Real Estate Private Equity Tax Benefits: FAQ for Investors Implications

Real estate private equity investments offer several tax benefits that can enhance after-tax returns. This FAQ covers the most common tax questions investors ask about REPE, from depreciation deductions to exit strategies.

Frequently Asked Questions

What tax benefits does private real estate equity offer?

Private REPE investments can provide tax advantages, including:

• Depreciation deductions: Offset property operating income by non-cash depreciation deductions, potentially lowering tax payments during the hold period.
• Gain on sale: Gain on ultimate sale of the property taxable at favorable capital gain rates
• Debt financing: Ability to include proceeds of debt in basis of property, thereby increasing depreciation deductions

Who can invest in real estate private equity?

Any type of taxpayer/entity can make an investment in REPE, from U.S. and non-U.S. individuals and partnerships to corporations, trusts, tax-exempt entities and foreign governments

What are the best types of investments for real estate private equity?

There is no one best type of investment. It depends on the taxpayer’s preferences, which can be investment in multi-family properties, commercial, retail, lodging, industrial or storage facilities.

What tax rate applies to private equity real estate returns?

Returns from operations are generally taxed at ordinary income tax rates, while returns from sales of the property are typically taxed at lower long-term capital gains rates This tax efficiency enhances after-tax returns for investors.

Are there tax considerations for foreign investors in private REPE?

Foreign investors should understand U.S. tax laws, withholding requirements, and potential treaty benefits. Returns from operations can be subject to much different tax rules than returns from dispositions of the property. Consult with tax professionals to optimize tax efficiency.

Can I use a 1031 exchange for REPE investments?

Yes, a 1031 exchange permits a deferral of tax on sale of a property when selling one real estate investment property and acquiring another like-kind property. Contributions to a Delaware Statutory Trust and an UPREIT also accomplish similar deferral.

How does UBTI (Unrelated Business Taxable Income) affect tax-exempt REPE investors?

UBTI may apply to certain tax-exempt entities investing in leveraged real estate. Consult with tax advisors to navigate UBTI implications.

How do REPE investments handle pass-through entities (LLCs, partnerships)?

Most REPE investments use pass-through structures to distribute cash and allocate income and losses to investors. Understand your role, rights and obligations as a limited partner or LLC member in these entities.

What role do qualified opportunity zones play in REPE investing?

QOZs offer favorable tax treatment for investments in economically distressed areas. Get tips for QOZ investing.

How can I minimize taxes when exiting a REPE investment?

Plan exit strategies early. Passive income, portfolio income and “active” income can all result from a REPE investment and losses against such income can be limited. Timing is crucial to offset income from one investment against losses from another in the same year. Also, consider a 1031 exchange or other deferral techniques.

What’s the role of a General Partner (GP) in a private equity real estate fund?

The GP manages the fund, distributes returns, sources deals, and makes investment decisions, often with the consent of the limited partners. A limited liability company (LLC) is frequently used which is managed by a “managing member.”

How do REPE investments handle distributions and waterfall structures?

Distributions follow a waterfall model, prioritizing returns and timing to specific classes of investors and the GP. Learn more about waterfall distributions here.

What’s the difference between core, value-add, and opportunistic REPE strategies?

Core focuses on stable, income-producing assets. Value-add involves improving properties for increased value. Opportunistic targets high-risk, high-reward investments.

How do the Tax Cuts and Jobs Act of 2017 (TCJA) and the One Big Beautiful Bill of 2024 (OB3) (affect REPE investments?

TCJA introduced favorable changes like “bonus” depreciation, increased interest deduction limits and Qualified Opportunity Zones. Bonus depreciation allows a real estate investor to deduct up to 100% of the cost of qualified improvement property (QIP) in the first year of ownership. QIP represents certain improvements made to the interior of a non-residential building. OB3 made the 100% amount permanent for QIP acquired and placed into service after January 19, 2025.

Under TCJA, business interest deductions were generally capped at 30% of adjusted taxable income, but eligible real estate businesses could elect ERPTOB status to avoid that cap. The tradeoff was slower ADS depreciation for certain real property and QIP, along with loss of bonus depreciation on affected property. Revenue Procedure 2026-17 now allows taxpayers that made that election for 2022, 2023, or 2024 to withdraw it, potentially restoring faster depreciation and bonus depreciation benefits. The deadline is generally the earlier of October 15, 2026, or the applicable limitations period.

Investment in a Qualified Opportunity Zone allows a taxpayer to defer taxation of capital gains, reduce the amount of capital gain subject to taxation and eliminate taxation of additional appreciation if the investment is owned for 10 years. OB3 enacted additional benefits, generally effective starting with the 2027 taxable year.

Should you invest in real estate private equity?

Investment in REPE is not for everyone. Some may want the safety and security of investment in tax-exempt bonds. REPE offers the tax benefits described above, such as depreciation deductions to reduce tax on operating income and favorable tax rates on ultimate sale. Also, historically REPE investments have appreciated in value, thus enhancing the returns from operations.

For guidance on how these tax considerations apply to your REPE investments, contact EisnerAmper's Real Estate Services Group.