3 Must-Know Real Estate Tax Benefits Investors Can Use in 2025

Real estate investors are seeing big returns as property values surge across the country—but those profits often come with significant tax obligations. Fortunately, there are legitimate ways to hold onto more of your earnings. In a recent episode of The Money Guy Show, the hosts broke down a few key strategies that real estate investors can use to reduce their tax bills and stay ahead of the game.

Here are three major tax benefits you should know about if you're investing in real estate:

1. Pay Less Tax with Long-Term Capital Gains Rates

Not all profits are taxed equally. If you sell a property you've owned for less than a year, those gains are taxed as ordinary income—which could mean losing up to 37% of your profit, depending on your tax bracket. But if you hold the property for more than a year, your gains may qualify for long-term capital gains tax rates, which range from 0% to 20%.

For example, let’s say you bought a rental property for $300,000 and sold it two years later for $400,000. If you fall into the 15% long-term capital gains bracket, you’d pay $15,000 in taxes instead of up to $37,000 at the highest income rate—a savings of $22,000.

Holding your investment a little longer can make a big difference come tax season. And if you fall into a lower income bracket, you may not owe any capital gains tax at all. That’s a major advantage for investors who plan strategically.

2. Use a 1031 Exchange to Keep Growing Without Paying Taxes Right Away

The 1031 exchange is one of the most powerful tools available to real estate investors. It lets you sell one investment property and reinvest the proceeds into another similar property—without paying capital gains taxes on the first sale.

This strategy lets you “defer” taxes, meaning you don’t have to pay them until you eventually sell a property and don’t replace it. Many experienced investors use 1031 exchanges to keep upgrading to larger or more profitable properties without taking a tax hit each time.

Here’s a simplified example: You sell a rental property for $500,000 and reinvest the proceeds into a $600,000 property. If the exchange is done correctly and meets IRS guidelines, you won’t owe taxes on the gains from the $500,000 sale.

But be careful—there are strict rules and deadlines. You must identify the new property within 45 days and close the deal within 180 days. A qualified intermediary is also required to handle the transaction, and both properties must be held for investment purposes (not personal use).

If done right, this strategy can help you snowball your real estate portfolio—tax-deferred.

3. Exclude Up to $500,000 in Profit When Selling Your Primary Residence

If you’re selling your main home—not a rental or investment property—you might qualify for one of the most generous tax breaks out there: the Section 121 exclusion.

Under this IRS rule, you can exclude up to $250,000 in profit from the sale of your home if you’re single, or up to $500,000 if you’re married and filing jointly.

To qualify, you generally need to:

• Own the home for at least 2 of the past 5 years

• Live in the home as your primary residence for at least 2 of the past 5 years

You don’t need to use the years consecutively, and you can rent out the home for part of the time—as long as you meet the ownership and use tests.

This exclusion can save homeowners tens or even hundreds of thousands of dollars, especially in today’s hot housing market where prices have surged in many areas.

Bonus Tips for Real Estate Investors:

• Track Expenses Closely: You may be able to deduct mortgage interest, property taxes, insurance, maintenance, and depreciation from your rental income. That lowers your taxable income and could keep you in a lower tax bracket.

• Use Depreciation Strategically: Real estate allows for depreciation deductions, which can help you reduce your yearly tax liability—even if your property is gaining value in real life.

• Work with a Tax Pro: Real estate tax rules are complex. Partnering with an experienced CPA or tax advisor can help you avoid mistakes and take full advantage of all available benefits.

Smart investing doesn’t stop at buying the right property—it also means understanding how the tax code works in your favor. Whether you’re holding a home long enough to qualify for lower capital gains, using a 1031 exchange to upgrade without penalties, or taking advantage of exclusions when selling your primary residence, these strategies can make a noticeable difference. The more informed your decisions, the better positioned you'll be to grow and protect your real estate profits.

Also Read: How to Use Your 401(k) or IRA for Real Estate Investments Without Breaking the Rules