Accounting for Real Estate in Washington D.C.

Presti & Naegele helps Washington D.C. real estate investors choose the most effective entity structure for rental property holdings. While any investment carries some risk, forming the right business entity can offer critical protections and flexibility.

✔ A Limited Liability Company (LLC) combines the operational ease of a sole proprietorship with the liability protection of a corporation. It separates personal assets from business liabilities, limits personal exposure, and provides tax flexibility for those seeking real estate accounting in Washington D.C.

An LLC allows rental income to flow directly to your personal tax return without corporate taxation. It also enables deductions for eligible property-related expenses, such as mortgage interest and upkeep. In the competitive D.C. property market, operating through an LLC signals professionalism to partners and tenants. Many investors prefer LLCs for their liability protection, tax flexibility, and ease of management. S Corps may also be beneficial for certain active real estate professionals looking for 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 Washington D.C.

For property owners and investors in Washington D.C., our Real Estate CPAs help clarify how tax regulations apply to your holdings. Accelerated depreciation is one approach that can improve your tax position while managing your properties.

Depreciation allows you to recover a property’s cost basis over time, accounting for physical wear, deterioration, and outdated features. While most residential rental properties are depreciated over 27.5 years, accelerated depreciation lets D.C. investors take larger deductions earlier in the ownership period, providing significant short-term benefits.

How Does Accelerated Depreciation Work?

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

In Washington D.C., rental property income is generally considered passive. Common expenses—such as mortgage interest, insurance, repairs, and depreciation—can contribute to passive losses. Likewise, investments in limited partnerships or other real estate ventures in D.C. where you have 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 Washington D.C. property held for investment or business purposes and reinvest in another qualifying property, you can defer capital gains taxes 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, not identical—such as exchanging an office building for retail space or a multi-unit rental for vacant land.

Multiple 1031 exchanges can be done over time, allowing D.C. investors to grow their portfolios without immediate tax consequences. Taxes are due only when you eventually sell for cash, and then at the applicable long-term capital gains rate. While this strategy defers taxes, it does not eliminate them. Certain conditions may even allow a former principal residence to qualify.

Strategic Advisory for Real Estate Growth in Washington D.C.

Compete effectively in Washington D.C.’s fast-moving property market with our specialized real estate accounting services and experienced Real Estate CPAs. We monitor local trends, identify investment opportunities, and provide the insight you need to make confident decisions. Presti & Naegele is your trusted partner for navigating D.C.’s complex real estate landscape.

STREAMLINE FINANCIAL OPERATIONS WITH QUICKBOOKS EXPERTISE

Accurate bookkeeping is essential for success in Washington D.C. real estate. Our QuickBooks services are tailored for property owners and investors, helping simplify accounting tasks so you can focus on managing and growing your investments. With our support, you’ll have clear, reliable records for your D.C. properties.

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