Accounting for Real Estate in Chicago

We assist Chicago real estate owners in determining the most effective legal structure for rental property investments. While every investment carries risks, establishing a separate entity can offer important protection and benefits.

✔ A Limited Liability Company (LLC) combines the operational simplicity of a sole proprietorship with the protections of a corporation. It shields personal assets from property-related liabilities, limits personal exposure, and offers tax flexibility for those needing real estate accounting in Chicago.

With an LLC, rental income bypasses corporate taxation and flows directly to your personal return. You can deduct qualifying property expenses, including mortgage interest and upkeep. In the competitive Chicago real estate market, operating as an LLC also demonstrates professionalism to partners and tenants. Many investors prefer LLCs for liability protection, tax adaptability, and straightforward management, though S Corps can be a smart option for certain active investors who focus heavily on accounting for real estate.

Legal Structure: How real estate owners pay taxes depends on the structure of their business.  At P&N, we can evaluate your situation and recommend the right entity for your business.

Sole Proprietorship – A sole proprietorship is the simplest form of business, where the owner and the business are one.

Limited Liability Company (LLC) – An LLC combines the liability protection of a corporation with the flexibility of a partnership.

Partnership – A partnership involves two or more individuals or entities sharing ownership and responsibilities.

S-Corporation – An S-Corporation is a pass-through entity that combines features of

corporations and partnerships.

UNDERSTANDING ACCELERATED DEPRECIATION in Chicago

For property owners and investors in Chicago, our Real Estate CPAs can help clarify how tax rules affect your holdings. Accelerated depreciation is one method that can strengthen your tax position while managing your property portfolio.

Depreciation is a deduction that allows you to recover the cost basis of a property over time, accounting for wear, deterioration, and outdated elements. While residential rental properties are generally depreciated over 27.5 years, accelerated depreciation gives Chicago property owners the ability to take larger deductions during the initial years, offering greater short-term tax benefits.

How Does Accelerated Depreciation Work?

A passive activity is an investment or business where the taxpayer is not actively involved during the year. Passive activity losses (PALs) occur when the expenses from such activities outweigh the income they produce.

In Chicago, rental properties are generally considered passive activities. Common expenses—such as mortgage interest, insurance, maintenance, and depreciation—can create passive losses. Similarly, investments in limited partnerships or other real estate ventures in Chicago with minimal personal involvement fall into this category.

Exceptions to the passive loss rules include:

• $25,000 Allowance: If you actively manage the real estate and earn less than $100,000 during the year, you can deduct up to $25,000 in passive losses against ordinary income.



• Real Estate Professionals: Real estate professionals who materially participate in their real estate activities are not subject to the same passive loss rules. They can use real estate losses to offset income from other active sources.
  

Material participation is a key factor. If you actively manage the real estate (e.g., handle day-to-day operations), your losses may not be strictly passive. Real estate professionals who meet specific qualifications can also avoid the passive loss treatment.

If you sell a Chicago property used for business or investment and replace it with another qualifying property, you can defer capital gains taxes on the sale. The sale proceeds must be held by an independent third party and used to purchase the new property without being received directly. “Like-kind” means similar in nature, not identical—for example, exchanging a retail space for an office building or a warehouse for vacant land.

You can use a 1031 exchange multiple times, continually rolling over gains from one property to another and allowing your Chicago real estate portfolio to grow tax-deferred. Taxes are due only when you eventually sell for cash, and then at the applicable long-term capital gains rate. While the 1031 exchange defers taxes, it does not remove them entirely. Certain conditions may even allow a former primary residence to qualify.

Strategic Advisory for Real Estate Growth in Chicago

Gain an advantage in Chicago’s real estate market with our specialized real estate accounting services and experienced Real Estate CPAs. We track market developments, identify promising investment opportunities, and provide the insight you need to make confident property decisions. Presti & Naegele is your trusted partner in navigating Chicago’s competitive property environment.

STREAMLINE FINANCIAL OPERATIONS WITH QUICKBOOKS EXPERTISE

Well-organized bookkeeping is essential for property success in Chicago. Our QuickBooks services are designed for real estate professionals, making accounting simpler and more efficient. With our guidance, you can focus on acquiring, managing, and growing your real estate investments while knowing your records are accurate and up to date.

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