Most real estate investors don't lose money to bad deals — they lose it to tax items they didn't know to look for. The checklist below covers the key areas we review with every client at PMD CPAs. Use it as a starting point for your own annual review, or bring it to your next CPA conversation.
Depreciation
Depreciation is the foundation of real estate tax planning. Every year, you should confirm that your depreciation schedules are current and accurate across all properties. This means verifying that the correct depreciable basis was established at acquisition, that any improvements have been added to the schedule, and that you're capturing all available deductions.
For investors who acquired properties in the past few years, it's also worth asking whether a cost segregation study makes sense. Cost segregation accelerates depreciation by reclassifying components of a building — flooring, fixtures, land improvements — into shorter recovery periods. The upfront deduction can be substantial, and the analysis often pays for itself many times over.
Checklist items
- Depreciation schedules reviewed and updated for all properties
- Improvements and capital expenditures added to the schedule
- Cost segregation study considered for properties acquired in the last 3 years
- Bonus depreciation elections reviewed for the current tax year
Passive Activity Losses
Passive activity loss rules are one of the most misunderstood areas of real estate taxation. In general, losses from rental activities can only offset passive income — not wages or business income. But there are important exceptions, and understanding them can dramatically change your tax picture.
Each year, you should confirm that passive loss carryforwards are being tracked and applied correctly. If you have multiple properties, grouping elections may allow you to aggregate activities and unlock losses that would otherwise be suspended. And if you or your spouse qualifies as a Real Estate Professional (more on that below), the passive loss limitation disappears entirely.
Checklist items
- Passive loss carryforwards tracked and applied against passive income
- Grouping elections reviewed for optimal offset across activities
- Material participation documented for any properties where it applies
- Real Estate Professional Status (REPS) qualification assessed
Entity Structure
As your portfolio grows, entity structure becomes increasingly important — both for liability protection and for tax efficiency. A single-member LLC that made sense for your first property may not be the right structure for a portfolio of ten.
Each year, review whether your current structure still aligns with your goals. Are partnership agreements current? Are income and expense allocations being handled correctly? Is there a case for consolidating entities or separating properties that carry different risk profiles? These are questions worth revisiting annually, not just at formation.
Checklist items
- LLC structure reviewed for each property or portfolio group
- Partnership agreements current and tax-aligned
- Income and expense allocations reviewed for accuracy
- S-Corp vs. partnership analysis completed if self-employment income is a factor
Acquisition and Disposition Planning
The tax consequences of buying or selling a property are often determined long before the transaction closes. If you're planning to sell, the question of whether a 1031 exchange makes sense should be answered months in advance — not the week of closing.
Similarly, if you're acquiring a property, purchase price allocation matters. How the purchase price is divided between land, building, and personal property affects your depreciation schedule for years to come. Getting this right at closing is far easier than trying to correct it later.
Checklist items
- 1031 exchange opportunities identified before any sale is finalized
- Purchase price allocation reviewed at acquisition
- Installment sale vs. full sale analysis completed where applicable
- Seller financing tax implications modeled if relevant
State and Local Taxes
Investors with properties in multiple states face a layer of complexity that purely local investors don't. Each state has its own rules around depreciation, passive losses, and entity taxation — and they don't always conform to federal treatment.
Even if all your properties are in Michigan, local transfer taxes, filing requirements, and any recent legislative changes are worth a quick annual review. State and local tax exposure is easy to overlook and can result in unexpected liabilities if not monitored.
Checklist items
- State nexus reviewed for any out-of-state properties
- State-specific depreciation differences accounted for
- Local transfer taxes and filing requirements confirmed
- Any recent state legislative changes reviewed for impact
Free consultation
Want to walk through this checklist together?
Schedule a free consultation with PMD CPAs. We'll review your portfolio against this checklist and identify any gaps.
Book a consultation