Planning Ahead: Tax Changes to Watch for in 2027

2 September 2026

Most real estate investors are still catching their breath from the post-2025 tax law adjustments. The bonus depreciation phase-down, the new pass-through deduction limits, and the constant churn of state-level rules have kept accountants busy. But if you are only looking at the current year, you are already behind. The tax landscape for 2027 is not a distant rumor. It is a concrete set of changes that will hit your bottom line, your cash flow, and your exit strategy. The investors who thrive are not the ones who react. They are the ones who position themselves early.

Let me be blunt: the window to make certain moves is closing faster than most people realize. If you own rental property, flip houses, or hold commercial real estate, the decisions you make in the next twelve to eighteen months will determine how much of your gains you actually keep in 2027. This is not about fear-mongering. It is about the mechanics of the tax code, which rarely rewards procrastination.

Here is what you need to know, what you need to do, and what you should avoid at all costs.

The Big Picture: Why 2027 Is Different

Tax changes rarely happen in a vacuum. They are the result of political compromises, budget scoring, and economic forecasting. The provisions that expire or adjust in 2027 are largely tied to the Tax Cuts and Jobs Act (TCJA) of 2017. That law was a sweeping overhaul, but many of its individual provisions were designed with sunset dates. The idea was to make the tax cuts look smaller on paper, then let them expire later. Well, later is now.

For real estate, the most significant items on the chopping block are the qualified business income (QBI) deduction, the increased estate tax exemption, and the more favorable treatment of like-kind exchanges. There is also the question of interest deductibility limits for business loans and the treatment of carried interest, which affects private equity and syndication deals.

But here is the nuance that most articles miss: 2027 is not just about expirations. It is also about the interaction between those expirations and the existing rules. For example, if the QBI deduction disappears, it does not just raise your effective tax rate. It changes the calculus for whether you should structure your rentals as an S-corp, a partnership, or a sole proprietorship. That is a structural decision, not just a tax return line item.

The other major factor is the alternative minimum tax (AMT). As regular tax rates adjust, more real estate professionals may find themselves pulled into AMT territory, especially if they have large depreciation deductions or municipal bond income. That is a trap that catches even sophisticated investors.

The Qualified Business Income Deduction: The 20% Question

The QBI deduction, often referred to as Section 199A, allows eligible pass-through business owners to deduct up to 20% of their qualified business income. For real estate investors, this has been a gift. Rental income can qualify if the rental activity is treated as a trade or business, which requires a certain level of involvement or the use of a triple-net lease structure.

In 2027, this deduction is scheduled to expire entirely unless Congress acts. That is a massive deal. If you are in the 32% marginal bracket and you have $200,000 of net rental income, the QBI deduction saves you roughly $12,800 in federal tax. Losing that is not a rounding error. It is the difference between funding a new roof or paying the IRS.

Here is what most advisors will not tell you: the expiration is not guaranteed. Congress has a history of extending popular provisions, sometimes retroactively. But waiting for a last-minute extension is a terrible investment strategy. You cannot structure a 1031 exchange or a cost segregation study based on a maybe.

The practical move is to model your 2027 tax liability under three scenarios: full expiration, partial extension, and full extension. Then, look at your cash flow under each. If you can still hit your return targets under the worst-case scenario, you are fine. If not, you need to adjust your acquisition criteria or your financing structure now.

One common mistake is assuming that the QBI deduction will be replaced with something similar. There is no guarantee. Some proposals suggest a lower rate for pass-through income, but those are speculative. Do not build a business plan on speculation.

Estate Tax Exemption: The Clock Is Ticking

The current federal estate tax exemption is historically high, around $13.6 million per individual in 2025. That number was set by the TCJA and is scheduled to drop back to roughly $7 million per individual in 2026, with the inflation-adjusted amount for 2027 likely landing around $7.2 to $7.5 million. For married couples, that means the combined exemption could fall from over $27 million to under $15 million.

If you are a real estate investor with a portfolio of properties, that sounds like a rich person's problem. But consider this: a few rental properties in a high-cost area, a commercial building, and a primary residence can easily push a couple's estate above the lower threshold. And unlike cash, real estate is not liquid. Your heirs may be forced to sell properties to pay estate taxes, often at fire-sale prices.

The most effective tool for this is the spousal lifetime access trust, or SLAT. A SLAT allows one spouse to gift assets into an irrevocable trust for the benefit of the other spouse and their descendants. The gifted assets are removed from the estate, but the family still has access to the income and principal through the beneficiary spouse.

The key is timing. To take advantage of the current high exemption, you need to make the gift before the sunset. That means the trust must be funded, not just drafted, by the end of 2025 or early 2026. If you wait until 2027, the higher exemption is gone. There is no retroactive fix.

Another option is the grantor retained annuity trust, or GRAT. A GRAT allows you to transfer property to a trust and receive an annuity payment for a fixed term. If the property appreciates faster than the IRS assumed interest rate, the excess passes to your beneficiaries tax-free. This is particularly useful for properties you expect to appreciate significantly over the next few years.

But be careful with valuation discounts. The IRS has been aggressive in challenging discounts for lack of marketability and lack of control, especially in family limited partnerships. If you set up a FLP and claim a 30% discount on the value of the properties, you should expect scrutiny. Work with a qualified appraiser and document everything.

Like-Kind Exchanges: The 1031 Debate

Section 1031 allows you to defer capital gains tax when you sell a business or investment property and reinvest the proceeds into a similar property. This has been a cornerstone of real estate wealth building for decades. The TCJA kept 1031 exchanges for real estate but eliminated them for personal property, like equipment and vehicles.

For 2027, there is ongoing discussion about capping or eliminating the 1031 exchange for real estate entirely. Some budget proposals have floated a cap, such as limiting the deferral to $500,000 of gain per transaction. Others have suggested eliminating it altogether to raise revenue for other programs.

Here is the reality: no one knows what will happen. But you should plan as if the exchange will become more restrictive. That does not mean you should stop doing 1031 exchanges. It means you should be more thoughtful about your exit strategy.

If you are holding a property with significant embedded gains and you are considering selling, think about whether a 1031 exchange is the right move or whether you should pay the tax now. This sounds counterintuitive, but there are scenarios where paying tax now is better. For example, if you are in a low-income year, perhaps due to a large depreciation deduction or a business loss, your capital gains rate might be lower than it will be in 2027.

Also, consider the new rules around qualified opportunity zones. The tax benefits for QOZ investments are tied to the same legislative cycle. If you are planning to roll capital gains into a QOZ fund, the timeline matters. The original deadline for reinvesting gains into a QOZ was 180 days after the sale. If you are aiming for the capital gains exclusion after ten years, you need to enter the fund before the end of 2026 to see the exclusion in 2036, assuming the program is extended. That is a long horizon, and the political winds could shift.

Interest Deductibility: The Silent Killer

The TCJA limited the deduction for business interest expense to 30% of adjusted taxable income. This applies to businesses with average gross receipts over a certain threshold, which is adjusted for inflation. For real estate, there is an important exception: you can elect to treat certain real property trades or businesses as not subject to the interest limitation, but then you must use a longer depreciation recovery period for the property.

That election is a trade-off. If you choose to be exempt from the interest limitation, you lose the ability to use shorter depreciation lives, like 10 years for certain improvements. For many investors, the interest deduction is more valuable than the accelerated depreciation, but not always.

In 2027, the calculation of adjusted taxable income will change. Under the TCJA, the 30% limit was based on EBITDA, which is earnings before interest, taxes, depreciation, and amortization. Starting in 2022, it switched to EBIT, which is earnings before interest and taxes, meaning depreciation and amortization are no longer added back. This makes the limit more restrictive.

If you have a highly leveraged portfolio, this is a serious issue. Your interest deduction could be capped, and you might end up paying tax on income you never actually received as cash. This is called phantom income, and it is one of the most frustrating situations in real estate.

The best defense is to reduce leverage on your most profitable properties, or to structure your debt differently. For example, consider using a mortgage with a lower interest rate but a longer amortization schedule. That reduces your annual interest expense and keeps you under the limit. Alternatively, you can structure some of your debt as a sale-leaseback, which converts interest into rent, which is fully deductible as a business expense.

Another option is to elect out of the interest limitation for your real property business, but only if you are comfortable with the longer depreciation schedule. Run the numbers both ways. It is not always obvious which is better.

Cost Segregation and Bonus Depreciation: The Last Hurrah

Bonus depreciation has been a powerful tool for real estate investors. Under current law, you can deduct a large percentage of the cost of qualified property in the year it is placed in service. The TCJA allowed 100% bonus depreciation for property placed in service after September 27, 2017, and before 2023. That percentage is now phasing down: 80% in 2024, 60% in 2025, 40% in 2026, and 20% in 2027.

After 2027, bonus depreciation is scheduled to disappear entirely. This is a huge deal for investors who use cost segregation studies to accelerate depreciation on building components like HVAC, plumbing, electrical, and interior finishes.

If you are planning to purchase a new property in 2026, you can still get 40% bonus depreciation on the personal property portion. In 2027, you get 20%. That is a significant difference in your first-year tax savings.

Here is the strategic play: if you are considering a purchase, try to close before the end of 2026. Even a December 31 closing can capture the 40% rate. But do not let the tax tail wag the dog. If the property is overpriced or in a bad market, a tax benefit does not make it a good deal.

Also, be aware that some states do not conform to federal bonus depreciation rules. For example, California has not allowed bonus depreciation for years. If you invest in high-tax states, your state tax savings will be much lower, and you may face a large state tax bill even as your federal tax is reduced.

Pass-Through Entity Taxes: The Workaround That Works

One of the most interesting developments in recent years is the state-level pass-through entity tax, or PTET. Several states have enacted these taxes to work around the $10,000 cap on state and local tax (SALT) deductions. Under a PTET, the entity pays the state tax on behalf of its owners, and the entity can deduct that tax as a business expense on its federal return. This effectively bypasses the SALT cap.

For 2027, the future of PTET is uncertain. Some states have made these taxes permanent, while others are temporary. If you invest in a state with a PTET, you should check whether the law has a sunset date. If it does, you need to plan for the possibility that your state tax deduction will disappear.

There is also a risk that the IRS will challenge these arrangements. In 2020, the IRS issued proposed regulations that generally allowed PTET deductions, but the rules are complex. If you are in a partnership or an S-corp, you need to ensure that the entity actually pays the tax, not the individual owners. If the owners pay the tax personally, the deduction is lost.

The practical advice is to work with a CPA who is familiar with the PTET rules in your state. This is not a DIY project.

Common Mistakes and Misconceptions

Let me clear up a few things that I see constantly.

First, many investors think that if they hold a property in an LLC, they are protected from estate taxes because the LLC is a separate entity. This is wrong. The value of your LLC membership interest is included in your estate, and the IRS will value it based on the underlying assets. The LLC structure does not reduce your estate tax exposure.

Second, some investors believe that a 1031 exchange is always the best choice. That is not true. If you are selling a property with a low basis and you have a high income year, the deferred gain might push you into a higher bracket later, especially if you do not plan to hold the replacement property for long. Sometimes, paying the tax now and reinvesting in a more liquid asset is the smarter move.

Third, there is a misconception that you need to be a "real estate professional" to deduct rental losses against your regular income. That is true for the active participation rules, but the real estate professional status is a higher bar. You must spend more than 750 hours per year in real estate activities, and those hours must be more than half of your total working hours. If you do not meet that test, your rental losses are passive, and you can only deduct them against passive income. The QBI deduction has its own rules, and the two are often confused.

Practical Steps to Prepare Now

You cannot change the tax code, but you can change your behavior. Here is a checklist of actions to take before the end of 2026.

First, review your entity structure. If you are a sole proprietor, consider converting to an S-corp or a partnership. The QBI deduction, if it survives, is more favorable for S-corps in some cases. But if it expires, the payroll tax savings of an S-corp might not be worth the administrative burden. Model both scenarios.

Second, do a cost segregation study on any property you placed in service in 2025 or 2026. The cost of the study is usually recouped many times over through accelerated depreciation. But do not wait until 2027, when the bonus depreciation is only 20%.

Third, consider making large gifts to trusts before the end of 2025. The estate tax exemption is still high, but the clock is ticking. If you have a net worth over $7 million, this is not optional. It is a necessity.

Fourth, review your financing. If you have variable-rate debt, consider locking in a fixed rate. Rising interest rates and the EBIT limitation could make your interest deduction less valuable. A fixed rate gives you certainty, which is worth something in a volatile tax environment.

Fifth, talk to your tax advisor about the PTET in your state. If you are not taking advantage of it, you are leaving money on the table. If you are, make sure the entity is paying the tax correctly.

The Bottom Line

2027 is not a mystery. It is a set of known changes that are predictable based on current law. The uncertainty is not about what will happen, but about what Congress will do to modify it. That is a risk you can manage with proper planning.

Do not wait for the last minute. The investors who do well in the next decade are the ones who treat tax planning as a year-round activity, not an annual chore. Your portfolio, your heirs, and your future self will thank you.