New Tax Rules Every Landlord Should Know in 2026

Key tax changes affecting rental property owners in 2026 — from depreciation rules and 1031 exchange updates to the latest on pass-through deductions and short-term rental classifications.

New Tax Rules Every Landlord Should Know in 2026

Tax law affects your real estate returns more than almost any other variable. Here's what changed for 2026 and what you need to discuss with your CPA.

Depreciation: Bonus Depreciation Phase-Down

• 2024: 60%
• 2025: 40% (current)
• 2026: 20%
• 2027: 0% (unless Congress extends)
What this means: For a cost segregation study on a $500,000 rental, you can now immediately expense 40% of qualifying personal property components (vs. 60% last year). The tax benefit of cost seg studies is shrinking — do them sooner rather than later.

The Pass-Through Deduction (Section 199A)

The 20% deduction on qualified business income from pass-through entities (LLCs, S-Corps, partnerships) is set to expire December 31, 2025 under current law. Congress has been debating extension — watch for a renewal bill in early 2026.

If 199A expires: Rental income from pass-through entities would be taxed at full ordinary income rates. A landlord in the 32% bracket with $80,000 in rental income would owe $25,600 vs. $20,480 with the deduction — a $5,120 annual increase. Planning move: Structure any new rental acquisitions with entity flexibility in mind. The 2026 legislative session will determine whether the deduction survives.

1031 Exchange: No Changes (Yet)

Proposals to cap or eliminate 1031 exchanges have floated through Congress for three years without passing. As of 2026, 1031 remains fully intact. Investors can still:

• Defer unlimited capital gains via like-kind exchange
• Use reverse exchange timing rules (buy replacement before selling relinquished)
• Combine 1031 with opportunity zone investments for added deferral
Note: IRS Rev. Proc. 2023-20 clarified timelines for delayed exchanges involving DST (Delaware Statutory Trust) interests. Confirm with a qualified intermediary for any exchange over $500k.

Short-Term Rental Classification Update

The IRS issued additional guidance in 2025 on the "7-day rule" for short-term rental tax treatment:

• Average rental period ≤7 days: Treated as a business (Schedule C), not passive rental. This means STR losses can offset other income — but you must materially participate (500+ hours/year or it's the primary activity).
• Average rental period >7 days: Treated as rental real estate (Schedule E), passive activity rules apply.
Common mistake: Many STR investors on Airbnb assume their 5-day average stay qualifies them for active loss treatment without meeting the material participation tests. IRS audits of STR investors increased 40% in 2024.

State-Level Changes to Watch

Several states have new landlord-specific tax rules:

• California: Expanded renter's credit. No direct landlord impact, but indicates political direction.
• New York: Proposed mansion tax expansion to investment properties over $3M. Not passed as of publication.
• Florida: Homestead exemption does not apply to investment properties — confirm this before any purchase in FL.
• Texas: No state income tax. But property taxes average 1.5–2.5% of assessed value — factor into cap rate calculations.