From Project to Portfolio: Real Estate Tax Planning Mistakes Operators Can’t Afford to Make

Most real estate operators are good at finding deals. Where things fall apart is what happens after the paperwork is signed, and by then, the most costly tax mistakes are already baked in.

During a recent interview Kyle Paxton, CPA and Tax Director at James Moore, broke down the financial strategies that separate reactive business owners from proactive ones. From entity structure to depreciation timing to investor communication, the conversation made one thing clear: real estate tax planning isn’t a year-end activity. It’s an ongoing strategy that directly affects how much cash you have to grow.

Tax Preparation and Tax Planning Are Not the Same Thing

One of the first points Kyle made is one that gets overlooked constantly: filing a tax return is not tax planning.

“Accounting historically from the compliance side in tax preparation, is a compliance activity. It’s a check the box. We filed the tax return, we move on to next year, and nothing really comes out of it.”

What Kyle and his team at James Moore have been working to change is that backward-looking approach. Rather than treating the tax return as the finish line, they use it as a starting point, meeting with clients quarterly to evaluate what can be done differently, tracking how those changes play out and making adjustments before year-end.

The goal, as Kyle put it, is simple: avoiding surprises. “Surprises are no fun. Sometimes they’re good surprises. Sometimes they’re really bad surprises. So in total, we’re trying to avoid surprises.”

How Depreciation Frees Up Cash Now

When it comes to real estate tax strategy, Kyle called depreciation “the low-hanging fruit.” Here’s why it matters so much for cash flow.

When an operator acquires a multifamily property and makes improvements to bring rents to market value, there’s an opportunity to be intentional about timing, specifically when the project is completed and what depreciation strategies are applied. Done well, this can accelerate deductions and put cash back in the hands of both the operator and any investors involved.

“If you finance a purchase, you can still potentially get a tax deduction for the full cost in year one. So you have a phantom tax deduction that’s not necessarily tied to a cash outflow from your pocket.”

That’s a significant lever. But it only works if the planning happens before the deal closes, not after.

Why Your Entity Structure Can Make or Break Your Tax Strategy

Entity structure is one of the first things Kyle unpacks with new clients, and it’s also one of the most common sources of pain for operators who come to James Moore after years with a less engaged accountant.

“How you structure your entities is number one on if your overall tax strategy is even going to work.”

The problem Kyle sees repeatedly: an LLC was set up without the right tax election, and by the time a major transaction is on the table, it’s too late to fix it cleanly. “They come to us with, ‘I have this transaction in five days and I need help minimizing tax.’ And it’s like, well, you’re too late and you have a huge problem coming.”

The fix isn’t just getting the structure right at the start. It’s re-evaluating it regularly, ideally every couple of years, to make sure it still aligns with the business.

The Cash Flow Surprises Kyle Sees Most Often

Beyond entity issues, there are several other places operators get blindsided.

Depreciation recapture on exit. Operators who have benefited from depreciation deductions over the life of a property often don’t account for the recapture that comes when they sell. The taxable gain isn’t just the spread between purchase and sale price. It includes recaptured depreciation.

State tax issues. Depending on where the property is located, where owners live and where employees work, state tax obligations can catch operators off guard. Some states require the entity itself to pay tax directly rather than passing it through to individuals.

Models that miss the mark. Whether bidding on a job or launching a real estate fund, there’s always a model involved, and there are a lot of places for that model to go wrong. Kyle pointed to overhead creep, change orders, underestimated professional fees and rising payroll costs as common culprits.

“It’s making sure that the model is projecting for all of those potential catches and factoring in that payroll increase.”

Say Yes to Growth, Intentionally

Kyle admitted he’s a “yes man” by nature, but his actual advice on growth opportunities is more measured. The key isn’t whether to grow. It’s whether the growth is intentional and whether the systems and people around it are ready.

He recommended having a core champion team that pilots new strategies, works out the problems and then builds buy-in across the rest of the organization. From there, the question becomes: does this free up capacity, and have the models built in enough buffer to protect margins?

What Operators Need to Focus on Right Now

Beyond tax strategy, Kyle flagged two things he sees separating sophisticated operators from the rest.

First, a real-time pulse on the business. “Are we having a conversation in July where we’re still not sure about what happened last December? That shouldn’t be happening right now.”

Second, investor communication. For operators running real estate funds with limited partners, keeping those investors informed isn’t just good manners. It’s essential for long-term growth. Investors who are kept in the dark on performance, K-1 timing or what numbers to report on their returns lose trust quickly. “That erodes investor trust, word gets out, you have a PR nightmare.”

Build the Foundation for Long-Term Success

The throughline of Kyle’s advice isn’t complicated. Keep your investors and banking relationships informed, make sure your entity structure actually supports your tax strategy, use real-time data to make better decisions and bring your CPA into deal conversations before the deal is done, not after.

“Our highest value client relationships are the ones where I have a lot of intimate knowledge on your business. Bring me in on these decisions and let me help you.”

To watch the full conversation with Kyle Paxton, visit the JMCO YouTube channel.

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