Tax Strategies for Long-Term LPs

December 2025

Real estate’s tax benefits are most effective when applied across multiple investments over time, not in isolation. For long-term limited partners, strong after-tax outcomes are rarely the result of a single transaction. They come from planning, repetition, and portfolio construction.

This article outlines the core tax strategies experienced LPs use to improve compounding and manage taxes across a multi-deal portfolio.

Start With the Right Objective

The goal of tax strategy is not to eliminate taxes entirely.

For long-term LPs, the objective is usually to:

• Defer taxes where possible

• Smooth taxable income over time

• Reinvest capital efficiently

• Align tax treatment with how returns are generated

This framing helps avoid chasing short-term tax benefits that undermine long-term outcomes.

1. Use Early Depreciation to Build Passive Loss Buffers

Depreciation is most powerful when viewed at the portfolio level.

Accelerated depreciation from newer investments can:

• Create passive losses early in the hold period

• Offset passive income from stabilized properties

• Help absorb depreciation recapture at exit

Because unused passive losses carry forward, LPs who invest consistently over time are often better positioned to use them effectively.

For a detailed explanation of how depreciation, cost segregation, and recapture work, see:
Depreciation, Cost Segregation & Depreciation Recapture

2. Use Refinances to Recycle Capital Without Tax

Refinances are one of the most underappreciated tools in real estate.

When executed conservatively, a refinance can:

• Return capital without triggering a taxable event

• Allow reinvestment while maintaining equity ownership

• Extend the compounding of deferred capital

Refinances are not guaranteed and depend on market conditions and asset performance, but when available they can materially improve long-term tax efficiency.

3. Ladder Investments Over Time

Staggering investments across multiple years creates structural advantages.

A laddered portfolio can:

• Smooth cash flow

• Maintain more consistent depreciation

• Stagger taxable exit events

• Enable ongoing reinvestment and compounding

This approach reduces reliance on any single deal and helps align taxes with long-term planning rather than one-time outcomes.

4. Match Investments to the Right Account Type

Where an investment is held materially affects after-tax results.

General guidance many experienced LPs follow:

• Use taxable accounts first to maximize depreciation, passive loss utilization, and favorable capital gains treatment

• Use Solo 401(k)s next (when eligible), particularly for stable or moderately leveraged real estate

• Use SDIRAs selectively, typically only when:

  • Taxable liquidity is limited

  • Leverage is minimal

  • UBIT impact is low

  • After-UBIT returns still exceed alternative IRA investments

Account structure should be matched to how a deal generates returns, not chosen in isolation.

For a structured comparison of account types, see:

Should You Use a Retirement Account to Invest in Real Estate Syndications?

5. Plan Ahead for Exit Years

Taxes at exit are shaped well before a property is sold.

Meeting with a CPA in the year before an expected sale allows investors to:

• Estimate depreciation recapture and capital gains

• Apply available passive losses

• Coordinate reinvestment timing

• Explore deferral or mitigation tools such as 1031 alternatives, Opportunity Zones, DSTs, or charitable planning vehicles

Exit planning is most effective when it is proactive rather than reactive.

For exit-specific considerations in syndications, see:

1031 Exchanges & Alternatives for Syndication Investors

Avoid Treating Taxes in Isolation

Tax considerations should never override:

• Market quality

• Underwriting discipline

• Sponsor execution capability

Strong fundamentals paired with reasonable tax efficiency tend to outperform aggressive tax strategies built on weak deals.

For a framework that integrates all of these elements, see:

How to Compare Multiple Deals Side by Side

Final Perspective

Long-term tax efficiency is built through portfolio thinking, not individual tactics. LPs who plan across multiple investments – rather than deal by deal – tend to achieve smoother cash flows, better loss utilization, and stronger compounding over time. The goal isn’t tax elimination, but tax optimization aligned with long-term investing discipline.

Note: This material is for educational purposes only and is not intended as tax, legal, or investment advice. Tax outcomes can vary significantly based on individual circumstances. Investors should consult with a qualified CPA or tax professional regarding their specific situation.

Continue Learning

This article is part of a broader learning series on passive real estate investing.

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: How to Build a Diversified LP Portfolio Across Markets & Asset Classes