Active vs Passive Real Estate Investing in 2026

Real estate investors come to us asking for tax advice. “How much in tax savings will this property get me.” “Which properties give me the most tax savings”

While we absolutely help out there (btw it’s RV Parks, Car Washes, Gas Stations, STRs), investors should be asking different questions.

Should I invest in this property? Is this going to cash flow? Is it going to produce enough appreciation for me to invest?

Because then we get to ask the question, which makes more sense? Being active or being passive?

Because tax benefits should be the cherry on top, not the ultimate goal.

The Question Everyone Asks (and Why It’s Backwards)

Most Investors Start With the Tax. That’s the Wrong Starting Point.

Most investors ask us, “How much savings if my spouse gets REPS?” “If I work less, does that make sense to do REPS?” “I need to do the STR Loophole to save on my taxes.”

Some do ask, “Is it worth it for me to keep running my property myself?”

Which is a good question. Are you actively putting in new improvements that can be depreciated? How much depreciation do we have left after a cost segregation study?

But the better question to ask would be “how much will the PM cost in comparison to the tax savings?” “Is this property cash flowing so well that I need all the depreciation I can get to offset it?”

The best way to determine all of this is to ask the real question: Is this property a good deal first?

Because it would be best to run a successful short-term rental, and NOT have to spend an enormous amount of bandwidth managing it.

Why?

Tax savings is tax savings, regardless if it is active or passive.

Example:

A client of ours buys a $500,000 property. They put another $100,000 of improvements into it, with the hope that the property will do better with cash flow.

Turns out, with everything they’ve done, they are now netting, AFTER depreciation, taxable income. Which is taxed at the same rates as all their other income.

Which means, doing a cost segregation study will help them save on taxes for the next ten years.

While they had another person manage the property, they could spend more time at their main gig and more time with their family.

So you can create tax savings WITHOUT having to be active.

So this is what happens if you’re passive and have a good deal (best way to think about it).

What Active and Passive Actually Mean in 2026

Active vs Passive: What the Tax Code Actually Says

Now that we broke down what that means, what does being ‘active’ really mean for taxes?

Under IRC 469(c), a ‘passive activity’ is defined as any activity that is the conduct of a trade or business and in which the taxpayer does not materially participate

And of course, IRC 469(c)(2) says that any rental activity is passive BY DEFAULT. Unless you qualify for REPS (real estate professional status).

So any real estate fund you invest in, any single-family home you rent out, etc, all of those are passive UNLESS you can spend 750 hours in real estate (and more than 50% of your work time). And don’t forget, you have to hit the material participation tests of Reg. 1.469-5T.

Normally, everyone goes for 100 hours or 500 hours (most defendable in an audit).

And of course, the short-term rental exception falls into place IF your property rents for an average of 7 days or less.

That’s how you go from ‘passive’ to active in the tax code.

The 2026 Landscape: Why This Matters More Now

What Changed in 2026 (and Why It Makes the Deal Matter More)

Why does 2026 have a bigger impact than before? Well, in 2025, the One Big Beautiful passed Congress. This changed bonus depreciation to go from 60%, back to 100%, and stay there permanently.

This largely increases the incentive for real estate investors who were looking for deals and tax savings.

Now that sounds different than what I said earlier, but it’s okay to want the cherry on top. It just can’t be the main driver for our investment analysis.

And, this helps anyone who is both active and passive. Depreciation is a paper deduction real estate gets to take advantage of (reducing taxable income while not being taxed on the equity build up from appreciation.)

Now, comparing properties with higher building allocations (check that building/land ratio on the county assessor) gets significantly more depreciation, and allows investors to keep more of their hard-earned dollars.

However, right now, interest rates are relatively high, which makes these types of decisions more difficult than they were a few years ago. It’s important to run a cap table to make sure what you’re investing is part of your ROI.

And using depreciation is incredibly key for that.

And it’s of course WORTH the conversation to walk down the question ‘is this worth me putting my own precious time in?’

With market downturn, STR compression, and saturated markets, differentiation is actually the key.

How to Think About This

Deal First. Tax Status Second. Here’s the Order of Operations.

Every real estate investor should first ask, ” What is my return on this project? Am I going to make money on appreciation, cash flow? If I don’t make money on cash flow, how much am I paying for the appreciation? Am I still netting?”

Then, you can bake in the tax benefit. We are always trying to reduce our tax costs. It’s the highest predictable expense you’ll ever pay. And if you can find a way to reduce that, then you’re going to be golden.

Working on that strategy BEFORE you acquire the property is one of the best decisions you can make. Then, figuring out how to execute it all? That’s a different conversation, and one that needs help with a tax strategist.

Do you actually need bonus depreciation? Does it help your cash-on-cash return? Should you consider 179 instead? What are your IRS audit risks, even if you execute the strategy correctly?

Do you need to make a grouping election?

There are so many decisions to make, and this is where tax truly becomes an art, not a science. Because it has to flow with your overall investment thesis and your life plan.

The one that you must absolutely execute on is documentation. You miss that; you shouldn’t even consider any tax strategies. Paperwork, however you save it, is the path to success with the IRS.

Anything else is just playing the audit lottery (and those who play usually lose).

The active vs passive question isn’t wrong. It’s just second in line. Good deal first. Tax optimization second. And in 2026, with bonus depreciation back and the market tighter, that order matters more than ever.

Start working 1:1 with a tax strategist today.