Is Real Estate a Good Investment for 2025? A Look at Interest Rates and Tax Law

Real estate has long been considered a cornerstone of wealth-building for investors. From generating steady cash flow through rentals to profiting from long-term appreciation, the opportunities in real estate have remained attractive. However, as we enter 2025, the question on many investors' minds is whether real estate is still a viable investment, especially when considering the economic landscape, including rising interest rates and evolving tax laws.

Let's break down the key factors that could influence your decision to invest in real estate in 2025, specifically focusing on interest rates and the tax incentives available. With potential changes in the tax code, including bonus depreciation of up to 40% in 2025 (and potentially up to 100% with the return of Trump-era tax cuts), this year could present a unique opportunity for the savvy investor.

Interest Rates: A Crucial Factor for Real Estate in 2025

Interest rates have always been a significant driver in the real estate market. When borrowing costs are low, real estate prices tend to rise as more buyers can afford to purchase properties. On the flip side, when interest rates rise, it becomes more expensive to finance property, often cooling down demand and slowing price appreciation.

As we head into 2025, interest rates are expected to remain elevated. While the Federal Reserve may not continue to hike rates as aggressively as it did in 2022, borrowing costs are still likely to stay relatively high compared to the historically low rates seen during the pandemic.

How High Interest Rates Could Impact Real Estate Investment

• Increased Mortgage Rates: When financing a property, higher interest rates mean higher monthly payments. As a result, the affordability of home purchases could decline, leading to reduced demand for properties. This may cause price growth to slow or stagnate in some markets, especially those previously driven by low borrowing costs.
• Reduced Property Appreciation: When interest rates are high, investors might see slower property appreciation, as fewer buyers can afford higher mortgage payments. For those looking to flip properties or rely on capital gains, this could result in tighter margins or even potential losses in certain markets.
• Stronger Rental Market: While the demand for buying homes may decrease, rental markets could see a boost. Higher mortgage rates could push many would-be homebuyers into the rental market, increasing demand for rental properties. If you are investing in residential real estate for cash flow, this could be a silver lining. A steady rental income stream could continue to make real estate an appealing investment in 2025.

Strategic Tip: Given the higher interest rates, focusing on rental properties may be a smart move for long-term investors in 2025. Even if property values aren't skyrocketing, rental income can still provide a consistent cash flow, especially in markets with high rental demand. Just be cautious of the higher mortgage payment because of rates, and watch your vacancy.

Tax Law: How Bonus Depreciation and Cost Segregation Can Impact Your Investment

Tax incentives are one of the most powerful tools in a real estate investor's arsenal, and bonus depreciation is a game-changer. In recent years, the U.S. government has allowed investors to depreciate certain assets at an accelerated rate, providing an immediate tax benefit.

In 2025, bonus depreciation is set to be 40% for eligible assets, which could be a significant boost for real estate investors. But that's not all—the potential for a return of Trump-era tax cuts, which could bring 100% bonus depreciation back, makes real estate investments even more attractive.

What Is Bonus Depreciation and Why Does It Matter?

Bonus depreciation allows investors to write off a large portion of the purchase price of an income-producing property upfront, often in the first year of ownership. This can result in significant tax savings and reduced taxable income. For example, if you purchase a property for $1 million, you could potentially deduct a considerable percentage of that cost in the first year under bonus depreciation, leading to a sizable reduction in your tax liability.

• 40% Bonus Depreciation in 2025: This year, if the current tax law remains in place, investors can deduct 40% of the value of eligible assets (like appliances, flooring, HVAC systems, etc.) in the first year. This strategy could be a powerful way to reduce your taxable income from real estate investments.
• Potential for 100% Bonus Depreciation: If the Trump-era tax cuts return, investors could see a return to 100% bonus depreciation, which would allow them to write off the entire cost of qualified property in the year of purchase. This update could provide a more significant tax advantage, especially for large real estate acquisitions.

Cost Segregation: Accelerating Depreciation Even Further

While bonus depreciation is already an attractive option for real estate investors, cost segregation can amplify the benefits of accelerated depreciation even further. Cost segregation is a strategy used to identify and separate the personal property components of a building (such as appliances, lighting, flooring, etc.) from the structural elements (like the foundation, roof, and walls). By breaking down the cost of the property into shorter-lived assets, investors can depreciate these components over a faster schedule, often leading to larger tax deductions in the early years of ownership.

How Cost Segregation Works

When you acquire a property, the IRS requires you to allocate the purchase price between land (which cannot be depreciated) and the various components of the building. Cost segregation identifies and reclassifies certain assets as personal property (with shorter depreciation schedules) or land improvements, enabling you to accelerate depreciation on those assets. Instead of depreciating the entire building over 27.5 or 39 years (depending on whether it's residential or commercial), you may be able to depreciate certain components over 5, 7, or 15 years.

For example, while the core structure of a building might be depreciated over 27.5 years for residential property, a cost segregation study might allow you to depreciate the flooring, lighting, or HVAC systems over just 5 or 15 years, enabling you to claim larger depreciation deductions in the first few years of ownership.

Why Is Cost Segregation Valuable in 2025?

• Bonus Depreciation and Cost Segregation Work Together: In 2025, with 40% bonus depreciation, if a cost segregation study is conducted on your property, you could potentially write off the accelerated depreciation of certain components in addition to the bonus depreciation on other eligible assets. This strategy can result in significant upfront tax savings.
• Tax Deferral: The accelerated depreciation deductions from cost segregation delay the payment of taxes, improving your cash flow in the early years of ownership. This deferral allows you to reinvest those savings into more properties or improvements, compounding your wealth.
• Maximizing Tax Benefits: By combining cost segregation with bonus depreciation, real estate investors can maximize the tax benefits of owning property. This strategy can be particularly beneficial for those purchasing sizable, complex properties like commercial buildings or multi-family complexes.

So, Is Real Estate a Good Investment in 2025?

Given the current economic climate, real estate in 2025 may not offer the same explosive growth opportunities seen during the period of ultra-low interest rates. However, for savvy investors, there are still plenty of advantages, especially when you take into account strong rental demand and powerful tax incentives like bonus depreciation and cost segregation.

Consider the Following Before Investing in 2025:

• Look for Cash Flow Properties: With the likelihood of slower price appreciation due to high interest rates, rental income becomes the most reliable return. Properties in high-demand rental markets may provide steady cash flow, which can help offset the rising cost of borrowing.
• Maximize Tax Advantages: The 40% bonus depreciation available in 2025 offers a significant tax break, especially for those purchasing property with substantial physical improvements. And if Trump-era tax cuts return, you may benefit from 100% bonus depreciation, dramatically reducing your tax burden. Additionally, cost segregation can further accelerate depreciation, boosting your upfront tax savings.
• Interest Rates Matter: Be mindful of the higher borrowing costs in 2025. Make sure you purchase properties with a positive cash flow, and be cautious of over-leveraging your investments. High interest rates can squeeze margins, so it's vital to carefully run the numbers.

Real estate may not be the high-growth, speculative investment it once was, but with the right strategy, it can still be an excellent way to build wealth in 2025. While interest rates may limit price growth, strong rental markets and tax advantages like bonus depreciation and cost segregation can provide solid returns for investors focused on long-term wealth-building.

Please be aware that tax law and deductibility of tax losses via bonus depreciation vary across the classification of real estate ownership. For example, the tax strategy for long-term rental properties looks completely different from short-term rental properties.

Maximize Real Estate Returns with Revo Tax 

By strategically purchasing cash-flow-positive properties, maximizing tax deductions, and carefully managing your financing, you can still make real estate a lucrative investment in 2025. The experts at Revo Taxpayer Advocacy are positioned to help you make the most of your investment. Our specialty? Helping you find Hidden Money and slash your taxes by taking advantage of every opportunity. Whether you need help with real estate tax planning, audit defense, tax preparation, or BOI filing, our specialists will find every deduction and ensure you don't pay a penny more than you need to. You can book a free consultation to get started today!