Decision Tree Overview
Real estate investing can feel like a maze, especially when it comes to taxes. But with the right moves, you can keep more cash in your pocket. This guide breaks down how to stack cost segregation (Cost Seg), 1031 exchanges, and Qualified Business Income (QBI) deductions to maximize tax deferral and boost cash flow. Think of it as a decision tree: each choice you make branches into new opportunities. Whether you’re buying, selling, or holding, sequencing these strategies correctly can save you thousands.
We’ll walk through two scenarios, share CPA tips, and show how to make it all work for passive net-lease income. Ready to learn how to keep your money working for you?
Scenario A—Acquire → Cost Seg → Refi → 1031
This path starts with buying a property, like a single-tenant NNN investment, and using tax strategies to generate cash flow early. Here’s how it works step by step.
Step 1: Acquire a Property
You buy a commercial property, say an NNN property for sale, like a Dollar General or Walgreens. These properties are ideal because tenants cover taxes, insurance, and maintenance, leaving you with passive net-lease income. In 2025, NNN properties remain hot due to their stability.
A recent report noted that triple-net cap rate trends are holding steady at 5-7% for prime locations, making them attractive for investors.
Step 2: Conduct a Cost-Segregation Study
Once you own the property, order a cost-segregation study for real estate. This study breaks down your property’s components like HVAC systems, lighting, or parking lots and assigns them shorter depreciation lives (5, 7, or 15 years) instead of the standard 39 years for commercial buildings. This accelerates depreciation, slashing your taxable income early on.
Step 3: Refinance for Cash
After a year or two, refinance the property to pull out cash tax-free. The extra depreciation from the cost-seg study lowers your taxable income, so you keep more rental income. Refinancing lets you access equity without triggering capital gains taxes.
Step 4: 1031 Exchange Later
When you’re ready to sell, use a 1031 exchange to defer capital gains taxes. A triple net (NNN) 1031 exchange lets you swap your property for another like-kind property, such as 1031 exchange properties for sale, without paying taxes on the gain. The IRS gives you 45 days to identify a replacement property (the replacement property 45-day rule) and 180 days to close (safe-harbor 1031 timelines). This deferral preserves your wealth for reinvestment.
| Step | Action | Tax Benefit | Timeframe |
| 1 | Acquire NNN property | Passive income, QBI eligibility | Month 1 |
| 2 | Cost-segregation study | Accelerated depreciation, 60% bonus | Months 2-3 |
| 3 | Refinance | Tax-free cash | Year 1-2 |
| 4 | 1031 exchange | Deferred capital gains | Year 3+ |
Stat: A 2025 study found that cost-segregation studies can increase first-year depreciation by 20-30% on commercial properties, saving investors an average of $50,000-$100,000 in taxes (USA Today, Jul 20, 2025)
Scenario B—Sell → 1031 → Cost Seg on Replacement
This approach is for investors selling a property first, then reinvesting to defer taxes and optimize cash flow.
Step 1: Sell Your Property
You sell an investment property, like an apartment complex, that’s appreciated significantly. Without a 1031 exchange, you’d owe capital gains taxes (15-20%) and depreciation recapture (25%). For a $1 million gain, that could mean $200,000-$250,000 in taxes. A 1031 exchange avoids this by rolling the proceeds into a new property.
Step 2: 1031 Exchange into NNN or DST
Use the sale proceeds to buy a replacement property through a triple net (NNN) 1031 exchange. NNN properties are popular because they require minimal management. Alternatively, consider DST 1031 listings under $1M for diversification. Delaware Statutory Trusts (DSTs) let you own fractional interests in institutional-grade properties, like medical centers or retail chains, with low entry costs. You must identify the replacement within 45 days and close within 180 days to meet safe-harbor 1031 timelines.
Step 3: Cost Segregation on Replacement Property
After acquiring the replacement property, conduct a cost-segregation study. This is especially powerful if the new property qualifies for 100 percent bonus depreciation in real estate (available for certain assets through 2026).
Step 4: Leverage QBI Deduction
The Qualified Business Income (QBI) deduction lets you deduct up to 20% of rental income from pass-through entities, like LLCs, if you meet IRS criteria. Pairing QBI with cost segregation maximizes your after-tax cash flow.
| Strategy | Potential Savings | Example Impact |
| 1031 Exchange | Defers $200,000-$250,000 capital gains | $1M gain preserved |
| Cost Segregation | $50,000-$100,000 first-year tax savings | 20-30% depreciation boost |
| QBI Deduction | Up to $16,000/year | 20% of $80,000 rental income |
Stat: In 2025, 60% of real estate investors using 1031 exchanges opted for NNN properties due to their low management and stable returns (Reuters, Jul 12, 2025).
CPA Coordination Tips
To pull off this tax stack, you need a CPA who knows real estate. Here’s how to work with them effectively.
Find a Specialist
Choose a CPA with experience in cost-segregation study real estate and 1031 exchanges. They should understand bonus depreciation sequencing and QBI rules. Ask for references from other real estate investors to ensure they’ve handled NNN properties or DSTs.
Plan Early
Start discussions before buying or selling. For Scenario A, your CPA can estimate depreciation benefits from a cost-segregation study. For Scenario B, they’ll help identify 1031 exchange properties for sale that maximize tax benefits. Early planning ensures you meet the replacement property 45-day rule and safe-harbor 1031 timelines.
Document Everything
Keep detailed records of your cost-segregation study, including asset classifications and costs. For 1031 exchanges, document the sale, identification, and purchase process. This protects you in case of an IRS audit. Your CPA can guide you on what to keep.
Coordinate with a Qualified Intermediary
For 1031 exchanges, you need a Qualified Intermediary (QI) to hold sale proceeds. Your CPA should work with the QI to ensure compliance with IRS rules. They can also advise on structuring the deal to maximize QBI deductions.
Monitor Tax Law Changes
Tax laws evolve. For example, bonus depreciation drops from 60% in 2025 to 40% in 2026 (Wall Street Journal, Jul 15, 2025). Your CPA should track these changes and adjust your strategy to keep tax stack real estate benefits intact.
| Task | Purpose | Who Handles |
| Cost Seg Study | Accelerate depreciation | CPA + Engineer |
| 1031 Exchange Setup | Defer capital gains | CPA + QI |
| QBI Qualification | Deduct 20% of income | CPA |
| Record Keeping | Audit protection | Investor + CPA |
Why This Works
Stacking Cost Seg, 1031 exchanges, and QBI is like building a financial fortress. Cost segregation front-loads depreciation, giving you cash flow early. 1031 exchanges defer taxes, letting you reinvest every dollar. QBI deductions cut your taxable income on rental profits. Together, they create a cycle of wealth-building with minimal tax leakage. NNN properties and DSTs are perfect for this because they’re low-maintenance and generate steady passive net-lease income.
Risks to Watch
No strategy is foolproof. Cost segregation can trigger depreciation recapture when you sell, though a 1031 exchange defers it. According to a report, if you miss the replacement property 45-day rule or 180-day closing, your 1031 exchange fails, and taxes are due. QBI has income limits and requires proper business structuring. Always consult a CPA to avoid pitfalls.
Frequently Asked Questions
Which strategy gives better cash flow, Scenario A or B?
Scenario A tends to front-load deductions faster because you cost-seg immediately and refinance. Scenario B defers gains and accelerates depreciation only on replacement property—so cash flow may start slower but preserves longer-term deferral.
Does cost segregation always apply to carryover basis in a 1031?
No. Only excess basis qualifies for bonus depreciation. However, if you elect to treat the entire basis as new, cost seg can apply to full basis but bonus depreciation still only applies to excess basis.
How does QBI deduction interact with cost seg and bonus depreciation?
Qualified business income deductions under Section 199A allow up to 20% deduction on net business income. If your real estate activity meets the safe-harbor, cost seg losses can reduce taxable income and increase QBI deduction eligibility
How does QBI help real estate investors?
The QBI deduction lets you deduct up to 20% of qualified rental income, reducing your tax bill. It works best with pass-through entities like LLCs.
What happens if I miss the 45-day rule in a 1031 exchange?
Missing the replacement property 45-day rule disqualifies the exchange, making your capital gains taxable. Work with a Qualified Intermediary to stay on track.
Conclusion
If you’re serious about real estate tax strategy in 2025, think about sequence. A wise tax stack real estate plan aligns cost segregation, bonus depreciation sequencing, 1031 exchanges, and QBI deductions in a clear order:
- Acquire and cost-seg
- Accelerate depreciation for cash flow
- Refi or sell via 1031
- Defer capital gains and restart
Whether you’re targeting a triple net (NNN) 1031 exchange, or passive cash flow from single‑tenant NNN investment, this approach delivers both upfront benefits and long-term deferral. Just remember: timing, documentation, and CPA coordination matter. And investing in bonus depreciation–eligible property helps ensure your stack works right.
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DISCLAIMER
I am not a CPA, attorney, broker-dealer, or investment adviser. This content is for general education and must not be relied upon for tax, legal, or accounting advice. Always consult your licensed professional. Federal and state rules change frequently; info may become outdated. Circular 230 Notice: Nothing here is intended for, nor can it be used for, avoiding U.S. tax penalties.
Advertising Disclosure. Posts may reference services offered by AMC Real Estate Investment Services and affiliates, including 1031DealHub.
Forward-Looking Statements. Any opinions or projections are based on current data and may change without notice.
