Real Estate Tax Services

Real estate is one of the most tax-advantaged investment classes in the US — but only if you structure it correctly. Depreciation deductions, 1031 exchanges, passive activity rules, and the interaction between New York City and state taxes create a complex web that generic tax software cannot navigate. Myung Keon Kim CPA serves real estate investors, landlords, and developers in Queens, Brooklyn, Manhattan, and the greater New York area.

Rental Property Reporting — Schedule E

Rental income and expenses are reported on Schedule E (Supplemental Income and Loss), which flows to your Form 1040. You must report all rental income received — including advance rent, security deposits applied to rent, and services rendered in lieu of rent. Deductible expenses include mortgage interest, property taxes, insurance, repairs and maintenance, property management fees, advertising, legal fees, utilities paid by the landlord, and depreciation. Capital improvements (replacing a roof, adding a room, installing new HVAC) are not immediately deductible — they must be capitalized and depreciated.

Passive Activity Rules and the $25,000 Allowance

Rental real estate losses are generally considered passive under IRC Section 469 and can only offset other passive income. However, there is a special allowance: if you actively participate in managing your rental property and your modified adjusted gross income (MAGI) is below $100,000, you can deduct up to $25,000 of rental losses against non-passive income. This allowance phases out between $100,000 and $150,000 of MAGI. Above $150,000, suspended passive losses accumulate and can only be used against passive income or released when you dispose of the property in a fully taxable transaction.

Planning around passive activity rules involves timing dispositions, pairing losses with passive income, and evaluating real estate professional status if your investment activity is significant enough to make the 750-hour test achievable.

1031 Exchanges — Deferring Capital Gains

A properly executed 1031 exchange allows you to sell an investment property and defer all federal capital gains tax by rolling the proceeds into replacement property of equal or greater value. The tax deferral can be indefinite if you continue exchanging — and upon death, your heirs receive a stepped-up basis that eliminates the deferred gain entirely under current law.

Critical requirements: you must close on the relinquished property before the exchange clock starts, a qualified intermediary must hold the proceeds (you cannot receive them), you must identify replacement property in writing within 45 calendar days (not business days), and you must close within 180 days or the due date of your return (including extensions), whichever is earlier. Like-kind means any real property held for investment or business purposes — you can exchange a single-family rental for an apartment building, or a commercial property for raw land.

Depreciation — MACRS and Cost Segregation

Every real estate investor's best friend is depreciation — a non-cash deduction that reduces taxable income without reducing cash flow. Residential rental property depreciates over 27.5 years; commercial property over 39 years. On a $500,000 residential building (land excluded), the annual depreciation deduction is approximately $18,182 per year.

Cost segregation accelerates this dramatically. An engineering-based cost segregation study identifies building components that qualify for shorter depreciation lives — 5-year property (carpeting, appliances), 7-year property (furniture and fixtures), and 15-year property (land improvements like parking lots and landscaping). On a $1 million building, cost segregation can shift $150,000–$300,000 of cost into 5–15 year property, with bonus depreciation on top. The result is significantly larger deductions in the first few years of ownership, often eliminating rental income tax entirely and creating passive losses to shelter other passive income.

Net Investment Income Tax (NIIT)

The 3.8% Net Investment Income Tax applies to the lesser of your net investment income or the amount by which your MAGI exceeds $200,000 (single) or $250,000 (married filing jointly). Net investment income includes rental income, capital gains from property sales, dividends, and interest. The NIIT is separate from the regular capital gains rate, meaning that a high-income taxpayer selling investment property may owe federal tax at effective rates of 23.8% on long-term capital gains (20% + 3.8%) plus state and NYC tax — potentially exceeding 33% combined. This makes 1031 exchanges and installment sales even more valuable for high-income New York investors.

NYC and NYS Transfer Taxes

New York State imposes a real estate transfer tax of 0.4% of the consideration under Tax Law §1402. Within New York City that rate rises to 0.65% where residential consideration reaches $3 million, or $2 million for any other property. New York City separately imposes its Real Property Transfer Tax (RPTT) at rates ranging from 1% to 2.625% depending on the property type and price. These transfer taxes are borne by the seller and are deductible as a selling expense in computing gain — but the timing and allocation matter when the sale is structured as part of a 1031 exchange.

Separately — and paid by the buyer, not the seller — New York imposes a "mansion tax" on residential purchases. Tax Law §1402-a applies 1% statewide once consideration reaches $1,000,000. Within New York City, §1402-b adds a supplemental tax beginning at $2,000,000 and rising by bracket to 2.9% above $25,000,000, so the combined mansion tax reaches 3.9% at the top. It is a frequent and expensive surprise for buyers who budgeted only for the seller-side transfer taxes, and it is added to the property's basis rather than deducted.

Foreign Investors and FIRPTA

Foreign nationals investing in New York real estate face FIRPTA withholding when they sell, plus the requirement to file a US tax return reporting the gain. As a Korean national or visa holder who owns US real property, we help you plan the acquisition structure (direct ownership vs. entity), ensure proper ITIN or EIN registration, and prepare the US return that applies your actual tax rate and recaptures the withheld amount. Planning before acquisition — including whether treaty provisions reduce your effective rate — is always more valuable than cleaning up after the fact.

Frequently Asked Questions

What is a 1031 exchange and how does it work?

A 1031 exchange (named after IRC Section 1031) allows you to defer capital gains taxes when you sell investment real estate by reinvesting the proceeds into a like-kind property. The rules are strict: you must identify replacement property within 45 days of the sale and close on it within 180 days. The replacement property must be of equal or greater value, and you must use a qualified intermediary (QI) to hold the proceeds — you cannot touch the money. Gain deferral is not elimination; when you eventually sell the replacement property without another exchange, you recognize the deferred gain. New York conforms to federal 1031 rules for state income tax purposes.

Am I a real estate professional for tax purposes?

Real estate professional (REP) status under IRC Section 469(c)(7) allows you to treat rental real estate losses as non-passive, meaning they can offset your W-2 wages, business income, or other active income — not just passive income. To qualify, you must spend more than 750 hours per year in real estate activities AND real estate must be more than 50% of your total personal services time for the year. This is a high bar — a full-time employee cannot qualify unless their spouse meets the test, which has its own requirements. REP status is one of the most litigated areas in tax law; documentation through a contemporaneous time log is essential.

How does depreciation work for rental property?

Residential rental property is depreciated over 27.5 years using the straight-line method under MACRS. Commercial real estate uses a 39-year recovery period. The land portion of the purchase price is not depreciable. Depreciation reduces your taxable rental income each year, but creates a depreciation recapture obligation when you sell — the accumulated depreciation is taxed at 25% (unrecaptured Section 1250 gain). Cost segregation studies can accelerate depreciation by reclassifying components of the building — flooring, lighting, electrical, plumbing — to 5-year, 7-year, or 15-year property, front-loading deductions and improving cash flow.

What is FIRPTA and does it affect foreign buyers or sellers?

FIRPTA (Foreign Investment in Real Property Tax Act) requires buyers of US real property from foreign sellers to withhold 15% of the gross sales price and remit it to the IRS. This is a withholding mechanism, not a tax itself — the foreign seller files a US tax return and the withheld amount is credited against their actual liability. If the property is sold for $1M or less and the buyer intends to use it as a residence, the withholding rate drops to 10%. Foreign sellers can apply to the IRS for a withholding certificate to reduce the amount withheld if their actual tax liability will be less than 15% of the gross price. New York also has its own withholding requirement for nonresident sellers.