Commercial real estate taxes for retiring owners

Which federal and Illinois tax rules surround commercial real estate?

Start with the taxpayer: an individual, partnership, S corporation, C corporation, trust, estate or retirement account does not have the same tax treatment. An LLC is a legal structure, not a universal federal tax classification. Also distinguish the asset's cash flow, your income tax return and estate exposure.

Rental expenses may include properly classified interest, taxes, insurance, management and repairs. Loan principal and cash deposited into reserves are not automatically deductible expenses. Betterments, restorations and adaptations generally require capitalization; use the tangible property regulations and the budget and capital guide. A federal personal SALT deduction limit is not automatically the rule for taxes allocable to a rental business.

Section 163(j) can limit business interest deductions. Small business exceptions depend on applicable gross receipts and tax shelter rules, not merely a small building. An electing real property trade or business can be excepted from the interest limitation but must use ADS for specified property, affecting depreciation and bonus eligibility. Review the election's consequences before making it.

Section 199A may allow eligible noncorporate taxpayers a QBI deduction of up to 20%, subject to limits; it continues after 2025 under Public Law 119-21. Capital gains, wages and pension income are not QBI. Rental business qualification differs from passive activity classification. The rental safe harbor has books, records, service hour and statement requirements. Triple net leases are excluded from that safe harbor, but may qualify outside it as a Section 162 trade or business. Do not confuse its generally 250 rental service hours with the real estate professional tests.

Other situations require a separate specialist: foreign owners and FIRPTA withholding, Opportunity Zone investments, development inventory, cancellation of debt, distressed loans, conservation or charitable gifts, energy incentives, partnership basis elections and multiple state returns. This guide identifies those issues rather than promising coverage of every applicable law. See Publication 544, Section 163(j) guidance and IRS QBI guidance.

What is a lazy 1031 strategy, and is it appropriate for retirement?

Lazy 1031 is informal marketing language for a qualifying exchange into property with less day to day management. It is not an IRS exemption, a special retirement plan or a promise that an investment is passive for every tax rule. A retiree might compare an eligible Delaware statutory trust (DST) interest, a properly structured tenancy in common interest or a directly owned property under professional management, including a net leased building.

The aim is often to defer eligible sale gain while reducing landlord work. The tradeoff can be less control, fees, concentrated credit exposure, restricted resale and dependence on a sponsor. A taxable sale followed by a diversified liquid portfolio is another option. Compare after tax available cash, household needs and risk rather than choosing solely to avoid paying a current tax bill.

DST eligibility is specific, not automatic

Revenue Ruling 2004-86 describes conditions under which a DST interest can be treated as a direct interest in real estate for Section 1031. Not every trust satisfies them. Qualifying structures can restrict trustee powers over new capital, debt, leases and reinvestment; those constraints can limit responses to a tenant failure or major repair. Verify the actual offering and tax opinion with independent counsel.

DST offerings are commonly securities, with eligibility and distribution requirements separate from tax eligibility. Review offering documents, debt allocations, sponsor compensation, conflicts, cash reserves, fees, property condition, lease credit, distribution sources, exit plans and transfer restrictions. A projected distribution rate is not a guaranteed yield; return of capital and borrowed cash are not the same as earned profit.

Plan the exchange before closing

1. Ask the CPA to calculate basis, projected gain, depreciation categories, suspended losses and state consequences for selling, exchanging and retaining the property.
2. Engage a qualified intermediary before relinquished property closes. Avoid actual or constructive receipt of proceeds and confirm the same taxpayer and ownership structure requirements.
3. Identify qualifying replacement property in writing within 45 days of transfer. Observe the three property rule, 200% aggregate value rule or, where applicable, the restrictive 95% receipt exception.
4. Receive replacement property by the earlier of 180 days after transfer or the return due date, including extensions. A return extension may be needed; do not assume 180 days is always available.
5. Have advisers test replacement value, equity, liabilities, closing costs and any cash or other property received. Do not describe replacing a mortgage as a requirement to take the identical new loan.
6. Keep the exchange documents, deferred gain and replacement basis/depreciation schedule, and report the transaction on Form 8824.

Cash or other nonqualifying property received, and certain net liability relief, can create taxable boot. Added cash can affect the liability calculation. Qualifying real property generally must be held for business or investment, not primarily for sale or personal use. Related party, partnership and subsequent transfer plans need special review. See Form 8824 instructions.

A replacement purchase does not erase deferred gain

Replacement basis generally carries the deferred gain forward; depreciation rules distinguish exchanged basis from excess new investment. Do not assume a new purchase price means a completely new full depreciation basis. A later taxable sale may expose preserved gain and depreciation related tax. A 1031 exchange also generally does not release all suspended passive losses as a fully taxable disposition would.

Ordinary REIT shares and partnership interests are not qualifying replacement real property. A Section 721 contribution to an UPREIT operating partnership is a different transaction, with debt, disguised sale and other partnership rules; later conversion to REIT shares can change liquidity and tax consequences. A marketed 1031 to 721 sequence is not an interchangeable exchange into publicly traded shares. Obtain advice on each step, not a blanket tax free claim.

Cost segregated assets may not all qualify as real property for Section 1031. Exchange eligibility and depreciation recapture classification are separate analyses; do not assume an exchange defers every component's ordinary recapture. Nor is an exchange an IRA rollover. Use retirement exit planning and Publication 541 when entity interests are involved.

Can passive real estate losses offset active income in retirement?

Rental real estate is generally passive under Section 469 even if the owner is involved. Passive losses ordinarily offset passive activity income, not wages, pensions, IRA withdrawals, Roth conversions, interest or dividends. Portfolio income is not passive activity income. Selling a property can involve special character and loss release rules, so do not assume any capital gain from any source is a passive loss offset.

Cash received is not the tax classification. A passive rental can have positive cash flow and a paper loss from depreciation. A retiree can have no job yet still hold a passive rental. Active participation, material participation, real estate professional status, QBI eligibility and compensation for a retirement contribution are distinct tests.

Active participation and the limited rental loss allowance

A qualifying owner who actively participates in rental decisions and generally has at least a 10% interest may use a special allowance of up to $25,000 against nonpassive income. For most taxpayers other than married filing separately, it generally phases out between $100,000 and $150,000 of specially defined MAGI. Married filing separately rules differ and can eliminate the allowance when spouses lived together. Pension income, distributions and a conversion can affect MAGI; do not infer eligibility from age or lack of wages.

Real estate professional status plus material participation

To qualify, one spouse on a joint return must generally perform more than 750 hours of services in qualifying real property trades or businesses in which that spouse materially participates, and those services must exceed half of that spouse's personal services in all trades or businesses that year. Rental activities must also meet material participation, generally individually unless a valid election groups rental real estate interests.

Spousal participation can count toward material participation, but spouses cannot simply combine their hours to meet one spouse's professional status thresholds. Employee hours have additional ownership conditions. Investment monitoring alone is not a substitute for qualifying services. Document activity and time; becoming retired, licensed or an LLC manager does not automatically qualify.

Other limits and the self rental trap

Where applicable, owner basis limitations and at risk rules precede passive loss limits; an excess business loss limit can also defer a deduction. A nonpassive rental loss is not automatically deductible in full. Suspended amounts must be tracked by the correct limitation and activity.

When you rent property to a business in which you materially participate, self rental rules generally recharacterize net rental income as nonpassive. They do not automatically turn a rental loss into a nonpassive loss. Retaining your building after selling your business can change the facts, especially if you remain employed or involved. Review grouping, leases and ownership before relying on offsets.

Suspended passive losses generally become available on a fully taxable disposition of the entire activity interest to an unrelated person, with grouping and installment rules affecting the result. A 1031 exchange ordinarily is not that full taxable exit. At death, losses generally are deductible only to the extent they exceed the relevant inherited basis increase; they do not simply transfer to heirs. See IRS Publication 925.

Illustrative loss offset, not tax savings promised

Assume $50,000 of pension/IRA income, $20,000 of passive rental income from one activity and a $30,000 depreciation driven passive loss from another, with sufficient basis and at risk amounts and no other adjustments. The loss may offset the $20,000 passive income, leaving $10,000 subject to carryforward unless an allowance or other exception permits use. It does not automatically eliminate $30,000 of pension/IRA income. If the income were portfolio dividends instead, the ordinary passive offset would not apply.

How does straight line depreciation work for an industrial building?

Ordinary nonresidential real property under the general depreciation system generally uses a 39 year recovery period, straight line method and mid month convention. Land is not depreciable. Residential rental, qualifying improvements, short life assets, ADS and specialized property can follow different rules. Depreciation begins when the asset is ready and available for its intended use, not simply when you sign a purchase contract.

Allocate acquisition cost and applicable capitalized transaction costs between land, the building and supported components. Capital improvements increase basis; depreciation allowed or allowable generally reduces adjusted basis even if you neglected to claim it. A title transfer to your revocable trust or disregarded LLC does not normally reset basis or restart depreciation.

Illustrative arithmetic: a $1,950,000 eligible building basis, excluding land and separately classified components, produces $50,000 in a full ordinary year under 39 year straight line treatment. First and last years require the mid month convention, so $50,000 is not a universal acquisition year deduction. This is not an appraisal allocation or a tax election recommendation.

After the recovery period, rent remains potentially taxable even if the original building has no remaining depreciation. New eligible improvements have their own schedules. Principal repayment, a reserve transfer and depreciation are different from each other and from operating cash. Use Publication 946 and Publication 551.

Can cost segregation and bonus depreciation improve a retiree's tax position?

A supported cost segregation study separates assets that properly have shorter recovery periods from the building's long life structure. Depending on facts, examples include certain 5 year equipment, 7 year furnishings and 15 year land improvements. It does not depreciate land, change the total supported purchase basis or make every industrial feature short life property.

Review engineering support, invoices, plans, allocations, component definitions and reconciliation to the existing tax schedule. A study on an older acquisition may require an accounting method change and Form 3115 with a Section 481(a) adjustment rather than simply deducting everything on the current return. A study performed in 2026 does not change an asset's original acquisition or placed in service date.

Current bonus rules are not the old phase down

Public Law 119-21 restored 100% additional first year depreciation for qualifying property acquired and placed in service after January 19, 2025, subject to statutory and acquisition rules. Binding contracts, self construction, related parties, prior use and elections can matter. Do not use an old percentage schedule or promise a complete write off of a purchased warehouse.

Eligible short life property and qualifying improvement property may qualify; an ordinary 39 year building and land generally do not qualify under Section 168(k). Qualified improvement property generally covers qualifying interior improvements made by the taxpayer after a nonresidential building was first placed in service, excluding enlargement, elevators/escalators and the internal structural framework. Its classification and eligibility must be verified.

Section 168(n) separately addresses certain qualified production property under the 2025 law. It has manufacturing/production use, construction/acquisition, timing, election and recapture requirements and is not a blanket deduction for rental warehouses, office space or every industrial acquisition. An ordinary landlord should not assume a tenant's manufacturing use gives the landlord the deduction. Seek specialized review if it is relevant; Notice 2026-16 includes specific related ownership exceptions and requirements.

See IRS Notice 2026-11 guidance and Publication 946. Tax law can change; apply the law for the actual asset and tax year.

Section 179 is a different election

Section 179 may apply to eligible purchased business assets and elected qualifying real property improvements, including eligible QIP and specified roofs, HVAC, fire protection/alarm and security systems. It has annual limits, investment phaseouts, taxable business income limits, business use conditions and special lessor restrictions. It is not automatic expensing of land or an entire building and is not identical to bonus depreciation.

Timing benefits can fail to become current savings

Compare the cost of a study, deductions usable now, suspended losses, expected hold, recapture, federal and Illinois differences and future tax brackets. A passive retiree with no passive income and no usable exception may only increase suspended losses. A planned near term sale can shorten the timing benefit. Illinois bonus modifications can delay state deductions. Cost segregation does not increase NOI or pay for a roof.

A lower income retirement year is not automatically the best year for a large deduction. A CPA should compare claiming, electing out where permitted, improving assets and selling, with effects on losses, QBI, NIIT and benefits. Consult the IRS Cost Segregation audit guide directory, not a vendor's fixed savings percentage.

What taxes arise on a sale, and what does depreciation recapture mean?

Start with amount realized after applicable selling costs and adjusted basis, not just cash after mortgage payoff. Allocate sale proceeds to land, building and separately classified assets on a supportable basis. Debt payoff changes net cash; it does not ordinarily reduce the property's gain calculation.

Ordinary 39 year straight line building depreciation often creates unrecaptured Section 1250 gain rather than ordinary Section 1250 recapture for an individual. Accelerated components, QIP, older assets and corporate owners require separate analysis. Section 291 can impose additional ordinary recapture for corporations. There is no one universal recapture rate for all CRE.

Worked sale example: gain is not equity cash

Assume an individual bought property for $2,000,000, allocated $500,000 to land and $1,500,000 to an ordinary building, claimed $300,000 of straight line building depreciation, made no further basis changes and sells for $2,600,000 with $100,000 of eligible selling costs. Adjusted basis is $1,700,000; net amount realized is $2,500,000; realized gain is $800,000.

If mortgage payoff is $900,000, available sale cash before income tax is $1,600,000. The $900,000 payoff does not reduce the $800,000 gain. For this simplified illustration, assuming sufficient building gain, no ordinary recapture and no relevant netting or lookback adjustments, up to $300,000 may be unrecaptured Section 1250 gain and $500,000 other qualifying gain. Actual asset allocation and the return control; this is not an $800,000 gain at one rate.

NIIT, Illinois taxes, suspended loss use and household income still need calculation. An installment sale generally does not defer depreciation recapture even if cash arrives later, and seller financing adds buyer credit and liquidity risk. A qualifying exchange can defer eligible gain, but a partial exchange may recognize some. Use Publication 544, Form 4797 instructions and capital gain rate guidance.

How do Illinois income and property taxes differ from federal taxes?

Illinois individual income tax is generally 4.95% of net income under current law, without a preferential state rate just because gain is long term. Corporations and certain pass through entities or trusts have different income and replacement tax rules. Partnerships, S corporations and trusts generally face 1.5% replacement tax; non-S corporations generally face 7% income tax plus 2.5% replacement tax, subject to applicable rules and exemptions. Entity elections and classifications need review; not every LLC has the same tax.

Illinois residents and nonresidents have different sourcing and credit questions. Illinois real property can generate Illinois source rent and gain after an owner moves elsewhere. A qualifying federal exchange generally defers federal gain entering the state starting point, but Illinois modifications and historical basis differences must be tracked. See Illinois income and replacement tax rates and Schedule NR guidance.

Federal bonus is not automatically the Illinois deduction

Illinois uses addition and subtraction modifications for federal bonus depreciation, calculated on IL-4562 and carried to the appropriate return or Schedule M. Keep separate federal and Illinois schedules through ownership, sale and exchange. Current IL-4562 instructions also address Section 168(n) for tax years beginning January 1, 2026. Do not multiply a federal first year deduction by 4.95% and call that immediate state savings.

Review the current IL-4562 instructions for the relevant year and asset. Reversals and disposition adjustments can matter years after a study or purchase.

Property, transfer and retirement income taxes are separate

Illinois property taxes come from assessment, equalization, levies and local extension/collection, not your federal depreciation schedule. A cost segregation study or low taxable rental profit does not automatically reduce the property tax bill. Cook County incentive classifications, renewal/compliance and appeal deadlines need parcel specific review. Use the Illinois industrial property tax guide.

Real estate transfer taxes can apply at state, county and municipal levels, including Chicago's own requirements. Confirm situs, exemptions, transfer declarations, entity interest transfers where covered and who pays under law and contract. A federal 1031 exchange is not a blanket transfer tax exemption. Sales/use, lease, withholding or business taxes may also apply to other assets and activities in a mixed transaction.

Eligible federally taxed retirement plan/IRA distributions and certain other retirement income may qualify for the Illinois subtraction in Publication 120. Ordinary rent and directly realized property gain do not become qualifying retirement distributions because you are retired.

Is there inheritance tax, estate tax or both on a retiree's real estate?

For ordinary domestic estates, federal law imposes an estate tax rather than a general inheritance tax on recipients; Illinois currently imposes estate tax, not a separate inheritance tax. Estate tax concerns transfers at death; income tax can still arise from inherited IRA withdrawals, later rent or a later sale. Other states, noncitizen/nonresident estates, covered expatriate transfers and treaty rules may differ.

Federal estate and gift rules in 2026

Public Law 119-21 increased the federal basic exclusion to $15 million per individual for 2026, with later inflation adjustments under current law. It is part of the estate and gift system, not a separate $15 million allowance for each building. Prior taxable gifts can consume exclusion; gross estate, adjusted gifts, debts, deductions, ownership and valuation affect filing and tax. Do not use obsolete claims of an automatic 2026 cut to the exclusion.

A surviving spouse may use a deceased spouse's unused federal exclusion through a proper portability election, generally on Form 706. It is not automatic doubling, does not transfer to children and does not provide portability of the GST exemption. Marital deductions, citizenship conditions, trusts and prior gifts require counsel. Federal estate returns are generally due nine months after death, with extensions and portability relief requiring their own review.

See IRS estate and gift updates and Form 706 instructions. A state filing or a portability election can matter even if no federal estate tax is owed.

Illinois's separate $4 million exclusion and no portability

Illinois has a separate $4 million estate tax exclusion under current law and does not allow spouses to port an unused Illinois exclusion. A married couple does not automatically get an $8 million Illinois exclusion for the survivor. An estate below the federal exclusion may still require an Illinois return and owe Illinois estate tax.

The Illinois exclusion is a threshold in an interrelated computation, not simply $4 million subtracted before applying a flat rate. Use the Attorney General's instructions and calculator. Gross estate, adjusted taxable gifts, deductions, Illinois situs and apportionment matter. Do not assume only the Illinois building's value determines whether a nonresident estate is exposed.

Illinois Form 700 and estate tax information are administered by the Attorney General. Illinois situs real property can create exposure even for a decedent living elsewhere. Returns and payment are generally due nine months after death; a filing extension does not automatically extend payment. Confirm current requirements with counsel and the instruction fact sheet.

Estate value can exceed available cash

Include the value of property/entity interests, accounts, other assets and life insurance where includible, not just checking accounts. Allowed debts may reduce the taxable estate but do not eliminate loan payments or filing analysis. Avoid counting a building and the full value of the entity holding it twice. Appraisals and supported entity valuations matter; discounts are not automatic.

Plan cash for taxes, loan covenants, administration and property carrying costs while heirs decide whether to hold or sell. Trusts can address succession and marital/state planning, but a revocable living trust does not by itself erase estate tax. Counsel should evaluate federal/state marital elections, including QTIP where appropriate, rather than relying on a generic bypass trust or gifting rule.

What happens to basis, depreciation and suspended losses at death?

Property acquired from a decedent generally receives a basis equal to fair market value at death, or a permitted alternate valuation, subject to statutory exceptions. This can be a step up or a step down. Qualified basis adjustment is not dependent solely on whether estate tax is actually paid. Obtain a defensible valuation and establish which property or interest qualifies.

For directly inherited depreciable commercial real property, allocate the new supported basis to land and depreciable assets and apply the heir's depreciation rules and placed in service timing. Do not continue the decedent's schedule blindly. An inherited partnership or corporation interest does not automatically reset the underlying building's basis; partnership Section 754/743 adjustments and entity rules can be critical.

Inherited building example, not an estate tax calculation

Assume a directly owned building and land with $1,700,000 adjusted basis qualifies for an inherited basis adjustment to a $2,800,000 date of death value. If the heir later sells for $2,900,000 with $100,000 selling costs, no intervening depreciation or improvements, and no other adjustment, net amount realized and inherited basis are both $2,800,000, so illustrative gain is zero. Estate tax could still have been due, and depreciation claimed after inheritance changes later basis.

This is not proof that every 1031 chain or trust eliminates all tax. Qualifying real property still held at death may receive a basis adjustment under Section 1014, but account holdings, entity structure, prior transfers and estate inclusion must be reviewed. A taxable sale during life creates realized gain; retaining its cash until death does not undo that sale tax.

Gifting and inherited retirement accounts are different

A lifetime gift generally carries donor basis for gain, with special loss basis and other adjustments; it does not automatically get the recipient a market value basis. Debt transfers can cause part sale treatment or other tax. A gift can require Form 709 and use exclusion without immediate gift tax due. The annual gift exclusion is not a per building reset and is not the same as the lifetime exclusion.

Income in respect of a decedent, including the taxable portion of an inherited traditional IRA, does not receive the ordinary Section 1014 basis adjustment. An IRA containing real estate does not become tax free because the account owner died. Beneficiary distribution rules, account basis and a possible deduction for estate tax attributable to IRD need separate review.

Suspended passive losses at death are generally allowed only to the extent they exceed the relevant increase in basis and do not simply pass intact to heirs. Other suspended losses, gifts and entity losses follow their own rules. Preserve separate loss schedules and ask the CPA to reconcile them to the final return. See Publication 551, Publication 559 and Publication 925.

How do property taxes interact with retirement withdrawals and benefits?

Taxable property income and retirement account income are not interchangeable. IRA/plan property cannot provide you personal depreciation deductions. Prohibited transaction and unrelated business income rules can apply even to a Roth account. See the retirement account and CRE guide for account ownership, contribution eligibility and RMD liquidity.

Net investment income tax is separate from depreciation recapture

NIIT is generally 3.8% of the lesser of net investment income or MAGI over $200,000 for single/head of household, $250,000 for married filing jointly/qualifying surviving spouse or $125,000 for married filing separately. Rental income and investment gains commonly count. Qualifying nonpassive business income may be excluded, but real estate professional status alone is not a blanket exemption.

Retirement distributions generally are not themselves net investment income, yet can raise MAGI and increase NIIT on other investment income. The same distinction matters for a Roth conversion. Use IRS NIIT guidance and Form 8960 instructions.

Medicare IRMAA and Social Security tax

A sale gain, conversion or larger taxable withdrawal can affect Medicare Part B and prescription coverage premiums separately from income tax. SSA generally uses tax information from two years earlier; IRMAA MAGI includes AGI plus tax exempt interest. A qualifying life changing event and income reduction can support reconsideration, but a property sale alone does not automatically qualify. Check SSA's IRMAA rules.

Property income can also affect the federal combined income calculation for Social Security taxation. Up to 85% of benefits can be included in taxable income, not taxed at an 85% rate. Taxability differs from the earnings test for benefits before full retirement age; ordinary rent is not automatically wages, but activity and service exceptions matter. Refer to Publication 915 and SSA before treating every benefit effect as the same tax.

Required minimum distributions and inherited account payout deadlines still apply to illiquid real estate holdings. Most noneligible designated beneficiaries face a ten year payout rule, with annual distributions required in some cases. Qualified Roth inheritance rules differ from traditional accounts but do not permit indefinite holding. A 1031 exchange does not satisfy an RMD.

What should a retiring owner bring to tax and estate advisers?

1. Ownership and family map: deeds, entities, operating agreements, trust documents, beneficiaries, citizenship/residence and authority to act.
2. Tax basis file: closing statements, land/building allocations, capital improvements, depreciation, cost segregation and federal versus Illinois schedules.
3. Loss and participation records: passive carryovers, basis/at risk limits, prior Section 1231 losses, elections and documented hours.
4. Exchange and debt records: deferred gains, Form 8824 history, intermediary proposals, loan balances, recourse, prepayment and entity consents.
5. Property cash needs: rent roll, leases, expense recoveries, management proposal, capital plan, vacancy case and sale estimates.
6. Household tax and benefits: filing status, projected pension/IRA income, conversions, RMDs, Medicare and Social Security information.
7. Estate liquidity: valuations, prior taxable gifts, federal portability filings, Illinois exposure and cash available for taxes and administration.

Ask for side by side projections of holding, a taxable sale, an exchange, a study and lifetime versus inheritance transfers. Include deductions actually usable, the new investment's basis, management/control tradeoffs, fees, family goals and adverse cash cases. Tax deferral is only one part of a retirement decision. Nothing here recommends a DST, exchange, trust or security.

Questions retirees holding real estate ask

What is a lazy 1031 exchange?

It is an informal description of exchanging qualifying property into a less actively managed investment, such as an eligible DST or professionally managed net leased property. It is not an IRS program, guaranteed income or a waiver of normal 1031 requirements.

Can a DST replace my industrial building when I retire?

Some DST interests can qualify as replacement real property under specific tax conditions. Review the actual structure, offering documents, debt, fees, sponsor, property risks and transfer restrictions with independent advisers. Less management does not mean low risk or easy access to cash.

Can I do a 1031 exchange directly into REIT shares?

Ordinary REIT shares are not qualifying replacement real property. A Section 721 contribution to an UPREIT partnership is a separate transaction, not an interchangeable 1031 exchange. A proposed multistep sequence needs its own legal and tax analysis.

Can I keep some sale cash for living expenses and exchange the rest?

A partial exchange may be possible, but cash or other nonqualifying property received can create taxable boot and reduce deferral. Debt and expense allocations also matter. Ask a CPA and intermediary to calculate tax and available cash before closing.

Do I always get 180 days to complete an exchange?

No. Replacement receipt is generally due by the earlier of 180 days or the tax return due date, including extensions. Identification is generally due within 45 days. Arrange the intermediary and any needed return extension before deadlines.

Does my 1031 replacement get a full new depreciation basis?

Not automatically. Deferred gain generally carries into replacement basis, with separate exchanged basis and excess investment depreciation rules. A new price does not erase old deferred gain or guarantee a deduction for the full price.

Can rental losses offset my pension or IRA withdrawals?

Generally not if the losses are passive, unless an applicable allowance or exception permits use. Pension and IRA income are not passive activity income. Real estate professional status plus material participation or a qualifying rental allowance require separate tests.

Can cost segregation wipe out the tax on a Roth conversion?

Not automatically. Passive depreciation losses generally cannot offset conversion income, and the conversion can increase MAGI and reduce a rental loss allowance. Basis, at risk and other limits may also block a deduction. Model usable losses, not merely a study's deduction total.

Are dividends passive income that rental losses can offset?

Portfolio dividends and interest generally are not passive activity income under Section 469. The everyday meaning of passive income differs from the tax category. Do not assume income requiring little work is available for rental loss offsets.

Does retirement make me a real estate professional?

No. You must meet the annual qualifying service tests, generally more than 750 hours and more than half your personal services, and separately materially participate in the rentals as required. Being retired, licensed or an LLC owner is not enough.

Can a retiree use the $25,000 rental loss allowance?

Possibly, with qualifying active participation, ownership and MAGI. For most taxpayers other than married filing separately, it generally phases out between $100,000 and $150,000 of specially defined MAGI. Retirement status does not establish eligibility.

Can rent from my own business absorb my other passive rental losses?

Not necessarily. Self rental rules generally treat net rent from a business in which you materially participate as nonpassive, without automatically making rental losses nonpassive. Ownership, participation and grouping require review before using offsets.

What happens to suspended rental losses when I sell?

A fully taxable disposition of the entire activity interest to an unrelated person generally releases passive losses, subject to applicable rules. A 1031 exchange is generally not that fully taxable disposition; grouping, recognized income and installment timing can change the result.

How many years do I depreciate a commercial building?

Ordinary nonresidential real property under GDS generally uses 39 year straight line depreciation and the mid month convention. Land is excluded; ADS, eligible components, qualified improvements and special property can follow different rules.

Can I avoid later tax by never claiming depreciation?

Generally no. Adjusted basis is reduced by depreciation allowed or allowable, so skipping deductions can still leave lower basis on sale. Have a CPA review correction procedures and records rather than deliberately omitting depreciation.

Is cost segregation worthwhile near retirement?

Compare usable deductions now, study cost, carryforwards, hold period, state differences and later recapture. A passive owner may only create suspended losses, and a near term sale can shorten the timing benefit. It is not universally beneficial.

Can I write off my whole warehouse with 100% bonus depreciation?

No, not as an ordinary warehouse purchase under Section 168(k). Eligible shorter life components and improvements may qualify under current rules, but land and the ordinary 39 year building generally do not. Specialized production property rules need separate review.

Does a new cost segregation study make an old building eligible for new bonus rules?

No. The study date does not reset acquisition or placed in service dates. Eligible classifications, historical law and any accounting method change must be reviewed for the original assets.

Is all depreciation recapture taxed at 25%?

No. Section 1245 ordinary recapture, Section 1250 ordinary recapture and unrecaptured Section 1250 gain are distinct. The latter has a maximum 25% individual rate, not a mandatory flat rate. Asset classifications, gain, netting and owner type matter.

Does paying off my mortgage reduce taxable sale gain?

Ordinary loan payoff reduces sale cash but is not generally a deduction from property gain. Gain depends on amount realized, applicable sale costs and adjusted basis. Loan principal and tax basis are different.

Can seller financing defer depreciation recapture?

Depreciation recapture generally is recognized in the sale year even when an installment method applies to other eligible gain. Seller financing also creates buyer credit, interest and liquidity issues. Review the full transaction before promising tax deferral.

Does Illinois allow the same immediate federal bonus deduction?

Not automatically. Illinois uses addition and subtraction modifications on IL-4562 and related returns. Keep separate state and federal depreciation schedules and review current asset, year and disposition rules.

Does being retired exempt my Illinois rent or property sale gain?

No. Eligible retirement account distributions can qualify for an Illinois subtraction, but ordinary property rent and directly realized gain do not become retirement plan income just because you are retired.

If I move away, do Illinois taxes on my building disappear?

No. Illinois source rents, gains and Illinois situs estate property can remain relevant for nonresidents. Review sourcing, residency, credits, entity treatment and estate apportionment with advisers in the affected states.

Can a building sale raise my Medicare premiums?

Yes. Taxable income can affect IRMAA, generally using a return from two years earlier. This is separate from sale income tax. A qualifying life changing event may support reconsideration, but a sale alone does not automatically qualify.

Can IRA withdrawals raise net investment income tax on rent?

They can raise MAGI even though retirement distributions generally are not themselves net investment income. That can increase the amount of rental or investment income subject to the 3.8% NIIT, subject to activity and threshold rules.

Does Illinois have an inheritance tax on my children's building?

Illinois currently has estate tax rather than a separate inheritance tax. The estate may owe tax before distributions, and heirs can owe income tax on later rent, a sale or taxable inherited account withdrawals. Other states can have different rules.

What are the federal and Illinois estate exclusions in 2026?

The federal basic exclusion is $15 million per individual for 2026 under current law; prior taxable gifts and other rules affect available exclusion. Illinois has a separate $4 million exclusion and no state portability. Estate tax is not calculated simply from the building's equity.

Does a married couple automatically get twice the Illinois estate exclusion?

No. Illinois does not allow portability of an unused spouse's exclusion. Federal portability is a separate election generally made on Form 706. Estate planning, marital deductions and trust elections require individual legal review.

Will my children get a new tax basis for inherited property?

Qualifying inherited property generally gets fair market value basis at death or an applicable alternate value, which can be a step up or down. Direct property, entity interests, trusts and retirement accounts have different rules; a new basis is not guaranteed for every underlying asset.

Should I gift my building now to avoid inheritance taxes?

There is no universal answer. A lifetime gift generally carries donor basis for gain and can use gift exclusion or require a return; debt and control changes add issues. Compare estate exposure, income tax basis, family goals and liquidity with counsel before transferring title.

Does an inherited IRA building get the same step up as personally held property?

No ordinary inherited property basis adjustment applies to the taxable portion of a traditional IRA distribution as income in respect of a decedent. Account holdings, basis and beneficiary distribution rules must be analyzed separately.

Do unused passive rental losses pass to my heirs?

Not automatically. At death, suspended passive losses generally are deductible only to the extent they exceed the relevant inherited basis increase. They do not simply become the heir's carryforward. The final return and other loss limitations require review.

Does putting the building into a living trust remove estate tax?

A revocable living trust generally does not remove the property from the owner's taxable estate or reset basis during life. It can help administration and succession. Tax results depend on the trust, ownership, powers and applicable estate rules.

Is exchange and hold until death always the best retirement strategy?

No. Qualifying basis treatment at death is only one factor. Liquidity, tenant and sponsor risk, management, fees, estate tax, family preferences and future law can outweigh deferral. Compare a taxable sale and other choices rather than treating inheritance as guaranteed tax elimination.

Official sources and limitations

Reviewed October 8, 2026. Follow the current law and instructions for the actual year, asset, taxpayer and state. Public Law 119-21 changed bonus depreciation, QBI and federal estate rules; older guides may show obsolete sunsets. Official publications explain many rules but do not replace statutes, regulations, case law or professional advice.

• IRS Publication 925: passive activities, at risk and dispositions
• IRS Publication 946: depreciation, bonus, QIP and Section 179 and Publication 551: basis
• IRS: restored bonus depreciation and Notice 2026-11
• IRS: tangible property regulations and Cost Segregation audit guide directory
• IRS Publication 544: sales, exchanges and recapture, Form 4797 and Form 8824 instructions
• Revenue Ruling 2004-86: specific DST exchange treatment and Publication 541: partnerships
• IRS: QBI deduction and Revenue Procedure 2019-38: rental safe harbor
• IRS: business interest limitation and Form 8960: NIIT
• IRS: estate and gift law updates, Form 706 and Publication 559: survivors, executors and administrators
• Illinois Attorney General: estate tax forms and calculator and instruction fact sheet
• Illinois income and replacement tax rates, IL-4562 and Publication 120: retirement income
• SSA: IRMAA reconsideration, IRS Publication 915: Social Security and Publication 590-B: IRA distributions and inheritance

Related retirement and owner guides

• Retirement accounts, property income and planning
• Expenses, capital and reserve budgeting
• Property NOI versus taxable income and cash
• Preparing an industrial sale
• Illinois assessments, bills, appeals and incentives
• Investment diligence and financing