Independence Products
Owner's guide · Last reviewed September 2026

Owning a real asset, from purchase to sale.

Four stages every owner moves through, and what matters at each.

01

Before you buy

Structure, financing, and how the cost is split. 02

While you own it

Depreciation and business use. 03

How you take part

Active, passive, or both. 04

When you sell or pass it on

Recapture, exchanges, and inheritance.
01

Before you buy

Decisions made at purchase shape everything after.

How you'll hold it

Directly, through an LLC, a partnership, or a fund. The structure decides who takes the depreciation and whether a 1031 exchange is possible later. The Asset classes page compares them.

How it's financed

Interest on financed business assets is deductible within the business interest limit.

How the cost is split

Land, buildings, and equipment are depreciated on different schedules, and land not at all. A cost segregation study documents the split.

Who will run it

Running it yourself or hiring a manager changes whether you're treated as active or passive.
For aircraft

Decide early whether the aircraft will fly only for you and your business, or also in managed charter. That choice changes the business-use test, how your participation is judged, and which FAA rules apply.

Records to keep

Purchase and closing documents, the cost allocation, and entity and ownership documents.

02

While you own it

Depreciation spreads the cost of a business asset over a recovery period the IRS sets. Business aircraft and helicopters generally use 5 years (7 years for some aircraft used in commercial charter), land improvements 15, rental housing 27.5, and other buildings 39. Land isn't depreciated.

Over time

Standard schedule

The cost is deducted a portion at a time across the recovery period.
In year one

First-year options

100% bonus depreciation for property with recovery periods of 20 years or less, made permanent by the OBBBA, and Section 179 expensing up to $2.5M a year, indexed ($2.56M in 2026). Bonus depreciation applies to property acquired after January 19, 2025.
Aircraft

Business use

Qualified business use has to stay above 50%. If it falls to 50% or below, earlier deductions can be recaptured.
For aircraft

Hangar, insurance, crew, management fees, and maintenance are operating costs. Personal and entertainment flights count against the business-use percentage, and entertainment flight costs are generally not deductible.

Records to keep

Depreciation schedules, operating expense records, and for aircraft, flight logs showing the purpose, passengers, and business reason for each trip.

03

How you take part

Whether depreciation offsets your other income depends on how you take part in each activity. The IRS judges each activity separately, every year, so a family can be active in one and passive in another. A single activity can't be both for the same person in the same year.

Status
When it applies
What the depreciation can offset
Active
You materially participate in the activity by meeting any one of the seven IRS tests below.
Wages, business income, and other non-passive income, up to the excess business loss limit: $256,000 single or $512,000 joint in 2026, indexed. Losses above it carry forward to later years.
Passive
You don't materially participate, or the activity is a rental. Rentals are passive by default, however many hours you put in, unless an exception applies.
Only passive income. Unused losses carry forward and are released in full when you dispose of your entire interest in a fully taxable sale to an unrelated party.
Both
Different activities, different status, same year. For example, working full time in a business you own while holding a passive stake in a rental property.
Active losses can offset other income in the same year, up to the loss limit. Passive losses wait for passive income or a sale.
03 / Tests

The seven material participation tests

Under IRS rules, meeting any one test is enough for that activity that year. In an audit, you have to prove it: the hour-based tests backed by records made at the time are the easiest to support, and test 7 is the hardest.

1
More than 500 hours in the activity during the year.
2
Your participation was substantially all the participation by anyone.
3
More than 100 hours, and at least as much as any other individual.
4
Over 500 hours combined across your significant participation activities.
5
Material participation in any 5 of the prior 10 years.
6
A personal service activity you materially participated in for any 3 prior years.
7
Regular, continuous, and substantial participation based on all facts and circumstances. Not available at 100 hours or less, or if someone else is paid to manage the activity.
Spouse
Your spouse's hours count toward these tests, even without an ownership interest.
03 / Real estate

When real estate counts as active

Rentals are treated as passive by default. These are the situations where the tax code treats them as active, each with its own conditions.

Real estate professional
More than 750 hours in real property businesses you materially participate in, and more than half of all your working hours spent in real property. Rentals you materially participate in are then non-passive.
One spouse must qualify alone; hours aren't combined for this test.
Short stays, 7 days or less
If the average guest stay is 7 days or less, the property isn't treated as a rental activity. With material participation, its losses can be non-passive.
Still requires meeting a participation test.
$25,000 allowance
Owners who actively participate in rental real estate (a lower bar than material participation) can deduct up to $25,000 of rental losses against other income.
Phases out between $100,000 and $150,000 of modified AGI.
Grouping activities
Related activities that form an appropriate economic unit can be treated as one activity, so participation is measured across all of them together.
Based on common control, ownership, location, and interdependence.
For aircraft

Owners who fly the aircraft for their own business can qualify as active. Owners who place it in managed charter and don't take part in operations are often passive.

Records to keep

Hour logs, calendars, and records of your role in each activity, made at the time.

04

When you sell or pass it on

A deduction taken early can come back as taxable income at sale, so the full holding period matters, not just year one.

Aircraft and equipment

Depreciation taken is generally taxed as ordinary income, up to the gain on sale.

Buildings

Depreciation on the building is generally taxed at up to 25%. Shorter-lived parts are taxed at ordinary rates.

1031 exchange

Real property held for business or investment can be exchanged for other real property with the tax on the gain deferred. Aircraft don't qualify.

Passed on at death

Assets generally take a new cost basis at fair market value, and the new owner's depreciation starts from that value.
Records to keep

Sale documents, the full depreciation history, and any exchange paperwork.

Want to walk through the full ownership picture, from purchase to sale?

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