Feb 05, 2025
Reducing taxes as a W-2 employee can be challenging, but real estate offers strategies that make it possible. One powerful method is using bonus depreciation, which allows property owners to claim significant deductions on property elements that depreciate over time, like cabinetry, lighting, and fencing.
To take advantage of bonus depreciation, property owners must conduct a cost segregation study. This process identifies which parts of the property qualify for accelerated depreciation, enabling large first-year tax deductions. However, this only applies to property improvements, not land or foundations.
Real estate professionals have a unique advantage here, as they can treat their properties as business assets. To qualify as a real estate professional, you must dedicate over half your working hours to real estate and spend at least 750 hours per year in related activities. If you don’t meet these criteria, there is another option: the short-term rental (STR) loophole. This approach allows non-professionals to claim their properties as businesses if the average guest stay is seven days or fewer and if they actively manage the property.
Active management involves tasks like handling bookings, guest communication, and property maintenance. To meet participation requirements, property owners can either work 100 hours annually—and more than anyone else—or manage the property alone without outside help. Alternatively, spending over 500 hours a year on the property also qualifies.
These strategies can significantly reduce taxable income by offsetting active income with real estate losses. However, there are important considerations. For example, selling a property after claiming bonus depreciation may lead to depreciation recapture, requiring repayment of some deductions. To avoid this, it’s best to hold properties long-term. Additionally, converting a short-term rental to long-term use shortly after claiming deductions could attract IRS scrutiny.
For those considering these tax strategies, planning is essential. Hiring a tax strategist can help navigate the complexities, while a cost segregation study ensures you maximize deductions. Keeping detailed records of your time and activities related to property management is also crucial to meeting IRS requirements.
While not everyone may benefit from these approaches, they are highly effective for property owners who plan to invest for the long term. Real estate not only builds wealth but also offers powerful opportunities for tax savings. If you’re looking to explore these options, consult with a knowledgeable realtor or tax professional to ensure you’re making the most of your investments.
Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
