios for tax efficiency — through cost segregation, 1031 exchanges, opportunity zones, and entity planning — keep significantly more of their investment returns.

Real Estate Investors Pay Too Much in Tax Because They Don't Plan.

Between depreciation recapture, capital gains, passive activity rules, and the 3.8% Net Investment Income Tax, real estate investors face a complex web of tax obligations. Without proper planning, a profitable investment can lose a significant portion of its returns to taxes.

The tax code provides powerful tools for real estate investors — 1031 exchanges, cost segregation, opportunity zones, and real estate professional status — but each requires careful planning and legal implementation to be used effectively.

We work with real estate investors, developers, and portfolio managers to structure acquisitions, operations, and dispositions for maximum tax efficiency. Every decision — from entity structure to depreciation method to exit strategy — has tax consequences we help you optimize.

From Our Practice

In our practice, we've structured real estate portfolios for investors holding $10M to $100M+ in property, implementing cost segregation, 1031 exchanges, opportunity zone investments, and entity restructuring to maximize after-tax returns. The tax strategy should drive the investment structure — not the other way around.

What We Do

Real Estate Tax Services

1031 Exchanges

Defer capital gains and depreciation recapture on property sales by exchanging into like-kind replacement property. We structure exchanges that meet all IRS timing and identification requirements.

Cost Segregation

Accelerate depreciation by reclassifying building components into shorter-lived asset categories. Our cost segregation analyses typically generate first-year deductions of 20-40% of the purchase price.

Opportunity Zone Investments

Invest capital gains in qualified opportunity zones to defer, reduce, and potentially eliminate tax on appreciation. We identify qualifying investments and structure compliant deals.

Real Estate Professional Status

Qualifying as a real estate professional unlocks the ability to use real estate losses against ordinary income. We help you meet the requirements and document your hours.

Entity Structuring

LLC vs. LP vs. S-Corp for real estate holdings — the right entity structure depends on liability protection, tax treatment, and estate planning goals. We design structures optimized for all three.

Disposition Planning

When it's time to sell, we plan the exit — 1031 exchange, installment sale, charitable remainder trust, or outright sale — to minimize your tax bill.

How It Works

Real Estate Tax Strategy: Explained

How does a 1031 exchange work?

Section 1031 allows you to defer all capital gains and depreciation recapture when you sell investment property and reinvest the proceeds in like-kind replacement property. You have 45 days to identify replacement properties and 180 days to close — strict deadlines that require advance planning.

We structure 1031 exchanges from start to finish, ensuring compliance with all IRS requirements and coordinating with qualified intermediaries.

What is cost segregation and is it worth it?

Cost segregation reclassifies components of a building (electrical, plumbing, fixtures, paving) from 27.5 or 39-year depreciation to 5, 7, or 15-year categories. Combined with bonus depreciation, this can generate massive first-year deductions.

For a $1M commercial property, cost segregation typically generates $200,000-$400,000 in accelerated depreciation — resulting in $60,000-$120,000+ in first-year tax savings depending on your bracket. It's almost always worth it.

What is real estate professional status?

Normally, rental income is passive — losses can only offset other passive income. But if you qualify as a real estate professional (750+ hours and more than half your working time in real estate activities), you can deduct rental losses against your ordinary income — including W-2 wages and business income.

This status is extremely valuable for high-income households where one spouse manages real estate full-time. We help you meet the requirements and maintain documentation that survives IRS audit.

Should I use an LLC for my rental properties?

Almost always yes — but the specific structure matters. Single-member LLCs for individual properties provide liability protection. Multi-member LLCs or limited partnerships can facilitate co-ownership and estate planning. Holding companies can centralize management and protect equity across a portfolio.

We design entity structures that balance tax efficiency, liability protection, and operational simplicity.

Talk to a Tax Attorney

Not Sure Where You Stand?

Schedule a free 15-minute call. We'll assess your situation, outline your options, and tell you exactly what to expect — no obligation.

Book Your Free Call

or call (619) 378-3138

Why Brotman Law

Tax Strategy Built for Real Estate Investors

Real Estate Focus

Real estate taxation is a core practice area. We understand depreciation, passive activity rules, and the full range of investor strategies.

Attorney-Led Implementation

1031 exchanges, entity formation, and operating agreements require legal execution. We handle the entire process.

Acquisition to Disposition

We plan tax strategy from the day you buy through the day you sell — optimizing every phase of ownership.

Audit-Ready Documentation

Every strategy we implement is documented to withstand IRS examination. We've defended real estate investors in dozens of audits.

Portfolio-Level Thinking

We don't optimize one property — we optimize your entire portfolio for maximum after-tax returns.

Developer Experience

We've worked with developers on ground-up construction, conversion projects, and large-scale commercial transactions across California.

Learn More

Real Estate Tax Guides & Resources

Free Guide

Real Estate & Investment Tax Strategy
Build Wealth. Keep It.

Real Estate Investors Pay Too Much in Tax Because They Don't Plan.