The 2026 Tax Reset: What Real Estate Investors Are Getting Wrong

“Before the LOI is signed, the very beginning of the deal, tax should be a part of the picture.” – Kyle Paxton, CPA

In this live episode, Kyle Paxton, CPA, breaks down the 2026 tax reset and the mistakes real estate investors are making right now. He covers bonus depreciation, the expanded SALT deduction, state tax exposure and entity structuring.

What’s Covered in This Episode

The One Big Beautiful Bill brought real wins for real estate investors, including the return of 100% bonus depreciation and an increase in the SALT cap from $10,000 to $40,000. Kyle explains why those wins come with catches, from depreciation recapture when a property sells to the SALT phaseout for higher income earners and the state nexus issues that can follow partners who live in different states.

He also shares why tax should be the passenger in every deal decision and what separates investors who build long-term wealth from those who always feel behind.

Resources

James Moore Real Estate Services

JMCO Real Estate on YouTube

Watch: The 2026 Tax Reset: What Real Estate Investors Are Getting Wrong

Full Episode Transcript

[00:01] Faith: Hi everyone and welcome to the JMCO channel. Today I am here with Kyle Paxton. Hi Kyle.

[00:01] Kyle Paxton: Hello Faith. Always a pleasure. How are you?

[00:01] Faith: Good. You ready to get into it?

[00:01] Kyle Paxton: Living the dream always.

[00:01] Faith: So today we’re talking about the 2026 tax reset. What investors are getting wrong right now.

[00:23] Faith: I always like asking these questions instead of what’s everyone doing right. No, let’s look at what everyone’s doing wrong and could do better, and getting advice from an expert like you is definitely valuable information. So the first question is, with tax laws changing and rates shifting, what are investors getting wrong right now?

[00:23] Kyle Paxton: Yeah, so this certainly hits home.

[00:44] Kyle Paxton: We’re filming this on April 16th, right? So we’re fresh off a tax day coming through here. Lots of good news for real estate investors and lots of not so fun news. Kind of a mixed bag in a lot of different conversations here. The ones that have gotten this right, and I’m not going to spend too much time on the right, are doing the intentional planning on the front end. I had clients and talked to prospects this tax season that really got burned by just hanging on to the low-hanging fruit of the One Big Beautiful Bill and hanging on to those buzzwords, bonus depreciation is going to do magic, all that good stuff, and really not seeing through the full picture. So I think to some degree it’s just a lag in expectations and still having a 2023, 2024 mindset going into 2025 tax execution, and now we’re in 2026, fully in the tax planning season going into next year.

[01:42] Kyle Paxton: So just kind of a timing lag. What I want to tie this together with is really being intentional about what the next steps are. Transaction planning on the front end and not just hanging on to the buzzwords, relying on the buzzwords, because we all know tax law is super complicated. Anything that’s too good to be true probably is.

[02:02] Kyle Paxton: And so in a tighter market where cash flow is at a premium, while I say this a lot, I don’t want tax to drive decision-making, it does need to be a strong part of your decision-making process. And you need to be proactive about tying tax into your deal structuring.

[02:24] Faith: Yeah. What’s one mistake you’ve seen experienced investors making today?

[02:24] Kyle Paxton: Yeah. So this gets back to just hanging on to what I call low-hanging fruit, right? I already mentioned bonus depreciation is a big topic here for the 2025 tax year. It’s back at 100%. I think people watching this probably already know that.

[02:46] Kyle Paxton: And so it’s really looking at, okay, while that’s great, 100% bonus depreciation, if I buy a property, I can write off a significant portion of that property in year one and get a good cost recovery in the form of a reduction of my tax liability. It’s really looking all the way through the deal cycle.

[03:09] Kyle Paxton: This is a timing difference. So ultimately we’re getting that deduction in year one. There are several different traps depending on whether or not you’re a real estate professional, your level of activity in a particular deal and what the rest of your income looks like. Do you have significant investment income that’s outside of the scope of real estate deals, other operating income? There are so many catches and traps that I still see experienced real estate professionals just kind of entering deals without really seeing that full picture and then getting surprised as part of that deal cash flow planning.

[03:39] Kyle Paxton: Again, talking about bonus depreciation as a timing difference, we’re seeing right now sales of properties from that early Tax Cuts and Jobs Act period, 2018 to 2020, where we got 100% bonus depreciation on the front end before it started tailing down, and then we restored back to 100% last year.

[04:05] Kyle Paxton: I’m seeing people exit deals but not understanding the implications that we have to recapture that bonus depreciation, and that can be a big tax dollar. States want their slice of the pie. Are we thinking through all of that component? If you hold real estate in a partnership structure and you have several partners, you may have to withhold tax and remit it to states on behalf of those partners.

[04:29] Kyle Paxton: So there are so many components to that. I’m throwing out a couple of mistakes I’m seeing now, but it’s all part of that broader picture of just hanging on to bonus depreciation’s great, it’s going to save me a bunch of cash, all that stuff. But there are always catches to that.

[04:29] Faith: All right. So we’re going to address that now then. When does it not make sense?

[04:46] Kyle Paxton: When does it not make sense? Right, 100% bonus depreciation.

[04:46] Faith: Yep.

[04:46] Kyle Paxton: Yeah, absolutely. So again, this all comes back to timing. It’s looking at the rest of your income picture, right? With bonus depreciation and cost segregations, we have the opportunity to really play around with the timing of deductions.

[05:08] Kyle Paxton: Just to use a high-level example here, if you have a million-dollar real estate acquisition and $800,000 of it is allocable to the building, you may get a 30% cost recovery of that in year one as part of bonus depreciation. If you have losses on the rest of your tax picture, if you don’t have a whole lot of income there, you may be saving tax at a clip of 10%, 12%, potentially 0% and just adding on to a net operating loss, when instead we can wait and take this bonus depreciation next year where we’ve got 37% tax, and that moves the dial much more in that picture.

[05:43] Kyle Paxton: So just using that as one tool and factor and looking at what the rest of your income looks like, and are we actually getting maximum benefit here, goes a long way. If you’re not expecting to hold property for a long time, a one or two year tax deferral may not make sense.

[06:05] Kyle Paxton: Typically, time value of money, you want your cash now over later, but just depending on your investment strategy and things like that, it may just not make sense. So this ultimately just comes down to making sure you have a really good grasp on your whole tax picture in order to make the decision around timing.

[06:26] Kyle Paxton: And that comes back to just having data up to date, making sure you have a good understanding of how your entities are set up and getting a good pulse on what your income streams are.

[06:26] Faith: Right. And with the SALT deduction, with the increase to the $40K, it sounds like a win, but who actually benefits from it?

[06:52] Kyle Paxton: Yeah, it is a win certainly for a lot of taxpayers. And I did get some entertainment this tax season on it. It felt good, right, when you’ve seen clients capped at $10,000 for years now and then all of a sudden they get a $40,000 deduction. Very exciting. And that’s just one component of the One Big Beautiful Bill where we’ve seen some more benefits in that itemized and standard deduction space.

[07:13] Kyle Paxton: The other one is the increased deduction for seniors, outside of the scope of the conversation here. But in general, some of those numbers in that itemized and standard deduction tier have increased, and that’s exciting. So with the SALT cap, $40,000, an increase from $10,000, it’s great for a lot of taxpayers.

[07:36] Kyle Paxton: It does phase out. For both single and married filing jointly taxpayers, it phases out at just north of $500,000 of adjusted gross income. So if you’re banking on that $30,000 additional deduction, and that can be a significant tax swing at 37%, right, you can get hit with a surprise there if your income is above $55,000 and you’re limited at that $10,000.

[08:02] Kyle Paxton: So fortunately, we have some other strategies we pull into play there. But overall, positive for a lot of our clients. But there were some surprises that came out specifically around that limitation for higher income earners.

[08:22] Faith: Yeah. And how can investors adjust their strategy to actually take advantage of these changes?

[08:22] Kyle Paxton: Yeah, for sure. So a lot of times we see these caps come into play, if we’re talking about the SALT limitation, in our high income tax states, right? So New York is the easy example. You have someone who lives in New York City, a high income earner.

[08:42] Kyle Paxton: They pay a lot of income tax to New York and they would like to get that $40,000 benefit at the individual level, right? I want to pause for a second and talk about how this can manifest in real estate, because just where that piece of real estate is doesn’t necessarily drive the state income tax implications, right? Where your general partners are located, if you have a management function attached to the real estate, if you have employees who are working remotely attached to real estate, that can drive state nexus and make you subject to state income tax.

[09:15] Kyle Paxton: So again, going back to New York as the example here, if you have limitations around that $10,000 SALT cap, there are different strategies we can use at an entity level. If you hold real estate in a partnership, which is typically what we see, whether individually or with other partners, we can bring in the PTE strategy or composite filings, which allow for the deductibility of the state tax at the entity level. There are a whole lot of caveats here depending on the state, your type of partners, everything else. But it opens up a lot more flexibility around which tier we can take the deduction for income tax at if you’re limited at the individual level.

[09:49] Faith: Right. And that’s why people need to have an expert, a trusted CPA such as yourself that’s knowledgeable in these things, because these changes can be meaningful or not.

[10:21] Kyle Paxton: Absolutely. And I think in the current tax environment, states have been more and more aggressive in recent years around state tax and nexus and who is subject to state tax. Notices fly left and right and states are trying to get their cut. And so I think to a bigger degree, if you are invested in real estate, and again this can just be a small property where you have a couple of partners but those couple of partners live in different states, having the resource that has the capacity to understand potentially 50 different state jurisdictions and how tax is driven is very important.

[10:50] Kyle Paxton: We see a lot of issues with clients we onboard where the state component hasn’t been handled correctly, and there can be a lot of exposure there. And then those conversations aren’t fun because a lot of times, from the state perspective, it’s a compliance issue where I have to be the bearer of bad news, right? You’re not doing this, this and this. This is causing you issues with the state, whether that’s your entity registration with the state or something along those lines.

[11:18] Kyle Paxton: I don’t often get exciting state wins with our new clients. I’m normally the bearer of bad news on compliance issues on that side of things.

[11:18] Faith: I’m sure, because it can be really confusing, especially once someone new comes into office and changes things around.

[11:18] Kyle Paxton: Yeah, absolutely.

[11:41] Faith: At what point should tax strategy start driving the investment decision instead of just reacting to it?

[11:41] Kyle Paxton: Yeah, absolutely. And I said before, I typically don’t like tax driving the investment decisions, but I want it to be the passenger, right? So before the LOI is signed, the very beginning of the deal, tax should be a part of the picture.

[12:05] Kyle Paxton: And I love clients that shoot me a note and say, “Hey, I just want a quick back of the napkin. We’re thinking about selling X. It’s going to be $10 million. Give me a back of the napkin, what might that gain look like? I don’t know the closing costs. I don’t know exactly when.” There are so many variables there, but in five minutes, I can put together a quick back of the napkin.

[12:26] Kyle Paxton: Here’s what that gain might look like. Then they can factor that into their cash flow planning and understand what they have to reinvest. Then it opens the door to, do we want to do a 1031 like-kind exchange? Are there allocation strategies? How does income flow down through our tiers? Are there any elections we can make? If cost segregations had been in play here, what does the depreciation recapture look like? And then using that to drive what we want to do for financing, if that’s needed.

[12:57] Kyle Paxton: If you’re making a sale and investing in another piece of real estate, what does financing look like? Just making sure we have the cash flow to cover any taxable issues we are encountering. And then, this is probably the best answer for the mistakes experienced real estate investors make question earlier, but time and time again I see issues where entity structuring really harms deals.

[13:26] Kyle Paxton: And so making sure we understand the tax strategy around our entity structure and how that factors into deals is huge. I could talk about that for three hours and not even start to get through my thoughts, so we won’t go into that today. But I can’t tell you the amount of times in the last month where I’ve had those funding conversations and I’m like, bad idea. We have got to do this in a different entity. That does not make sense from the tax perspective, right?

[13:51] Kyle Paxton: And so I’m not blowing up the deal necessarily, because the investor can just go to one of their other entities and do the same thing. But just making sure we’re optimized and we’re not making bad tax choices that are actually going to impact the economics of the deal.

[14:13] Faith: Absolutely. Okay, so last question. What separates investors who build long-term wealth from those who always feel behind?

[14:13] Kyle Paxton: The investors who are building wealth, we see, are the ones that have repeatable systems, right? And I want to be clear with that repeatable system, you need to be flexible because the market’s ever changing.

[14:35] Kyle Paxton: But you have the structure in place. You have the right team around you, depending on your scale, where you understand what your basis is and what that means, the debt levers and how you’re going to finance different deals. The entity structure I’ve beat to death already. What your exit strategy might be, and then holistically just timing issues and tax strategy.

[14:50] Kyle Paxton: I see the wealth builders with, I would say, typically more intentionality around deals, and the ones that are really driving it are asking, okay, this may be a five or 10 year deal, but what is this going to look like for my kids and however many years? I’m going to say 100, but that’s too many.

[15:20] Kyle Paxton: But what is this going to look like over time, and am I positioning myself to keep this snowball rolling? Right now for our real estate investors, it is a really good time to start that snowball and keep that snowball rolling, but it takes very meticulous planning.

[15:39] Kyle Paxton: So I would say that’s the big difference. The ones that are building long-term wealth are the ones who are putting the system in place before diving into the deals. And then I would say the ones I’m seeing struggle are the ones who are entering deals to stay afloat and get the cash, which is super valid.

[15:59] Kyle Paxton: You’ve got to execute a deal, got to get the cash flow, whatever’s needed, but not doing the work on the front end to really understand what this is going to look like down the road. And then, kind of where we started the conversation, what could go wrong. I don’t think, especially from a tax perspective, our real estate investors do that to the extent that they should, often.

[16:20] Faith: And I definitely think I would prefer to have a CPA real estate expert like you that had intentional choices for my future. That is huge. I think that right there says it all.

[16:20] Kyle Paxton: One of the best things about my gig, I think, is I get visibility into a lot of successful business owners, right? And I get visibility into what works and what does not work.

[16:45] Kyle Paxton: If we’re talking about the real estate syndication fund space, I have a lot of data to draw from, anecdotally in my head, on what has worked, what has not, what deals have had issues, and I think I can bring a really fresh perspective into that. And I’m not afraid to push back on those investment decisions because I’ve seen people I care about get burned by making these choices before.

[17:11] Kyle Paxton: I’m not perfect. I make mistakes. I’ve been the cause of entity structure mistakes in the past. It happens, but we learn and we grow, and now I’m a better CPA because of it. And I can help my clients on a proactive basis going forward never make that mistake again.

[17:28] Faith: Absolutely. Oh, I love that. Well, it was a great conversation with you, Kyle.

[17:28] Kyle Paxton: Thanks. Always a pleasure.

[17:28] Faith: And we’re going to have you back on May 7th and we’re going to talk about why today’s real estate deals aren’t performing like they used to, which I want to hear your opinions on, and how investors need to adjust their strategy.

[17:47] Faith: A lot has changed and I think we touched on a little bit of that today. Every state is different with new election cycles and people coming in and changing things, and it can be very confusing at times.

[17:47] Kyle Paxton: Every day it feels like.

[17:47] Faith: Yeah. And I think adjusting your strategy and getting your advice on that will be a solid episode. So I can’t wait to speak with you again, Kyle. It was great having you on.

[18:06] Kyle Paxton: Thank you.

 

Watch the Full Episode

Kyle’s insights on bonus depreciation, the SALT cap and entity structuring are worth hearing in full. Watch the full episode on YouTube and subscribe to the JMCO Real Estate YouTube channel for future episodes. To talk through your own deal timing and tax picture, connect with the James Moore real estate team.

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