Personal Finance & Estate › Income, gift, estate & real-estate taxes
Real-estate tax rules (depreciation, 1031, property tax)
· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
The special tax playbook for property owners: depreciation, passive-loss limits, 1031 exchanges, recapture and California property tax.
See it on the Personal Finance & Estate map →How it works
Owning a building touches three tax systems. Income tax: rents are taxed after expenses, interest and depreciation, often leaving little taxable income; losses face passive-activity limits. Sale tax: gain splits into depreciation recapture (up to 25%) and capital gain (up to 20%), plus 3.8% NIIT and California's up-to-13.3%, unless deferred by a 1031 exchange. Property tax: Prop 13 sets the bill and Prop 19 limits family transfers. At death, the step-up can erase income tax on gains.
Why it matters for you
Real estate gets some of the tax code's richest breaks, each with a trap; planning a building's sale or inheritance means coordinating all three systems.
Rules, limits and sources (2026)
Internal Revenue Code Secs. 167-168 (depreciation), 469 (passive losses), 1031, 1250 and 1411; California Constitution Article XIII A (Prop 13); IRS Publication 527 on rentals.
Watch out for
Congress periodically proposes trimming 1031 exchanges and the step-up; the 2025 law left both intact, but future changes are unknown.
Inside this (5)
Connections (5)
▸Depreciation & recapture (27.5 / 39 years) is the core of Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Depreciation is the engine of real-estate tax planning: it shelters rental cash flow, creates paper losses that the passive rules limit, lowers basis so sale gains grow, and creates the recapture that 1031 exchanges defer and the step-up at death erases. Most other real-estate rules either limit or release it.
When it applies
Depreciation deductions date to the 1909 corporate tax and 1913 income tax; today's schedules came in 1986 and 1993.
The rule
IRC Secs. 167 and 168 allow it; IRS Publication 527 walks rental owners through it on Schedule E.
Watch out for
How much of a purchase price is land, which can't be depreciated, is a judgment call often disputed in audits.
▸1031 like-kind exchange is a deferral tool in Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Within real-estate tax rules, the 1031 is the main way to sell without paying now: gain and recapture roll into the next property instead of being taxed. It works only for property held for investment or business, and it ties together depreciation, basis and the step-up at death.
When it applies
Available since 1921; limited to real property by the 2017 tax law, effective 2018, and left intact by the 2025 law.
The rule
IRC Sec. 1031 and Treasury regulations define like-kind real property; IRS Form 8824 reports each exchange.
Watch out for
Economists disagree on how much 1031s raise property turnover and prices versus simply deferring tax revenue.
▸Proposition 13 (California property-tax cap) governs property tax in Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Prop 13 is the property-tax side of the playbook: a 1% base rate on an assessed value that rises at most 2% a year until a change in ownership. That makes reassessment risk central whenever a California owner sells, retitles into an LLC or trust, or passes property to heirs.
When it applies
Passed by California voters on June 6, 1978, led by Howard Jarvis and Paul Gann, amid soaring assessments.
The rule
California Constitution Article XIII A and the Revenue and Taxation Code; county assessors and the Board of Equalization apply it.
Watch out for
Whether Prop 13's benefits for long-held commercial property are fair, and how they affect housing and business turnover, is still debated.
▸Proposition 19 (parent–child transfer limits) narrowed family breaks in Real-estate tax rules (depreciation, 1031, property tax)Watch out
How they connect
Prop 19 rewrote a major family exception in California property tax. Children inheriting a rental, commercial building or vacation home now take a market-value assessment, and even the family home keeps its low tax base only if a child moves in, up to an inflation-adjusted cap.
When it applies
California voters approved it in November 2020; the parent-child rules took effect February 16, 2021, applied by the 58 county assessors.
How sure?
California Constitution art. XIII A, sec. 2.1; Board of Equalization guidance and county reassessment records document the change.
Watch out for
Its long-run effect on family ownership, housing turnover and local revenue is still being measured.
▸Passive-loss rules & real estate professional status limit losses in Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Rental losses, often created by depreciation, are passive by default, so they can't shelter wages or portfolio income unless an exception applies. The rules decide when real-estate losses are usable: now (the $25,000 allowance or professional status), against other passive income, or at a taxable sale.
When it applies
Enacted in the Tax Reform Act of 1986 to end 1980s tax-shelter partnerships; many syndications collapsed afterward.
The rule
IRC Sec. 469 and Form 8582; the IRS's Passive Activity Loss Audit Technique Guide focuses heavily on rental claims.
Watch out for
Economists still debate how much the 1986 rules contributed to the late-1980s commercial real-estate crash and savings-and-loan crisis.