First my caveat/disclosure: I am NOT an expert in this area. I will reference a couple of links to help round out what I'm going to share with you, but this subject is EYE-OPENING!
Second, this is in regards to property that you purchase for business or rental purposes, not your residence or 2nd personal property home, etc.
One of the greatest advantages of purchasing real estate for investment purposes, is the ability to depreciate it.
What does it mean to 'depreciate' your property? No, it doesn't mean that you like it less. It simply means that, according to the tax code, you can deduct a percentage of the value of the property each year for normal wear and tear use. My friend, Kelly Smith, CLU, ChFC would call this kind of tax deduction a "tax-code" deduction, as opposed to a "checkbook" tax deduction. You don't write a check to take advantage of this. You simply add it into your taxes as a deduction according to the allowable schedule. From what I'm reading, residential rental property can be depreciated/deducted over a 27.5 year recovery period.
So, what's the problem? The problem is if you plan to sell the depreciated property to fund your retirement (or any other purpose). It's called Depreciation Recapture.
Here's the link to an overview of this on Investopedia: https://www.investopedia.com/terms/d/depreciationrecapture.asp
I'll describe this briefly:
You have a piece of property that you bought for $500,000.
Over time, you deduct the depreciation, which lowers your basis in the property. For this simple example, let's say that you depreciate the property by HALF as much as what you bought it for: $250,000 is now your basis in the property.
Let's say that real estate values skyrocket and now that property is worth $1 million and you decide to sell it.
Your adjusted basis in the property is $250,000. You sold it for $1 million. The amount of deducted depreciation is now factored back in at ordinary income tax rates.
Again, if you purchased it for $500,000 and depreciated it down to $250,000, and you sold it for $1 million... then $250,000 will be 'recaptured' back into your taxable income at ordinary tax rates. Then the remaining $500,000 gain will be taxed at capital gains rates.
How could this be worse than a 401(k)? A 401(k) or similar plan may have a lot of taxes within it, but you can stretch them out over time. There's a certain sense of control. The depreciated recapture is done in the year you sell the property. There's no stretching that out over multiple years.
For more information, please review the Investopedia link above as well as IRS Publication 551: "Basis of Assets". https://www.irs.gov/pub/irs-pdf/p551.pdf