Depreciation is the whole game
Residential rental property is depreciated over 27.5 years, commercial over 39. It is not optional: on sale, the IRS recaptures depreciation allowed or allowable, so skipping it for a decade still produces ten years of recapture. If prior returns understated it, there is a procedure to correct the position, and it is usually worth doing.
- Allocate purchase price between land and building — land is not depreciable
- Track improvements separately from repairs; the distinction is worth real money and is frequently got wrong
- Consider cost segregation on larger properties to accelerate deductions
- Keep the depreciation schedule with the property forever, including through an inheritance or exchange
Passive activity losses
Rental losses are generally passive, and passive losses can only offset passive income unless an exception applies. A limited allowance exists for active participants at lower income levels and phases out as income rises. Real estate professional status removes the limitation entirely, but the test is demanding: more than half your working time and over 750 hours in real property trades, with material participation. Suspended losses are not lost — they carry forward and generally release on disposal.
1031 exchanges
- 1Like-kind exchange of real property held for investment or business use.
- 2A qualified intermediary must hold the proceeds — touching the money disqualifies the exchange.
- 3Identify replacement property within 45 days and close within 180 days. These deadlines are absolute.
- 4Basis carries over, so the deferred gain and the accumulated depreciation follow you into the new property.
- 5Boot — cash or debt relief — is taxable to the extent received.
The Portland layer
- Portland requires residential rental registration, with a schedule filed alongside the city business tax return
- Rental income counts toward the Portland Business License Tax and Multnomah County Business Income Tax thresholds
- Metro SHS reaches rental income within the district on the same threshold basis as other income
- Out-of-state owners — including Clark County landlords with Oregon property — have an Oregon non-resident filing obligation
Selling
Plan a sale before signing anything. Depreciation recapture, capital gain, Oregon tax, potential Metro SHS exposure, installment sale treatment and a possible 1031 exchange all interact — and every option narrows once a sale closes. This is the single highest-value conversation a property owner can have, and it has to happen early.
Repair or improvement?
A repair keeps the property in ordinary operating condition and is deductible now. An improvement betters, restores or adapts it and is capitalized. The regulations include safe harbours worth using.
Should I hold property in an LLC?
Often sensible for liability. For a single-member LLC it changes nothing about the tax reporting. Consider financing implications before transferring title.
I inherited a rental. What is my basis?
Generally fair market value at date of death, which usually resets depreciation. Get a valuation contemporaneously.
Do I need to file in Oregon if I live in Washington?
Yes — Oregon real property produces Oregon-source income for a non-resident.
Questions this guide does not answer
Guides are general. Your return is not. An appointment costs less than a wrong assumption.
Written by
Enrolled Agent, Oregon Licensed Tax Consultant
License number: Enrolled Agent 00160070-EA · Oregon Licensed Tax Consultant 35746-C
Heather has spent more than a decade preparing individual and business returns across the Portland metro and the Columbia Gorge, and holds unlimited rights to represent taxpayers before the IRS.
Last reviewed
This page is general information about Oregon, Washington and federal tax rules, not advice about your own return. Thresholds and rates change every year. Figures were verified as of August 2026 — check the linked official sources, or talk to us about your situation.