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Most high-income earners focus on making more money—but few understand how to keep more of what they earn.
In this episode, we break down some of the most powerful tax strategies available to real estate investors, including Real Estate Professional Status (REPS), short-term rental tax benefits, cost segregation studies, bonus depreciation, and how accredited investors can use these tools to accelerate wealth building.
The episode explores how a high-income physician used a spouse’s active real estate involvement to qualify for Real Estate Professional Status, generating substantial tax deductions through real estate acquisitions, cost segregation studies, and bonus depreciation while reinvesting tax savings into additional cash-flowing assets.
This episode covers tax strategy, real estate investing, passive income, wealth strategy, cost segregation, bonus depreciation, real estate professional status, financial freedom, accredited investors, cash flow creation, and wealth building strategies for entrepreneurs and high-income earners.
A good tax plan is also understanding like, where do you spend your time? And what time do you have available? And do you have the time associated to be able to do some of these activities? So it’s kind of aligning your facts and circumstances with the strategies to be able to fully utilize them. I think in this real estate strategy—this group, I would imagine, has a lot of real estate investments and is involved in those types of activities—so there’s probably not a whole lot on here that is not taking advantage of cost seg studies to be able to accelerate depreciation, bonus depreciation, 1031 exchanges. Like, are there some opportunities there?
I think some of the most powerful strategies that I’ve seen and we put in place is using that real estate professional status, because that real estate professional status, if it’s achievable, is one of the most powerful wealth-building opportunities that you can have. Because like all of those passive activity and active income types that we were talking about before, really that real estate professional status changes that and it changes those opportunities. And it makes that a little bit more powerful too. So some of the most powerful strategies are high income, one spouse; real estate professional, other spouse; and therefore we have the high income generator, but then we also have the active loss generator as well. And if you can merge and marry those two things together, then that creates a really strong tax reduction opportunity.
One I’ve seen and you’ve probably heard a lot about like Airbnbs and short-term rentals and those kinds of things—so those kinds of activities actually have their own unique structure to them, in that you don’t necessarily need to have the real estate professional status in order to be able to take advantage of the short-term rental strategies that are out there. So high, high—but a lot of times what I see is high-income W-2 doesn’t have the time or we don’t have a spouse that can be a real estate professional, then maybe Airbnb real estate investments is a good opportunity for you.
And I guess I’ll kind of qualify all this in saying that a good tax plan—I don’t know if this was in the core principles or not—but a good tax plan is also understanding like, where do you spend your time and what time do you have available? Do you have the time associated to be able to do some of these activities? So it’s kind of aligning your facts and circumstances with the strategies to be able to fully utilize them.
So I think installment sale planning is also a really key part. Opportunity zones was less of a thing for the last couple of years, but I could see that coming back into play a little bit more in the years coming up, now that they’ve renewed that and there’s kind of the opportunity zone 2.0 pieces that are out there. So I could see opportunity zones coming back into play a little bit more in the future as well. Everybody’s just probably familiar with cost seg studies and the power of cost seg studies, but I just wanted to kind of lay out an example. That $3 million property—and what a cost segregation study does is it goes in, takes a look at the different asset lives that are on that property by itself. And some of those components in that building have a shorter lifespan than 27 and a half years or 39 years. So you identify some of those shorter lifespan assets. And typically I’ve seen it usually in that 17 to 20 to potentially as high as 25%—very rarely 25; 20% is usually kind of the target number of that short-life asset, which means that up to 17 to 20% of the purchase price is then available for bonus depreciation, which can then become a deduction in the year that you buy the asset. Continuing to buy more and more real estate as an investment, if that’s your investment path, and we have real estate professional status or we have the short-term rental, can be a really powerful tax deduction generator also.
Hey, John. Just a question. As you talk through some of these real estate strategies, can you give an example or two of like high-income W-2 earners that implemented the short-term rental strategy?
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Dave Wolcott: Or they were able to use a spouse as a real estate professional and it made a significant impact on their taxes? And like, what did that portfolio look like? Was it just one short-term rental or a few? What did the portfolio actually look like?
Speaker 1: Yeah, I think so. Probably different on the short-term rental side versus the long-term rental side. And really the difference is what it takes to achieve real estate professional status is it’s not easy. It’s 750 hours or more than 50% of the time that you spend doing anything else. So if you think about 750 hours, it’s about 20 hours a week. So to be a real estate professional in the eyes of the IRS doesn’t mean that you’re a realtor or that you’re a broker or you’re licensed or anything along those lines; it really is an IRS designation. So to achieve that real estate professional status, one property is difficult to achieve. I think you’d have to have a portfolio of multiple properties in order to be able to get to that real estate professional status. And that’s more on the long-term hold type property.
That kind of goes back to understanding what your facts and circumstances are will then drive what type of asset you want to purchase. So if you think to yourself, “Okay, real estate professional status is not an option for me because I’m not going to be able to achieve those hours,” well then maybe the fallback plan or the other option, the other route, would be the Airbnb short-term rental strategy because that does not require real estate professional status. So if you go that route, one property could probably be enough. There you just have to make sure that you have some material participation, you’re involved in the property, you’re not just handing it over to a property manager to have them do everything, and that you’re actively involved in that property as well.
But from an example perspective, I think of one high-income doctor, high-income W-2. Other spouse spends their time 100% on their rental portfolio and building their rental portfolio. And they go out and they buy properties that need some renovation. They get their material participation hours by managing the contractors and working with the contractors and renovating those properties. And an example, if I go back to that—if you were to buy a $3 million property, multifamily property or $3 million Airbnb beach house, you generate a $500,000 deduction from that. You have a $500,000 W-2. Now your taxable income is zero for that year. So all the withholdings on the W-2 are coming back as a refund. You use that refund to then reinvest in the next property, and then that’s kind of how the wealth-building cycle can accelerate, because you’re saving those tax dollars and then taking those tax dollars and reinvesting those into another asset that is building cash flow and creating tax deductions all at the same time too. Did that answer your question?
Yeah, absolutely. I think that’s helpful. It’s just trying to find out the right balance of what that portfolio looks like to where it’s really not questionable by the IRS. And I always like to ask that question because it’s never clear. I guess if your spouse is also a realtor, that can count towards the number of hours to kind of qualify as a real estate professional?
Yeah, absolutely. Real estate professional hours are active real estate involvement, and broker or agent hours qualify. So managing the property—really the only hours that don’t qualify are hours where you’re acting as the investor. So you’re reviewing financial statements, you’re reviewing property management reports. And in order to be able to get to that 750 hours, what we always talk about is how do you build out that time log? And what are the activities inside of that time log? Because if the IRS was to question that, the very first thing that they would ask for is, “Give me your hours and show me your time log.” And if inside that, the descriptions for your time log are “reviewed financial statements” or “reviewed property management reports,” they’re going to throw those hours out. But if it’s “showing this property, showing that property, on the property to meet a contractor, painting, drywalling”—all the things that you could do that are active participation hours—then those are going to be good hours.
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