Accounting for Real Estate in Connecticut

Presti & Naegele helps Connecticut investors determine the most effective entity structure for their rental property holdings. While any investment involves some risk, establishing a separate legal entity can offer important protections and flexibility.

✔ A Limited Liability Company (LLC) combines the straightforward management of a sole proprietorship with the liability protections of a corporation. It separates personal assets from business liabilities, reduces exposure, and offers tax flexibility for those using real estate accounting in Connecticut.

With an LLC, rental income flows directly to your personal tax return, avoiding corporate taxation. You can also deduct eligible property-related expenses, including mortgage interest and necessary repairs. In Connecticut’s competitive real estate market, operating as an LLC signals professionalism to tenants and business partners. Many property owners favor LLCs for liability protection, tax adaptability, and ease of management, though S Corps may also be worth considering for certain active real estate professionals seeking additional shareholder protections.

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 Connecticut

For property owners and investors in Connecticut, our Real Estate CPAs can help you understand how tax rules apply to your holdings. Accelerated depreciation is one strategy that can strengthen your tax position while managing your portfolio.

Depreciation allows you to recover a property’s cost basis over time, factoring in wear, deterioration, and outdated features. While residential rental properties typically depreciate over 27.5 years, accelerated depreciation gives Connecticut investors the ability to take larger deductions in the early years of ownership, creating more immediate benefits.

How Does Accelerated Depreciation Work?

A passive activity is an investment or business where the taxpayer does not materially participate during the year. Passive activity losses (PALs) occur when expenses exceed the income generated from these activities.

In Connecticut, rental property income is generally considered passive. Common expenses—such as mortgage interest, insurance, maintenance, and depreciation—often contribute to passive losses. Likewise, investments in limited partnerships or other Connecticut real estate ventures with minimal involvement are treated as passive activities.

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.

When you sell a Connecticut property used for business or investment and reinvest in another qualifying property, you can defer capital gains tax on the sale. The proceeds must be held by a qualified intermediary and cannot be received directly. “Like-kind” refers to properties similar in nature but not necessarily identical—such as exchanging a retail storefront for an industrial building or a multi-family complex for undeveloped land.

A 1031 exchange can be used multiple times, enabling Connecticut investors to expand their portfolios while deferring taxes. Taxes are due only when you sell for cash, at the applicable long-term capital gains rate. While this defers taxes, it doesn’t eliminate them entirely. In certain situations, even a former primary residence may qualify.

Strategic Advisory for Real Estate Growth in Connecticut

Excel in Connecticut’s real estate market with our dedicated real estate accounting services and experienced Real Estate CPAs. We track market trends, uncover investment opportunities, and provide insights that help you make informed property decisions. Presti & Naegele is your trusted partner for navigating Connecticut’s diverse property environment.

STREAMLINE FINANCIAL OPERATIONS WITH QUICKBOOKS EXPERTISE

Accurate, well-organized bookkeeping is essential for property success in Connecticut. Our QuickBooks services are tailored for real estate owners and investors, simplifying accounting so you can focus on growing and managing your portfolio. With our support, you’ll have clear, reliable records for every property.

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