Real estate investing can be a highly rewarding way to build wealth, but taxes are one area where even experienced investors can stumble. At Tavola Group, we work with investors every day who have fallen into common tax traps, mistakes that could have been avoided with the right guidance.
If you want to protect your profits and make smarter tax decisions, book a free consultation with our team today. We’ll help ensure your real estate investments are both profitable and tax-efficient.
Mistake #1: Forgetting to Claim Depreciation
One of the biggest opportunities for tax savings is depreciation, yet many investors either forget about it or assume it’s optional. Depreciation lets you deduct the cost of your property over time, reducing taxable income without affecting cash flow.
We often see clients who skipped depreciation thinking it wouldn’t make a difference, only to find out later that the IRS assumes they claimed it anyway. To avoid leaving money on the table, always claim depreciation on your rental properties. Using cost segregation studies can accelerate deductions for certain parts of your property, and keeping detailed records of improvements ensures you’re maximizing the benefit.
Mistake #2: Misclassifying Repairs and Improvements
A seemingly small error that can have big consequences is misclassifying repairs versus improvements. Repairs, like fixing a broken faucet or patching a hole, are deductible immediately, while improvements, such as replacing a roof or upgrading a kitchen, must be capitalized and depreciated over time.
We’ve seen investors try to deduct a full renovation as a repair, which can trigger audits or penalties. To prevent this, carefully track all expenses, separate routine maintenance from value-adding upgrades, and consult with a tax professional when in doubt. Correct classification ensures maximum deductions and protects you from compliance issues.
Mistake #3: Ignoring Passive Activity Loss Rules
Many investors are surprised to learn that losses from rental properties can’t always be deducted against other income, like salaries or investment earnings. Passive activity loss rules place limits on these deductions, and misunderstanding them can result in unexpectedly high tax bills.
We help clients understand how their level of involvement and income affects deductions. By strategically planning their activities, increasing active participation, or qualifying as a real estate professional, investors can make sure they’re not leaving money on the table.
Mistake #4: Failing to Plan for Capital Gains Tax
Selling a property without anticipating capital gains tax is another common pitfall. Investors who don’t plan ahead often face large tax bills that erode the profits they worked hard to build.
We guide investors in strategies such as 1031 exchanges to defer taxes and reinvest in new properties. Maintaining meticulous records of improvements also helps reduce taxable gains by increasing your property’s cost basis. Understanding the difference between short-term and long-term capital gains is critical to ensure the right rates are applied.
Mistake #5: Overlooking Self-Employment Tax
Some investors are surprised to learn that active flipping or dealing in real estate may trigger self-employment taxes on top of income taxes. Many assume rental income is always exempt, which isn’t true for dealers or those running a business.
At Tavola Group, we help investors determine their status and structure their business appropriately. Using tools like S-corporations and maintaining accurate documentation of real estate activities can reduce or clarify self-employment obligations, preventing unexpected tax liability.
Mistake #6: Poor Expense Tracking
A surprisingly common mistake is simply failing to track expenses properly. Receipts in shoeboxes or unorganized spreadsheets lead to missed deductions and higher taxes.
We encourage clients to use real estate–specific accounting software, keep digital copies of all receipts and invoices, and review expenses regularly instead of waiting until the end of the year. Diligent expense tracking not only lowers taxes but also gives a clearer picture of property performance.
Mistake #7: Ignoring State and Local Tax Rules
Many investors focus solely on federal taxes and overlook state and local obligations. Different states have unique rules for property taxes, income taxes, and reporting requirements, and failure to consider these can lead to unexpected costs or penalties.
We work with investors to evaluate state and local tax implications before purchasing properties and incorporate these costs into overall ROI calculations. Proactively addressing multi-state filing requirements prevents surprises and keeps investments profitable.
Avoid Mistakes by Partnering with Tavola Group
Taxes are one of the most common areas where real estate investors make costly mistakes. Forgetting depreciation, misclassifying expenses, ignoring passive activity rules, and neglecting proper recordkeeping are just a few of the errors that can reduce profits and create stress.
At Tavola Group, we specialize in helping investors identify these mistakes before they become expensive problems. By partnering with us, you can make smarter, more tax-efficient decisions and maximize your returns. Don’t wait until it’s too late. Schedule a free consultation with Tavola Group today and let us help you avoid costly tax mistakes while keeping your real estate investments on track for long-term success.
