Real Estate Year-End Tax Planning Tips

December 31 may feel like an arbitrary date when you're negotiating a real estate deal. For tax purposes, it isn't.

A transaction that closes in December instead of January can affect which tax year recognizes the income or gain, estimated tax needs, depreciation, partnership reporting, and your broader investment strategy.

That doesn't necessarily mean you should delay a good deal. It means that before you sign another closing statement this year, your CPA should probably know what's coming.

Download LMJ's Year-End Real Estate Planning Guide for a practical checklist of the financial and tax questions to review before your final deals of the year.

Why Year-End Real Estate Closings Deserve a Tax Review

Real estate transactions rarely exist in isolation.

A sale may affect your personal tax position. A new acquisition could create depreciation opportunities. A partnership transaction may affect multiple investors. A property in another state could create additional filing requirements.

The right question isn't simply: “How much tax will I owe on this deal?” A better question is: “How does this deal fit into everything else I'm doing this year and next?”

6 Areas to Review

Here are six areas worth reviewing before your next closing.

1. Know the Tax Impact Before You Know the Sale Proceeds

The number on the closing statement isn't necessarily the number that matters for tax planning. Your potential taxable gain can depend on your adjusted tax basis, capital improvements, depreciation previously claimed, transaction costs, ownership structure, and other factors.

That calculation can look very different from the simple difference between what you paid and what you're selling the property for.

Running the numbers before closing gives you time to evaluate the tax consequences and decide whether another strategy makes sense.

Ask your CPA, “What would my estimated federal, state, and local tax exposure be if this transaction closes this year?”

2. Considering a 1031 Exchange? Start Before the Closing

A 1031 exchange can allow qualifying real estate investors to defer recognition of gain when exchanging investment or business real property for qualifying replacement real property.

But timing matters.

For a deferred exchange, the IRS generally requires you to identify replacement property within 45 days after transferring the relinquished property and receive it within 180 days, or by the tax return due date, including extensions if earlier. Waiting until after the sale closes to start thinking about an exchange can create unnecessary problems.

A 1031 exchange also isn't available simply because you're selling something related to real estate. The federal rules generally apply to qualifying real property held for investment or business use, not property held primarily for sale.

Planning point: If a 1031 exchange is even a possibility, discuss it with us before closing.

3. Look at the Next Property, Not Just the One You're Selling

Year-end planning shouldn't stop with the disposition. If you're acquiring property, consider how the acquisition fits into your longer-term tax strategy.

Depending on the property and circumstances, your CPA may want to examine:

• Depreciation and the property's tax basis.
• Whether to evaluate a cost segregation study.
• Planned renovations or capital improvements.
• Financing and ownership structure.
• The timing of placing property in service.
• The expected holding period and exit strategy.

This is particularly important when you're moving from one investment into another. The tax consequences of today's purchase can continue for years.

4. Review Your Partnership and Investor Position

For sponsors, developers, and investors, the property isn't always the complete tax picture.

Partnership income generally passes through to the partners, who may owe tax on their share of income whether or not it was distributed to them.

Before year-end, sponsors and investors should have a clearer picture of expected partnership income, losses, distributions, and potential K-1 implications.

Questions worth discussing include:

• Will investors receive enough cash to cover anticipated tax obligations?
• Could this transaction change expected taxable income for the year?
• Should you consider multiple entities or properties together?
• Could a year-end transaction create an unexpected estimated tax obligation?

5. Don't Ignore State and Local Taxes

NYC real estate professionals and investors often operate well beyond New York City.

You may own property in New Jersey, Connecticut, Florida, or another state. Investors and partners may live in different states. A partnership may generate income across several jurisdictions. That makes state and local tax planning an important part of the transaction.

Before closing, determine whether the deal could create new state filing requirements or change the allocation of income among jurisdictions.

6. Step Back and Look at Your Entire Real Estate Portfolio

Don't evaluate one more closing as “one more closing.” Look at the year as a whole.

• What did you sell?
• What did you acquire?
• Where did you generate gains or losses?
• How much depreciation are you claiming?
• What income is expected from partnerships?
• What transactions are already planned for early next year?
• What changed personally?

For family offices and high-net-worth real estate investors, the final question matters most. Real estate planning may intersect with estate planning, gifting, trusts, succession planning, and family wealth strategies.

A transaction that makes sense for one entity may look different when viewed as part of the family's complete financial picture.

What Should Real Estate Investors Review Before Year-End?

Before your final real estate transactions close, consider reviewing:

• Expected gains and losses from transactions.
• Adjusted tax basis of properties being sold.
• Potential 1031 exchange opportunities.
• New acquisitions and depreciation planning.
• Cost segregation opportunities.
• Partnership income, distributions, and K-1 expectations.
• Estimated federal and state tax payments.
• Multi-state filing exposure.
• Ownership and entity structure.
• Transactions expected during the first quarter of 2027.

The goal isn't to make a deal based solely on taxes. It's to understand the tax consequences while you still have choices.

Download LMJ's Year-End Real Estate Planning Guide for a practical checklist of the financial and tax questions to review before your final deals of the year.

Frequently Asked Questions

Don't Let the Closing Date Make the Tax Decision for You

In real estate, deals move quickly. Tax planning often doesn't. Once December 31 passes, many planning opportunities disappear.

If you have another acquisition, disposition, refinancing, partnership transaction, or major investment decision planned before year-end, give LMJ CPAs an opportunity to review the numbers before the paperwork is final.

This article is intended for general informational purposes and should not be considered tax, investment, or legal advice. Tax strategies depend on individual circumstances.