Higher Interest Rates and Real Estate Tax Planning: 5 Strategies Investors Can’t Ignore

According to MarketWatch, mortgage rates recently climbed to 6.55%, the highest level this year. Investors feel that number in two places: the cost of financing new deals and the interest expense on properties they already own. The second one is where real estate tax planning becomes critical.

During a recent episode of Your CPA’s Take on Real Estate, Kyle Paxton shared his take on what higher interest rates mean for investors. The discussion made it clear that opportunities haven’t gone away, but planning matters more when borrowing costs stay high.

Why Higher Rates Change the Tax Conversation

Investors are starting to accept that rates may stay higher for longer. Freddie Mac’s latest weekly reading came in at 6.66%, and investor purchases have dropped to their lowest level since 2020.

Higher rates also mean more interest expense on investment properties. That might sound like a bigger deduction. Whether you can actually take it depends on how your deals and financing are structured, and that’s where most of the planning opportunities are.

5 Tax Planning Strategies for a Higher Rate Environment

1. Cost Segregation and Bonus Depreciation

This is still the first place to look. 100% bonus depreciation is currently available for qualified property under the One Big Beautiful Bill. The timing of depreciation deductions can also have a significant impact on cash flow.

It isn’t automatic, though. Depreciation is a timing difference. You take the deduction while you hold the property and may face recapture when you sell, unless you complete a 1031 exchange. A cost segregation study is worth doing because the numbers support it, not because everyone else is doing one. As Kyle put it, “there’s 15 different catches, caveats, things that you need to work through in your analysis to make it actually worth it.”

2. Watch the Business Interest Limits

There are limits on how much business interest you can deduct. Partnerships carrying a lot of debt are especially exposed, and that includes the classic real estate fund with many limited partners.

With interest costs up, more is at stake. Plan ahead to confirm the deduction is actually available, and look at strategies for getting out of the limitations before they become a problem.

3. Trace Where the Borrowed Money Goes

The deductibility of interest generally follows how the borrowed proceeds are used. “Just because we have a debt doesn’t necessarily mean that we can take the interest deduction,” Kyle explained.

Refinances are where this most often goes wrong. If you refinance a property and then distribute the cash to partners, the deductibility of that interest can become a problem. Before pulling equity out, know where the money is going and how that affects the deduction.

4. Use Real Estate Professional Status

Real estate professional status can play a big role in getting maximum deductions. For investors with significant interest expense and depreciation, qualifying can change how much of those deductions they can actually use.

5. Revisit 1031 Exchanges and Opportunity Zones

Classic deferral tools are coming up more often. Section 1031 like-kind exchanges remain a common strategy. Qualified opportunity zones are also back in the conversation because they offer gain deferral when you invest in properties located in those zones.

Higher Rates Don’t Close the Door

None of these strategies make high rates disappear, but they can keep more cash in your pocket while rates stay elevated. Kyle summed it up well: “Higher rates don’t eliminate the real estate opportunities. It just makes that analyzing the cash so much more important.” Model out worst-case scenarios before committing to a deal, and plan your deductions as carefully as your financing.

Watch the full episode of Your CPA’s Take on Real Estate to hear Kyle’s take on underwriting, depreciation and tax planning when rates stay high.

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