Exploring Tax Deferral Strategies for Rental Property Investments

A key downside in rental property investments is the depreciation recapture tax incurred upon property sale. This tax is akin to capital gain tax but is usually lower than the ordinary income tax rate. However, various deferral methods can mitigate this tax, such as a 1031 exchange or qualified opportunity zones. The latter, established with the Tax Cuts and Jobs Act, offers the opportunity to defer or eliminate capital gains tax by investing in designated zones to spur economic growth. Additionally, offsetting depreciation recapture tax with deductions from buying new properties in the same year is a viable strategy.