Real Estate Investing

100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

Neil Langlois Business Taxes, Real Estate , , , , , , 1 Comment
100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

New Manufacturing Tax Deduction Could Be a Game-Changer — If You Structure It Right

Find the long version of this summary here: Executive Summary: 100% Deduction for New Manufacturing Facilities (Qualified Production Property)

From January 1, 2025 through December 31, 2028, there’s a powerful federal tax deduction on the table for businesses that build or buy manufacturing property — but you have to structure it right to qualify.

The headline: If you construct or purchase a building and use it for actual manufacturing, production, or refining, you may be able to deduct 100% of the building cost in the year it’s placed in service. This goes far beyond machines and equipment — this is about the building itself.

Under the new IRC §168(n) provision — often referred to as the Main Street Manufacturing deduction or Qualified Production Property (QPP) expensing — businesses can fully expense the cost of eligible real property placed in service during that four-year window. But the rules are tight, and the IRS will be watching.

No More “HoldCo leases to OpCo”

That common setup where your holding company owns the building and leases it to your operating business? That structure kills the deduction. The law is clear: landlords don’t qualify, even if the tenant is your own company. To get this right, the same taxpayer needs to be on both sides of the activity.

Even if you’re using a disregarded LLC, having a formal lease in place could still trigger the lessor disqualification. If there’s rent on paper, the IRS could treat it as a landlord arrangement regardless of how it’s taxed. That means your real estate holding company likely won’t qualify unless it’s completely ignored for tax purposes and there’s no lease in place.

Use It Right — Or Give It Back

There’s a 10-year recapture rule. If you stop manufacturing in that space, convert it to storage, lease it out, or sell it within 10 years, you could be required to pay back some or all of the tax savings. This isn’t a quick-flip benefit — it’s meant for long-term operators with real production activity.

Watch the Anti-Abuse Period

You also can’t just buy an old factory and write it off. If the building was used by anyone for manufacturing between January 1, 2021 and May 12, 2025, it doesn’t qualify. That anti-abuse lookback period trips up more deals than you’d think. You’ll need documentation showing what the space was used for — and brokers aren’t always equipped to give you the right answer.

Mixed-Use? Only Deduct the Manufacturing Footprint

If your business occupies part of a property and leases out the rest, only your manufacturing portion counts. You’ll need to carve out the costs based on actual use — square footage, building systems, etc. This isn’t a generic cost seg play. It’s a functional-use allocation tied to how much of the building supports actual manufacturing activity.

Didn’t Qualify? There May Still Be Options

If the building flunks the QPP test, you might still be able to expense certain components — like HVAC, roofs, security systems, or tenant improvements — under Section 179. It’s not a full write-off of the building, but it might still give you meaningful deductions in the first year. That’s especially important if you’re investing in a facility that’s used for warehousing, offices, or other non-manufacturing functions.

The §168(n) window only runs from 2025 to 2028. Miss the timing, and you miss the deduction.

Thinking about buying or building a facility for your business? Let’s make sure your structure doesn’t blow up your deduction.

I work with operators, owners, and investors who want to take full advantage of the new §168(n) manufacturing deduction. If you’ve got a project on deck and want to make sure it’s eligible before it’s too late to fix the setup — let’s talk.

This is not tax advice. But if you’re looking for real-world answers and practical modeling, I can help.

You can reach me directly at info@neil.tax or (541) 240-2933.

Understanding Self-Rentals and Tax Strategies for Business Owners

Neil Langlois Business Taxes, Individual Taxes, Real Estate , , , 0 Comment
Understanding Self-Rentals and Tax Strategies for Business Owners

Many business owners own both their operating business and the building that business operates in. The usual setup is simple: the business pays rent to a building LLC, the LLC takes depreciation, and everyone assumes they’re getting the full benefit of the structure.

The issue is that the passive activity rules treat self-rentals differently, and the default treatment often blocks you from using losses when you need them most. This becomes especially noticeable in a cost segregation year. The fix is the grouping election, but most owners are never shown how it works or why it matters.

Below is a simple, real-number example so you can see exactly where self-rentals break down and how grouping solves it.

A Simple Example

You own:

  • A CPA practice (Schedule C)
  • The building it occupies (owned in an LLC)

For the year:

  • CPA profit: $200,000
  • Rent paid from the practice to the LLC: $36,000
  • Cost segregation bonus depreciation: $(450,000)
  • Spouse’s W-2 wages: $150,000
  • You materially participate in the CPA practice

We’ll compare two outcomes:

  1. Default self-rental treatment
  2. Grouping the building and business into one activity

Scenario 1: Default Self-Rental Treatment

The self-rental regulation says that only net rental income is recharacterized as non-passive. “Net” means income minus deductions.

First, calculate the rental LLC’s results:

  • Rental income: $36,000
  • Bonus depreciation: $(450,000)
  • Net rental result: $(414,000)

Because the rental nets to a loss, there is no net rental income, so nothing is recharacterized as non-passive.

What you end up with is:

  • Non-passive income from the rental: $0
  • Passive loss: $(414,000), suspended

And that passive loss cannot be used this year to offset:

  • Your $200,000 of CPA income
  • Your spouse’s $150,000 W-2 income

You still get the depreciation; it wipes out the rent entirely. But the remainder drops into the passive bucket and gets stuck there until you generate passive income or dispose of the property.

This is where most people assume they’ve “lost” a benefit, when really it’s just locked away.

Scenario 2: Grouping the Building With the CPA Practice

If the building exists solely to support the operating business, ownership matches, and you are effectively the only tenant, the IRS allows both activities to be treated as one combined activity. This is the grouping election under Reg. 1.469-4.

When grouped, the building and the CPA practice become one non-passive activity.

Now combine the numbers:

  • CPA profit: $200,000
  • Rent (still part of the activity’s income): $36,000
  • Cost seg bonus depreciation: $(450,000)

Combined activity result: $(214,000)$ non-passive loss

Because the entire activity is non-passive, you can use that loss against all of your non-passive income.

Your only remaining non-passive income for the year is your spouse’s W-2:

  • W-2 income: $150,000
  • Loss applied: $(150,000)

Remaining: $(64,000)$ non-passive loss, carried forward (subject to the §461(l) business loss limitation rules)

And importantly:

  • The rent portion is still not subject to self-employment tax

Grouping doesn’t change how SE tax works. It only changes how income and losses are classified under the passive activity rules.

Side-by-Side Summary

Without Grouping (Self-Rental)

  • $36K rent is fully wiped out by depreciation
  • Remaining $(414K)$ is a passive loss
  • Cannot offset CPA income
  • Cannot offset W-2 wages
  • Passive loss is suspended

With Grouping (One Activity)

  • Building + business = one non-passive activity
  • Net loss = $(214K)$ non-passive
  • Can offset W-2 income and business income in the same year
  • Remaining $(64K)$ carried forward as non-passive
  • SE tax treatment unchanged

Why This Matters

Self-rental rules don’t stop you from deducting depreciation. They simply classify the leftover loss as passive, and passive losses can’t offset W-2 wages or business income.

Grouping removes the passive bucket entirely for this activity and treats the whole thing as part of the business you already materially participate in.

For owner-operators—especially in a cost segregation year—this can be the difference between carrying a large loss forward for years or using it today to reduce your tax bill dramatically.

If you own your building, are the only tenant, and the ownership structure lines up, the grouping election is often worth evaluating every single time.

The Short-Term Rental “Loophole” in 2025: How to Make STR Losses Non-Passive (and When You Can’t)

Neil Langlois Business Taxes, Real Estate , , , , 0 Comment
Short term rentals

Why investors care (in 60 seconds)

Most rental losses are passive, which means they normally can’t offset your W-2, business, or other non-passive income. Short-term rentals (STR) (think Airbnb/VRBO) can be different. If your rental isn’t a “rental activity” under the passive activity rules and you materially participate, your STR losses can be non-passive—which means they can offset W-2s, consulting income, interest, etc. That’s the “loophole.”

Plain English: get it right and a big cost-seg/bonus depreciation deduction from a new STR can reduce your ordinary income. Get it wrong and the same loss just piles up as passive carryforwards.

When a “rental” isn’t a rental

Under the passive activity rules, a “rental activity” generally means you’re paid for someone to use property you own. But there are exceptions. Two big ones for STRs:

  • Average stay < 7 days. If your average period of customer use is 7 days or less, the activity is not a rental activity.
  • Average stay < 30 days and you provide significant personal services (hotel-like services).

If you fit either exception, you’re outside the normal “rental” bucket. Then, if you materially participate, the activity is non-passive.

Quick example. You host 120 nights across 40 bookings (average 3 nights). You’re under 7 days—not a rental activity. If you materially participate (see below), your losses are non-passive.

What non-passive STR losses can offset

If your STR is not a rental activity and you materially participate, the loss is non-passive and can offset:

  • W-2 wages
  • Schedule C or K-1 non-passive income
  • Interest/dividends/short-term capital gains (depending on other rules)

This is why investors pair STRs with cost segregation + bonus depreciation to create large year-1 deductions that actually move the needle on total tax.

This is the “aha” most readers miss: the value is not just depreciation—it’s making that depreciation non-passive.

Material participation—human terms

A man wearing a plaid shirt is smiling while receiving keys from a woman, indicating a rental transaction, with a plant visible in the background.

You need to be active enough that the IRS considers you truly running the activity. There are seven tests; common paths:

  • 500-Hour Test: You spend 500+ hours on the STR in the year.
  • Substantially All Test: You (and your spouse) do substantially all the work.
  • 100 Hours + More Than Anyone Else: You do 100+ hours and more than any other person. Bookkeeping, messaging guests, setting rates, repairs, turnovers, supervising cleaners, vendor management, and pricing work can count. Keep a contemporaneous log.

The property-management company wrinkle (your big question)

Many owners hold the property in an LLC and pay a separate property-management company (sometimes their own Schedule C or C-corp) to handle operations. Does that break the STR play?

It depends on structure: “master lease” vs. “agent.”

  1. Master-lease to the manager (bad for STR treatment).
    If your property LLC leases the home long-term (say, a 1-year lease) to a management company, your customer is the manager, not the nightly guest. Your average period of customer use is the length of the master lease (>> 7 days). You’ve now fallen back into rental activity territory at the owner level.
  • Result: Your big depreciation loss is passive at the property-owner level.
  • If you materially participate in the management company, the self-rental rule can re-characterize net rental income as non-passive, but losses remain passive—so the cost-seg loss won’t offset W-2.
  1. Manager acts as your agent (good for STR treatment, with caveats).
    If the PM is acting as an agent (no master lease), and you—the owner—are the host granting nights to guests, your “customer use” is the guest’s stay. You can meet the < 7 days exception, and if you materially participate (not just the manager), your losses can be non-passive.
  • Caveat: If significant personal services are provided (daily cleaning, meals, concierge), net income may be subject to self-employment tax. If services are not significant, many practitioners treat it as not subject to SE tax, even while non-passive for §469 purposes. Facts matter; document your services.

Bottom line: Avoid master-lease arrangements if your goal is non-passive STR losses. Use an agency relationship and make sure you materially participate.

Where the law/guidance comes from (in brief)

  • IRS Pub. 925 explains passive activity rules, exceptions for average stays (< 7 days; < 30 days with significant services), and self-rental recharacterization (net income non-passive; losses stay passive).
  • IRS Chief Counsel Advice 202151005: confirms that STRs with average stays < 7 days can be non-rental activities and, with material participation, non-passive (implications also discussed for NIIT).

(There are also Tax Court decisions analyzing “significant personal services” and misclassified STRs, but Pub. 925 + CCA 202151005 are plenty to show the framework.)

Common misclassifications we still see

  • STRs dumped on Schedule E as passive when average stays are < 7 days and the owner clearly meets a material participation test.
  • Master-lease setups that unknowingly kill the STR exception at the property-owner level.
  • Treating heavy hotel-like services as passive (risk: SE tax can apply to net income when services are significant).

Practical checklist (use this before you buy or restructure)

  • Average stay math: Track nights/booking to prove < 7 days (or < 30 with significant services).
  • Your role: Keep a time log; if you rely on a manager, ensure you still hit a material participation test.
  • Contract structure: Avoid master leases; use an agency agreement with your PM.
  • Cost seg timing: Plan acquisition/placed-in-service dates to maximize bonus depreciation (and confirm 2025 bonus phase rules with your CPA).
  • SE tax exposure: If services are hotel-like, plan for possible SE tax on net income.
  • Documentation: Policies, pricing decisions, guest messaging, maintenance oversight—document all of it.

Have a Short-Term Rental tax question?

We handle STR questions every week for owners and real estate investors.
If you want clarity on how these 2025 rules apply to your property:

Ask a STR Tax Question

Quick FAQ

Q: If my PM company does “everything,” can I still materially participate?
A: Yes—if your hours are 100+ and more than anyone else, or you hit another test. If the PM’s hours exceed yours, you may not meet the test.

Q: Can I just lease the home to my own C-corp manager and still take non-passive losses at the property LLC?
A: Generally no. A master lease makes your customer the manager; you lose the < 7 days exception at the owner level. Also, self-rental rules can recharacterize income but not losses.

Q: Do STRs automatically go on Schedule C?
A: Not automatically. Schedule C is more likely when significant services are provided. Some non-rental, non-SE-tax STRs are still reported outside Schedule C. Facts matter; coordinate with your CPA.

The takeaway

The “loophole” isn’t magic—it’s definitions and documentation. Structure the PM relationship as agency (not master lease), keep average stays under 7 days, and materially participate. Do those three, and your depreciation-driven STR losses can become non-passive and actually offset other income.

Ready to do this the right way?

If you’re planning a 2025 STR purchase or thinking about cost seg/bonus on an existing place, let’s make sure the structure actually delivers non-passive losses (agency vs. master lease), your material participation is documented, and your depreciation plan fits your broader tax picture.

What we’ll cover in a quick strategy call:

  • Entity & contract check: Confirm your PM relationship is agency (not a master lease) so the STR stays out of “rental activity” status.
  • Participation plan: Pick the right material-participation test and set up an easy time-log so it holds up.
  • Cost seg & bonus timing: Coordinate placed-in-service dates, safe-harbors, and year-one impact on your W-2/other income.
  • SE-tax exposure: If services are hotel-like, plan for (or around) self-employment tax on net income.

Questions or ready to run numbers?
Wm. Neil Langlois, CPA, LLC • (541) 240-2933 • info@neil.tax

Important note & disclaimer

This post is general education, not tax or legal advice. Facts drive outcomes with short-term rentals (average stay, services, hours, contracts, and ownership). Before you implement anything here, get advice for your situation. Services provided by Wm. Neil Langlois, CPA, LLC (Oregon). We work with clients in multiple states.

References

  • IRS Publication 925, Passive Activity and At-Risk Rules (rental exceptions; self-rental rule; material participation).
  • Chief Counsel Advice 202151005 (STR average stay < 7 days; material participation; non-passive treatment and NIIT implications).
Ask a Short-Term Rental Tax Question
We handle STR questions every week for owners and real estate investors. If you want clarity on how these 2025 rules apply to your property:
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Free Residential Cost Segregation Estimator for Landlords

Neil Langlois Business Taxes, Real Estate , , , , 0 Comment
Cost Segregation Study

We’re excited to announce a powerful new addition to our website: a free Residential Cost Segregation Estimator—built specifically for landlords, CPAs, and real estate investors who want to take control of their after-tax returns.

If you own rental property, you’ve probably heard of cost segregation—a strategic way to accelerate depreciation deductions by breaking your property into shorter-lived components. The problem? It’s traditionally required a paid engineering study just to see if it’s worth it.

That’s why we built this estimator.

Our tool lets you estimate how much of your building’s value might qualify for 5-year personal property, 15-year land improvements, and standard 27.5-year building structure categories. You’ll also see:

  • Bonus depreciation impacts (under IRC §168(k))
  • First-year tax savings based on your federal and state tax rate
  • Tailored results based on unit count, building quality, appliances, flooring type, HVAC system, and more

It’s fast, free, and educational—and while it doesn’t replace a full engineering-based study, it gives you a reliable benchmark before spending thousands on a formal report.

🔍 Try the tool here: Residential Cost-segregation Tool

When Should You Use It?

  • You’re evaluating a new rental property acquisition
  • You want to understand potential first-year depreciation
  • You’re comparing different properties or rehab strategies
  • You’re a tax professional doing high-level planning for a client

Disclaimer: This estimator uses general assumptions and industry benchmarks. It should not be relied upon for filing purposes. If you’re serious about maximizing depreciation, we recommend a formal cost segregation study backed by engineering detail.

Ready to explore a professional cost seg study? Book a strategy call now

Qualifying as a Real Estate Professional: Unlock Significant Tax Benefits

Neil Langlois Business Taxes, Real Estate , , , 0 Comment
Real Estate Professional

If you’re a real estate investor, understanding how to qualify as a real estate professional can transform the way your rental real estate activities are taxed. This special designation allows you to unlock powerful tax benefits, including the ability to offset rental losses against other forms of income. In this post, we’ll explore the key qualifications, rules for married couples, and how these tax benefits can make a significant impact—complete with examples.

What is the Real Estate Professional Tax Election?

Under IRS rules, most rental real estate income or losses are considered passive. This means that losses can only offset other passive income, not wages or other forms of nonpassive income.

However, if you qualify as a real estate professional, you can treat rental real estate activities as nonpassive. This allows you to use rental real estate losses to offset income from wages, business profits, or other nonpassive sources, significantly reducing your overall taxable income.

Qualifying as a Real Estate Professional

To qualify as a real estate professional, you must meet two key requirements:

  1. More than 50% of your personal services performed during the tax year must be in real property trades or businesses in which you materially participate.
  2. You must perform more than 750 hours of service in real property trades or businesses in which you materially participate.

Both criteria must be met during the tax year, and accurate documentation of hours worked is essential. Keep detailed records, as post-event estimates or reconstructions are typically not accepted by the IRS.

Material Participation Requirement

Qualifying as a real estate professional is only the first step. To treat your rental activities as nonpassive, you must also demonstrate material participation in each rental activity.

Material participation can be established through one of several tests, such as spending over 500 hours on a rental activity. If you own multiple rental properties, you can elect to group all rental real estate activities as a single activity to meet the material participation requirements. This election must be made on your tax return and is generally irrevocable.

Special Rules for Married Couples

If you’re married, the IRS applies special rules for determining whether you qualify as a real estate professional and materially participate:

  1. To meet the 50% and 750-hour tests, one spouse must individually satisfy these criteria. Hours worked by both spouses cannot be combined for this purpose.
  2. For material participation, hours worked by both spouses can be combined. This means that if one spouse is heavily involved in managing the rental properties, their hours can help satisfy the participation requirements for the other spouse.

These rules provide flexibility for couples and can be especially useful when one spouse works primarily in real estate while the other does not.

The Benefits of Qualifying as a Real Estate Professional

The ability to treat rental real estate activities as nonpassive can significantly lower your tax liability. Here’s how:

Offsetting Ordinary Income with Real Estate Losses

Typically, passive rental losses cannot offset wages or business income. For example, consider a married couple:

  • One spouse is a high-earning professional, and the other manages several rental properties.
  • The rental properties generate significant passive losses due to depreciation, but those losses cannot offset the professional’s wages unless one spouse qualifies as a real estate professional.

Now, imagine the couple acquires a new property and conducts a cost segregation study, allowing them to take advantage of bonus depreciation. This strategy could create sizable rental real estate losses.

If one spouse qualifies as a real estate professional and materially participates in their properties:

  • The losses from depreciation can now offset the professional spouse’s high income, significantly lowering their taxable income.
  • For example, a $100,000 real estate loss could reduce their taxable income by the same amount, potentially saving tens of thousands of dollars in taxes.

Accelerating Tax Benefits

Qualifying as a real estate professional opens the door to accelerated depreciation through cost segregation. This allows you to front-load depreciation expenses, creating large paper losses even if your properties generate positive cash flow.

Tax-Deferred Growth

When combined with strategies like bonus depreciation, you can defer paying taxes on rental income for years. This deferral allows you to reinvest more into growing your real estate portfolio, compounding your returns.

Greater Flexibility in Tax Planning

If you qualify as a real estate professional, you can plan strategically to manage taxable income, especially in years with high earnings or significant property acquisitions.

Key Considerations

While the benefits are significant, there are a few important considerations:

  1. Nonpassive Income Limitation: If your rental activities generate income rather than losses, qualifying as a real estate professional may prevent you from offsetting this income with passive losses from other investments.
  2. Short-Term Rentals: Time spent managing short-term rentals (with average stays of seven days or less) does not count toward the 750-hour requirement.
  3. Record-Keeping: Maintaining accurate, contemporaneous records of your hours is critical. Courts routinely reject post-event estimates or approximations.

Is Qualifying as a Real Estate Professional Right for You?

If you’re heavily involved in real estate and want to maximize your tax benefits, qualifying as a real estate professional could be a game-changer. This designation allows you to treat rental losses as nonpassive, offset other income, and take advantage of accelerated depreciation strategies like cost segregation.

For married couples, the ability to combine hours for material participation provides added flexibility, making it easier to meet the requirements.

Take the Next Step

Qualifying as a real estate professional requires careful planning, documentation, and a clear understanding of the rules. If you think this strategy might benefit you, contact us to schedule a consultation. Together, we can analyze your situation, develop a plan, and ensure you’re leveraging all available tax benefits.

Disclaimer: This content is for informational purposes only and should not be considered as tax, financial, or legal advice. Always consult with a qualified tax professional regarding your unique situation. Wm. Neil Langlois, CPA LLC does not guarantee the accuracy or applicability of the information presented in this blog post to any individual circumstances.

Anticipating a Dip in Home Mortgage Interest Rates: Expert Perspectives

Neil Langlois Business Taxes, Real Estate , , ,
Dip in interest rates

The world of real estate and finance is buzzing with the prospect of home mortgage interest rates taking a downward turn. Recent insights from financial experts and analysts suggest a potential decline in these rates, a shift that could significantly impact the housing market. It’s essential to note that this article serves purely informational purposes and does not constitute investment advice. Let’s delve into the emerging signals and professional opinions that bolster the notion of lower home mortgage interest rates.

Experts Weigh In:

Financial experts and economists have been closely monitoring the trajectory of home mortgage interest rates, and their observations provide valuable insights.

According to a CNBC report titled “Economic Indicators Point to Potential Mortgage Rate Decline” published on September 15, 2023, recent economic data indicates a possible decrease in home mortgage interest rates. This is attributed to a slowdown in inflation and a more cautious approach from the Federal Reserve.

The slowdown in inflation is seen as a sign that the Federal Reserve may adopt a less aggressive stance on interest rates. This could translate into a more favorable environment for those in the market for a new home or looking to refinance their existing mortgages.

Bloomberg, in an article titled “Shifting Market Dynamics: Implications for Mortgage Rates” dated September 20, 2023, delves into the shifting market dynamics and their implications. According to the publication, these dynamics, influenced by global economic factors, may exert downward pressure on home mortgage rates.

The global economic climate, characterized by geopolitical uncertainties, has contributed to a softer demand for loans. This, in turn, may play a role in driving mortgage rates down. Nevertheless, it’s essential to remember that the housing market is multifaceted, and numerous variables are at play. While lower mortgage rates can benefit homebuyers, they can also reflect broader economic challenges.

The Wall Street Journal, in an article titled “Federal Reserve’s Flexibility and Mortgage Rates” from September 25, 2023, discusses the flexibility of the Federal Reserve in adjusting its monetary policies. The publication suggests that this adaptability could result in more favorable mortgage rates for potential homebuyers.

The Federal Reserve’s openness to policy adjustments indicates a willingness to respond to changing economic conditions. While this flexibility may lead to reduced mortgage rates, it’s crucial to maintain perspective. Monetary policy decisions are influenced by a wide range of factors, and their impact on mortgage rates can vary. Homebuyers should remain vigilant, considering factors like personal financial goals and the overall economic landscape when navigating the housing market.

A Different Viewpoint:

While several experts are optimistic about the potential for lower home mortgage interest rates, it’s important to acknowledge that not all share this sentiment.

Understanding the Landscape:

Recent insights from financial experts paint a compelling picture of a potential decline in home mortgage interest rates. Factors such as a more cautious Federal Reserve, signs of economic stabilization, and global economic dynamics have contributed to this outlook. However, predicting interest rate movements is an intricate endeavor. Individuals navigating the housing market should carefully assess their unique financial circumstances and stay attuned to evolving market conditions.

Disclaimer:
This article serves purely informational purposes and should not be considered as investment advice. The fluctuations of interest rates are influenced by a multitude of economic and market factors that can change rapidly. It is advisable to consult with a financial advisor or mortgage professional before making any decisions related to home financing or investments.