Client Profile

Client: Lin

‍Occupation: Finance Manager‍

Income Level: $900000 combined income (W2 plus consulting income)

‍Client Type: High-income W2 earner and real estate investor with long-term rental properties

Primary Goals:
Reduce taxable W2 income
Reduce self-employment consulting income
Manage and reduce capital gains from the sale of a rental property
Stay compliant while maximizing allowable real estate tax advantages

The Tax Challenge: High Income, Capital Gains, and Passive Loss Limitations

Lin came to us facing a familiar high-income problem. He was paying substantial taxes despite owning multiple rental properties.

He earned substantial W2 income and generated additional consulting income, and he recently sold a rental property, which triggered significant capital gains.

Although he had several long-term rentals, he was unable to fully use the real estate losses these properties generated because passive losses cannot offset W2 or most consulting income without Real Estate Professional Status.

These losses were getting suspended every year.

Lin needed a plan that aligned with IRS rules and unlocked his trapped deductions while reducing a rapidly increasing tax bill.

The Strategy: REPS, STR Loophole, and Accelerated Depreciation Working Together

1. Real Estate Professional Status REPS: Converting Passive Losses Into Active Deductions

Lin qualified for REPS, which allowed his real estate activities to be treated as non-passive. This was the key step that allowed suspended passive losses to be used against high W2 income and consulting income.

Why It Matters:
REPS is one of the most powerful tax designations in the Internal Revenue Code. It allows significant rental losses to reduce wage income when the taxpayer meets the material participation tests.

Bonus Insight: Many professionals assume REPS is almost impossible to qualify for. With proper documentation and activity logs, it is entirely achievable and fully IRS-compliant.

2. Short-Term Rental STR Loophole: Additional Losses Without REPS

To strengthen the strategy, we used the STR loophole. Short-term rentals are not treated as rental activities under section 469 when the investor meets specific participation standards.

This allowed Ger Lih to classify certain property activities as non-passive without needing REPS for those specific units.

Why It Works:
STRs do not fall under the standard passive loss rules, so high earners can deduct losses from these properties against active income if they materially participate.

3. Cost Segregation: Accelerating Nearly $800000 of Deductible Losses

Once REPS and STR positioning were in place, we performed cost segregation studies on multiple properties.

This engineering-based study separated the property into components eligible for shorter depreciation lives, which allowed accelerated depreciation and bonus depreciation.

This resulted in nearly $800,000 in paper losses, which were fully deductible under the REPS and STR structures.

Bonus Insight:
Many investors ask how depreciation is calculated. Cost segregation removes the guesswork by providing detailed IRS-compliant asset classifications that front-load deductions.

The Results: Over $200000 in Refunds and a Blueprint for Multi-Year Tax Savings

By combining REPS rules, STR positioning, and accelerated depreciation through cost segregation, Lin achieved impressive results.

He unlocked nearly $800000 in allowable deductible losses.
He received more than $200000 in tax refunds.
He significantly reduced taxes on both W2 income and consulting income.
He offset capital gains from the rental property sale.
He developed a repeatable, IRS-compliant long-term tax strategy.

What began as a stressful tax situation became a breakthrough year of savings.

Takeaway: High-income earners CAN Use Real Estate to Eliminate Taxes

Lin success demonstrates that high-income earners can unlock meaningful tax benefits with the proper structure.

You do not need to quit your job or build a massive real estate portfolio.
You need a strategic combination of REPS rules, STR participation, and cost segregation studies tailored to your income level.

Most high earners are unaware that these options exist.

Need a REPS plus Cost Seg plus STR Strategy Built for Your Income

Our team specializes in designing IRS-compliant tax strategies for high-income professionals just like you.

Call Us Toll Free: +1 800 522 6091
Email: clients@investorfriendlycpa.com

Book Your FREE Consultation Today
More innovative tax planning creates real long-term wealth.

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