Real Estate Tax Basics for High Earners Who Keep Less Every Year
You earn more every year and keep less of it. Real estate gets some of the most favorable treatment in the tax code, and passive investors can share in it. L5 Legacy Capital, a veteran-led firm in Frisco, Texas, investing in Texas and Louisiana, explains depreciation, cost segregation, K-1s, passive losses and taxes at sale. Bring it to your CPA.
By Byron Kizzie, Managing Partner · Updated October 2026
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Why do high earners keep less every year?
Because wages and practice income are taxed as ordinary income, up to the 37% top federal rate plus payroll taxes, with few ways to offset them. Investment income can add the 3.8% net investment income tax on top.
If you're a physician, a dentist or a practice owner, you know the pattern. Every April, a bigger share of your hardest work goes out the door. Maxing the 401(k) and giving to charity only go so far. Business owners feel it too, after a strong year or a sale.
Real estate owners play by different rules. The tax code rewards owning income-producing property in ways it doesn't reward a salary or a stock portfolio. Here's the plain version.
Why does real estate get favorable tax treatment?
Because the tax code lets owners deduct the wear on a building, called depreciation, even while the property may be rising in value.
Because it's a non-cash deduction, it can offset some or all of the cash a property distributes. Investors may receive distributions while reporting little or no taxable income from the investment in the early years.
The core tax concepts passive investors meet
What is depreciation?
Depreciation spreads the cost of a building (not the land) over a set tax life and deducts a portion each year:
- Residential rental property (apartments): 27.5 years
- Nonresidential property (retail, offices, most hotels): 39 years
In a syndication or fund taxed as a partnership, those deductions flow through to limited partners as the operating agreement allocates them, and show up on each investor's K-1.
What is a cost segregation study?
A cost segregation study identifies parts of a property with shorter tax lives, so they can be depreciated faster.
Engineers and tax specialists separate items such as carpeting, fixtures, appliances and furniture (5 or 7 years) and parking lots, landscaping and site work (15 years) from the building. That pulls depreciation into the early years of ownership. Hotels are often prime candidates due to FF&E.
What is bonus depreciation?
Bonus depreciation lets owners deduct a large share of qualifying shorter-life property in the first year instead of over several years.
Under 2025 federal tax law, 100% bonus depreciation is permanently available for qualifying property acquired after January 19, 2025. Paired with cost segregation, it can create significant first-year deductions.
What is a Schedule K-1?
A K-1 is the tax form a partnership sends each investor, reporting their share of income, deductions and credits.
Syndications and private funds are usually taxed as partnerships, so the entity doesn't pay federal tax; investors report their share. K-1s often arrive in March or later, so many investors file an extension. Note: Texas has no personal income tax; Louisiana does.
Can real estate losses offset my W-2 or practice income?
For most passive investors, no. Losses from a passive activity, including those created by depreciation, generally offset only passive income, such as income from other real estate investments.
Unused passive losses carry forward to future years and are generally released when you dispose of your interest in a fully taxable sale. Real estate professional status can change this, but requires over 750 hours and more than half of working time in real property trades.
Even without it, passive deductions can shelter the cash the investment distributes. For a high earner, that matters.
What happens at sale?
At sale, depreciation taken is generally "recaptured" and taxed, and remaining gain is generally taxed as long-term capital gain.
Depreciation recapture on real property is taxed at up to 25%; recapture on shorter-life personal property is taxed at ordinary rates. Remaining gain on property held longer than one year is taxed at capital gain rates.
That's why the exit choice matters. A refinance can return capital without a sale; a sale realizes gain and releases suspended passive losses. Plan it from day one.
How does L5 think about taxes?
We plan the exit before we buy, and that plan includes what investors keep, not just what a project earns.
Depreciation Built In
Boutique hotels and value-add properties, our core focus, are often strong cost segregation candidates.
Exit Planning
"We know when we purchase it how we're going to leave it." — Byron Kizzie. Refinance or sale is weighed for tax efficiency.
K-1s & Your CPA
Every fund investor receives a Schedule K-1, and we welcome your CPA's questions directly.
Our Money In First
We invest alongside you, so we live with the exact same tax results you do.
Should I talk with my CPA before investing?
Yes. Real estate's tax benefits are real, but they depend on your income, your other investments, how you hold the investment and the law in effect each year. Bring your CPA in early. Private investments take time to fund, so if this tax year matters to you, start the conversation well before December. We're happy to talk with your CPA directly.
What's your next step?
- 1.Served? → Get the Veteran's Guide
- 2.Watch the Webinar: Byron covers tax basics alongside how deals are built. → Watch Webinar
- 3.Get Due Diligence Checklist: Question 20 is about your K-1. → Get Checklist
- 4.Talk with Byron, and bring your CPA.
Frequently Asked Questions
Will investing in private real estate reduce my taxes?
It may create deductions that offset income from the investment and other passive income; whether it lowers your overall tax depends on your situation. Talk with your CPA before you invest.
Can real estate losses offset my W-2 or practice income?
For most passive investors, no. Passive losses generally offset passive income only, unless you or your spouse qualify as a real estate professional and meet the related rules.
When will I get my K-1?
Partnership K-1s commonly arrive in March or later, so many private real estate investors file an extension. Plan for that with your CPA.
Is a hotel depreciated differently from apartments?
Yes. Most hotels are nonresidential property depreciated over 39 years, apartments over 27.5 years, and hotels' furniture and equipment often qualify for much faster depreciation through cost segregation.