Real Estate Investment and Tax Planning in a Shifting Market: Live With Kyle Paxton

“The investors who are winning right now are the ones who are planning early, they stay flexible and just treat tax as a piece of the pie.”

– Kyle Paxton, CPA

In this episode, Faith sits down with Kyle Paxton, CPA to discuss what real estate investors need to know about tax planning in today’s market. From cost segregation and bonus depreciation to entity structuring and proactive planning, this conversation covers the most important tax strategies for investors right now.

With rising interest rates, tighter margins and changing legislation, the difference between a reactive and proactive tax strategy has never been more important. Paxton breaks down the biggest mistakes investors are making today and shares practical advice on how to stay ahead, including why cost segregation should be a conversation every year and how the right entity structure can protect your investments as you scale.

Whether you are a seasoned investor or just getting started, this episode offers clear, actionable guidance you can put to work right now.

Resources

1. James Moore Real Estate Industry Services
2. Real Estate Industry Update Playlist
3. Watch This Episode: Real Estate Investment and Tax Planning in a Shifting Market

Full Transcript

[00:02] Faith: Hi everyone and welcome to episode two of the James Moore channel. I am here with Kyle Paxton. Hi Kyle.

[00:08] Kyle Paxton: Hello.

[00:09] Faith: I know you’re busy to be here. Always a pleasure.

[00:12] Kyle Paxton: We were just talking about how busy you are, especially this time of year. So I’m happy to have you on just to kind of pick your brain about some things.

[00:21] Faith: Today we’re talking about tax planning in a shifting market. What real estate investors need to know now. So I’m just going to go through and ask you a few questions and get your expertise on these things. So that should be fun.

[00:33] Kyle Paxton: You’re the one person in my world right now who’s not asking where a tax return is. So I’m very happy to have this conversation.

[00:39] Faith: We actually like talking right now.

[00:41] Kyle Paxton: Yeah, I do. I like talking to you right now.

[00:44] Faith: So Kyle, with rates, legislation and real estate values shifting, what are investors missing right now from a tax perspective?

[00:53] Kyle Paxton: Yeah, we’re seeing this all over, across the board. We’re reacting. And we see this time and time again with our clients in all different environments, all different situations. But really what we work with our clients on, especially in a shifting market, is how do we get from the reactive to the proactive?

[01:12] Kyle Paxton: The kind of issues with that, when you’re reactive in uncertain, shifting markets, small mistakes hurt. They hurt more. Your margins are lower. You’re already kind of on edge. The pain is increased. And so it’s really a good time. When you’re in the middle of that uncertain market, it’s a little too late, but it’s a good reminder to check in on what we talk about all the time. Entity structure, depreciation, how are your estimated tax payments. In the real estate space, that’s a challenge with cash flow in an uncertain market. You just go back to what we know. When is cash available? When do we need it?

[01:50] Kyle Paxton: Taxes. I’ve said on this platform before in a lot of different ways, I never want tax to drive strategy. I want to make sure we’re grounded in economics. But at the same time, tax is a huge lever in strategy. It’s a good time to just reset and check in on everything.

[02:10] Kyle Paxton: Typically what ends up happening is that GPs, real estate investors, whatever form this takes, are rushing to get a deal across the finish line. There’s some sort of pressure and they have to get something done, and the proper front-end work’s not done. Then pain comes up behind that when there’s uncertain tax consequences.

[02:38] Faith: Right. So what are the biggest tax mistakes real estate investors are making today?

[02:43] Kyle Paxton: Yeah. We’re fresh off of, anytime there’s a law change, we’re still kind of in that new One Big Beautiful Bill territory, right? And so typically what we see when these things happen, especially in the age of social media and AI rampant everywhere, there are little snippets of tax advice on what you should be doing right now. I get Instagram screenshots from my clients all the time. Like, why aren’t we doing this? What’s going on with this?

[03:13] Kyle Paxton: In times of significant law change, I find we kind of gravitate towards a few buzzwords that pop up. It’s the few things that the news is running with and you pick up those sound bites. Time and time again I’m having that same conversation with a client.

[03:30] Kyle Paxton: Long-winded setup to say, a lot of this is just around getting back to cash flow. We’re fixating a lot on bonus depreciation. We could save a bunch of tax right now with bonus depreciation. You buy a property, you do a cost segregation, you break it into the small components, you can potentially get a deduction on a large chunk of that property. It can be 30% of the purchase price in year one.

[04:02] Kyle Paxton: That is the sound bite we love, right? 100% bonus depreciation is back in real estate. Everybody runs with that. I have conversations about that every single day. But it doesn’t work. It doesn’t make sense for everybody’s tax. We’re looking at optimizing tax rates across years.

[04:22] Kyle Paxton: People fixate so much on the now. And we are planning with time value of money. I don’t want to discount that. I’d much rather you have your cash now than have your cash later. But would you rather get a 10% deduction this year or a 37% deduction next year? So there’s just playing around with timing of deductions and getting too excited about the buzzwords, I’d say, is something that we see pop up a lot.

[04:52] Kyle Paxton: And then I feel like I talk about this in every single real estate video I do. So people who have watched me before, I’m sorry. But it’s the entity structuring. Every single day, and I’m not exaggerating on these every single days, every single day we have new clients, we have existing clients that haven’t done the front-end work properly, communicated with their CPAs what their intentions are with various entities, and it creates headaches.

[05:22] Kyle Paxton: Just to use an example on someone who’s really doing this right, I had a meeting yesterday with a client who’s going through a complicated 1031 like-kind exchange transaction. They have this thing all set up nice and pretty. We have visuals. Pull the computer up. But this is on day one of the 180-day window of a like-kind exchange.

[05:48] Kyle Paxton: You could argue it’s already late because maybe we could have done this prior to even starting the clock. But we’re still on day one. We have 179 days to get it fixed. Through that conversation, it was apparent quickly, you do not want to do this deal within this entity. You have 30 entities. The one you picked is the wrong one, and here’s the reasons why.

[06:12] Kyle Paxton: A lot of times that stuff just gets lost in the shuffle. We find that our real estate investors are very much focused on the acquisition and financing side and the path of least resistance to get the deal across the finish line and get financed. Again, don’t want to discount the importance, but don’t forget about this other thing and what comes next.

[06:36] Faith: So I’m kind of jumping around with our questions here just because I feel like you can cover anything. So why do so many investors confuse cash flow with taxable income?

[06:48] Kyle Paxton: Oh yeah. It’s a good question. I think we could reframe this question as, why do banks confuse that? Because that’s a conversation I have all the time.

[07:00] Kyle Paxton: The reason being, a lot of times it does just come down to a mismatch in education a little bit. I want to reframe this question because I want to open it up. We’re kind of focused on real estate in this conversation. One of the biggest tax levers in real estate is what we just talked about, depreciation. If you look at most real estate returns I’m putting out the door, they show taxable losses because they have that depreciation introduction in year one, or two, or three, or five. And then eventually they sell, they have a large gain, and that’s where the income event happens.

[07:42] Kyle Paxton: If you fixate so much on the tax return, you may be looking at a cash basis tax return with a lot of depreciation. So you’re not factoring in the timing of accruals and when expenses are actually getting, what periods expenses actually cover, when that cash is anticipated to leave. You have that non-cash depreciation component.

[08:10] Kyle Paxton: All the time there’s a disconnect both with our real estate investors and GPs who are running real estate funds and then investors who maybe are just getting a K-1 out of the deal, or they have some sort of interest in the real estate but maybe they’re not doing the day-to-day management. They just see, wait a second, this is losing money every year. What am I doing?

[08:35] Kyle Paxton: Having a good understanding of the deal structure, when to anticipate cash depending on how the deal is structured, what the waterfall looks like, who’s getting cash when, all paints this picture. You may have five years of taxable losses, but over those five years, you’re going to be getting cash payouts via distributions along that line. So it really just comes back to education and making sure everybody involved has a good understanding of the deal structure and the waterfall on when to expect cash.

[09:12] Faith: Yeah. And how do higher interest rates change tax strategy and deductions?

[09:18] Kyle Paxton: I think this gets back to just the margins being tighter. We’re squeezed a little bit more. And this is really where the pain comes to light.

[09:30] Kyle Paxton: We had several years, we’re kind of a couple years removed from it now, but we had a several-year string where we kind of joke internally that it was pretty easy to do a real estate deal. The market was in a good place. You could gather up some buddies, put some money into a parcel of real estate and make a good return.

[09:52] Kyle Paxton: The last couple years we have really seen a separation on who actually has that structure correct and who has a good understanding of the market, and who can stay proactive and in front of changes to the market versus those that are more reactive in nature. And there’s a sharp divide in returns.

[10:10] Kyle Paxton: How those compare to expectations, and then unfortunately sometimes to the degree of deals just completely falling apart. There’s maybe even investors who have invested in projects and ended up getting zero of their money back, or very little.

[10:25] Kyle Paxton: I don’t feel like I’m answering this extremely concisely here, but this is really what just separates. The margins become so much slimmer and that’s where the proactive planning becomes so much more important.

[10:42] Faith: Yeah. And how should investors be thinking about cost segregation right now?

[10:48] Kyle Paxton: Yeah, it’s definitely a good time for thinking about cost segregations. As you’re wrapping up 2025 tax returns, we’re streaming this here on March 26th. A lot of our real estate deal tax returns may already be done for 2025. We’re holding some of them to do cost segregations. It’s not too late to do cost segregations for 2025. You’ll find that the firms that do cost segregations are nice and crunched right now. So there may be a waiting period.

[11:18] Kyle Paxton: I mentioned before that bonus depreciation is kind of a buzzword that came out of the One Big Beautiful Bill Act, but I’m not doing it a service. This is a huge tax planning tool that is saving investors a lot of money. And it’s kind of line one in the real estate investing tax playbook: cost segregation.

[11:40] Kyle Paxton: If you’re not familiar with the concept or you haven’t had that conversation or picked up that conversation again in the last year, now’s the time to do it. And it may be, hey, in 2025 we acquired a property, we put it in service, we’ve already filed the tax return for said property. But then looking forward to 2026, you can still do a cost segregation after that initial startup. And there’s mechanisms to kind of catch up what that depreciation should have been in years past.

[12:15] Kyle Paxton: So certainly now’s the right time. We already have 100% bonus depreciation, quote unquote, indefinitely. We know how that goes with politics. Next time we have a change in regime, we may just unwind everything. But for the foreseeable future, this should be a conversation every year.

[12:38] Kyle Paxton: Just to kind of bring the strategy a little bit more to this, if I’m a real estate investor who owns two separate pieces of property, I’m skipping a lot of the hoops you have to jump through to get here. But just at a high level example, when you have two properties, I go and sell one, I have a big gain. I’m going to pay tax on that. But if I use these proceeds and acquire another property here, I may get that depreciation deduction. So I’m offsetting a lot of this gain in year one.

[13:05] Kyle Paxton: And that’s kind of the timing game. In years two through six, you may not have much, you have a much lower deduction, but you’re just kind of bringing in rental income, have your typical expenses, all that kind of stuff. And then you do it again. You sell a property, you buy another one, you bonus depreciate. And that’s kind of the game, or part of the strategy, in the timing and execution of these deals.

[13:30] Faith: Yeah. And my next question was, what’s the latest with bonus depreciation? Do you have any updates? What’s going on?

[13:38] Kyle Paxton: The updates are really just still that everybody’s doing it. It’s everywhere. And if you need one and you aren’t in line to get one, now’s the time. We have firms we work with that we like to refer in this space. Just a little more nuance: typically these are firms that are engineers at core and can go in and break apart a building and things like that into the smaller components and generate a nice report we can use to substantiate our deduction.

[14:10] Kyle Paxton: But the changes are really just still kind of around the One Big Beautiful Bill Act. And I would just say in the uncertain market, as deals are coming to light, it’s more prevalent. We’re seeing it be more and more prevalent.

[14:28] Faith: So we’re going to talk about smart scaling. When does it make sense to change your entity structure?

[14:36] Kyle Paxton: I think there’s an argument you should be revisiting your entity structure every single year. And that doesn’t need to be a formal, full-blown analysis. But that is a conversation that every year at tax return delivery time you should be having with your CPA.

[14:52] Kyle Paxton: This becomes more relevant. In the age of AI, as accountants, my value proposition has had to change significantly over the last five years. The compliance stuff is less important for me now. And I have positioned myself and need to be more of a business advisor. We can streamline some of our compliance-type processes and use that as the blueprint to really implement better solutions going forward.

[15:20] Kyle Paxton: I think this is a conversation you have every year. With our top clients, I really push, can we meet at least quarterly in a structured, formal meeting setting? We all have a million things going on. We move at a million miles an hour. When I’m doing that, I can be hard to track down at times. We need to get something on the calendar. Let’s go ahead and schedule the next three. And it can be four months away, eight months away, whatever.

[15:50] Kyle Paxton: Really sit down and look at what have you done in the last couple months. Hopefully I already know about it and it’s just kind of a recap. Not always true. But then also, what are we doing looking forward? And then, are we positioned correctly from an entity structure perspective to do that?

[16:10] Kyle Paxton: It’s really challenging when we get brought into new deals late. And you’ve already got your investors lined up, you’ve understood what, and again, you need to do what you need to do to make an acquisition or get funding or whatever. But we need to be a part of that conversation on the front end. This is an ongoing consideration.

[16:35] Kyle Paxton: There’s no need to do a very formal entity reshuffle annually, of course. But this is an ongoing conversation that needs to happen at least once a year as your circumstances change, the market changes and everything like that.

[16:52] Faith: Yeah, my next question was, when should an investor bring in a CPA versus doing it themselves? I think you just answered that. Day one.

[17:05] Kyle Paxton: No, no. The reality here is, we onboard new clients frequently who have had that experience. We bring on clients all the time where, going back to One Big Beautiful Bill, a lot of people are interested in real estate investing right now.

[17:20] Kyle Paxton: I’m an accountant. If I’m going to invest in my first deal, and maybe it’s just going in with a couple friends on a small single-family house we’re going to put on Airbnb, you probably can figure out 99% of what you need to do via Google, what your friends do, everything else. The Instagram thing, right?

[17:45] Kyle Paxton: It really, as you scale, and this gets back to your last question on smart scaling, as you scale from the legal side, which I can’t touch, your risk increases dramatically. So you want to make sure you’re buttoned up on that end.

[18:00] Kyle Paxton: But then on the tax side, you want to make sure you understand how all these different investments play together. Because it’s a lot easier just to look at one piece of the pie and understand how that’s going to impact you individually. Much more challenging to understand when those tax events are coming and how you can use different properties and things like that to optimize that.

[18:30] Kyle Paxton: Typically we’ll see that initial stage, you can probably get away with doing it on your own. Maybe you just have a quick 30-minute phone call to get the basics. But then really as you’re getting to two, three, four properties, slices of properties, 5% investment in a property, really good time to stop, have conversations and make sure everything is optimized.

[18:55] Kyle Paxton: It can be easy to unwind. You have one entity structured incorrectly, that can be a lot easier to unwind than 15. So somewhere in the middle there is probably where you start having the more formal conversations and really make sure you have what you need to scale successfully.

[19:12] Faith: Yep. What separates investors who build long-term wealth versus those who constantly feel behind?

[19:20] Kyle Paxton: Yeah, it’s a great question. This gets back to the proactive planning, being very intentional about where you’re going, what the next steps are.

[19:30] Kyle Paxton: What I see a lot in real estate is that you have the real estate investors who, like I talked about, a couple years ago a lot of people made a lot of money in real estate. And then the market squeezes. Things get more challenging. People get weeded out a little bit. The people that do really well in that time, it’s about how you manage that and what comes next.

[19:55] Kyle Paxton: What I think we find grounds people a good bit in this conversation, and getting back to my role as a business advisor, is we ground this conversation a lot into transition planning, estate planning. Are you motivated? Do you have children? Are you motivated to leave them wealth? We find that regrounding the conversation, again, we all move at a million miles an hour, we’ve got a million things going on, it’s the next deal, it’s the next thing.

[20:25] Kyle Paxton: But taking a step back and resetting: what’s the end goal here? Are you building wealth for yourself? Do you want to support a charity down the line? Do you want to leave wealth for your kids? What does that look like? I think that really helps reset that conversation.

[20:45] Kyle Paxton: And then it’s also the folks that just treat tax as part of their investment process. We see right now that with all the great software you can buy, AI, there is no excuse for you not having today’s data. We can’t be looking six months behind right now. It is what’s going on today and forward-looking. Can I pull up a dashboard where I can see yesterday’s data? You need to be having that.

[21:15] Kyle Paxton: We’ve seen some separation in that and investments that are managed really well because of that data access. It’s becoming more and more available and faster and easier. You’ve got to be on top of that, and that’s changing every day. I know some of that stuff, but I know people who can really help you implement those tools.

[21:40] Kyle Paxton: All those things kind of blend together to really separate who’s going to build that generational wealth and keep the snowball rolling.

[21:50] Faith: Yeah, absolutely. So as we kind of finish here, what’s your final piece of advice for investors in today’s market?

[22:00] Kyle Paxton: Yeah. I think these tighter markets really reward discipline. It’s easy, I’m falling into kind of a cliche there, right? But it’s making sure you have the right team around you. You’re able to delegate, do what you’re best at and fill in the gaps.

[22:20] Kyle Paxton: The investors who are winning right now are the ones who are planning early. They stay flexible and just treat tax as a piece of the pie. They don’t fixate too much on tax and the buzzwords and everything else. It’s the discipline, finding the right team, using AI and the tools that are available to us right now and making sure we have real data. And just making sure you can kind of roll with the punches and be adaptable and still find a way to sleep at night.

[22:55] Faith: Yeah. I think that’s why it’s good to have a good relationship with someone like you, like your CPA, that could advise you in the right direction when things change overnight and you have all these questions. I mean, you’re really there to help everyone succeed. I think that’s really cool.

[23:15] Kyle Paxton: And one other point I want to make real quick, Faith, is just like, and I’m harping on this data thing and the access to data. I can pull up any client file and in a couple minutes really put together a detailed industry comparison, really draw from data from different sources and distill it down into how you are comparing against the market.

[23:40] Kyle Paxton: Having a good understanding of that and moving away from just, I think most real estate investors have a good understanding on back-of-the-napkin percentage return. They can do that well. But we can expand that now. We don’t need the back-of-the-napkin stuff anymore. Really keying in on that is huge value in 2026.

[24:02] Faith: Awesome. And episode three, we’re going to talk about the 2026 tax reset, what investors are getting right now.

[24:10] Kyle Paxton: Sweet.

[24:12] Faith: Yeah, we got a lot of fun topics coming up in the next few weeks. And it was great talking to you today, Kyle. I can’t wait to speak with you again. I’m thinking we’re playing with dates. I think like April 16th-ish.

[24:25] Kyle Paxton: So fresh off of the April 15th deadline there. I’ll be nice and sleepy on that day. But it’ll get me out of bed, right?

[24:33] Faith: You might be needing it. Faith holds me accountable. It gets me up here. I love it. All right. I can’t wait to speak with you again. Thanks for joining me today.

 

Want to hear more from Kyle Paxton on tax planning for real estate investors? Watch the full episode here and subscribe to the Real Estate Industry Update for new episodes.

 

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