Client Profile:

• Client Names: Dr. Jeremy & Spouse

• Occupation: Physician (W-2 Earner) & Real Estate Professional

• Combined Income: $290,000

• Primary Goals:
  
  • Reduce taxable income from high W-2 wages
  • Build long-term, tax-free retirement wealth
  • Stay compliant with IRS rules while executing advanced strategies
  • Leverage real estate investing to unlock tax deductions

The Tax Challenge: High-Income Household, Limited Deductions

Dr. Jeremy, a successful physician earning a $300K W-2 salary, was frustrated by his massive annual tax liability. Despite contributing to retirement plans and using standard deductions, he was still overpaying with limited remaining tools for deferral or long-term tax-free growth.

His spouse, however, had taken on a more strategic role managing several rental properties and meeting the IRS’s Real Estate Professional Status (REPS) tests, including material participation requirements.

As high-income professionals often discover, real estate tax benefits are often limited by passive loss rules. But this couple had the perfect combination to unlock the REPS tax benefits and pursue paper loss real estate strategies.

They also had questions about compliance such as whether real estate taxes are the same as property taxes, and whether they could pay taxes directly while having escrow both common areas of confusion among first-time investors.

That’s when they turned to our team for a fully integrated tax plan.

The Strategy: Real Estate, Depreciation, and a Backdoor Roth

To minimize their tax burden and maximize long-term wealth, we crafted a multi-layered tax strategy centered on real estate depreciation, Roth IRA conversions, and IRS-safe positioning.

1. Real Estate Professional Status (REPS): Unlocking Passive Losses

Because Dr. Garlick’s spouse qualified as a real estate professional and materially participated in managing the rentals, we were able to reclassify passive real estate losses as non-passive, allowing them to offset Dr. Garlick’s W-2 income.

Why it matters: Normally, real estate losses are limited and can't offset W-2 income. But with REPS tax benefits, those losses became a powerful tax shield, fully IRS-compliant.

2. Cost Segregation Study: Accelerating Depreciation Deductions

We performed a cost segregation depreciation analysis on one of their newest rental properties. This engineering-based study broke the property into components that could be depreciated over shorter periods (5, 7, and 15 years).

That meant the couple could access bonus depreciation on items like appliances and fixtures, unlocking tens of thousands in paper losses right away, without selling the property or reducing cash flow.

This approach is especially powerful when combined with REPS, because it makes the cost segregation bonus depreciation fully deductible against active W-2 income.

Bonus Insight: For investors asking, “how do you determine depreciation on a rental property?” it’s not a guess. A cost segregation study provides precise, IRS-compliant classifications and accelerates your deductions significantly.

3. Backdoor Roth IRA Conversion: Tax-Free Retirement Growth

With taxable income strategically reduced, we implemented a Backdoor Roth IRA strategy. As high earners, the Garlicks couldn’t contribute directly to Roth accounts due to income limits, but we helped them:

• Make non-deductible Traditional IRA contributions

• Convert those contributions to a Roth IRA

• Time the transaction to avoid the pro-rata rule

This gave them access to tax-free retirement growth and future withdrawals, a crucial long-term win.

Why it works: The Backdoor Roth IRA is ideal for high-income earners, but only if executed properly. Without careful timing, the conversion could trigger unexpected taxes or penalties.

What About STRs? The Short-Term Rental Loophole

Although the Garlicks didn’t use it in this plan, many of our clients also leverage the short-term rental loophole (STR loophole). This powerful strategy allows real estate investors to deduct losses from short-term rentals without needing REPS status, as long as they meet certain material participation standards.

If you're not quite ready to qualify as a real estate professional, STRs may be your gateway to using real estate losses to offset active income.

The Results: $53,000 Saved and a Blueprint for Tax-Free Wealth

By layering strategies carefully and staying within IRS guidelines, the couple achieved:

• $53,000 in tax savings in one year

• A repeatable strategy for future tax years

• Fully IRS-compliant documentation

• Built a tax-free retirement account through Backdoor Roth IRA

• Used cost segregation bonus depreciation and REPS status to offset W-2 income with paper losses

Takeaway: Physicians and High-Income Professionals CAN Save Big with the Right Tax Strategy

Dr. Garlick and his spouse didn’t rely on basic deductions or hope for refunds. Instead, they unlocked real savings by combining:

• Real Estate Professional Status

• Cost Segregation and Bonus Depreciation

• Backdoor Roth Conversion

• And deep understanding of material participation, real estate tax rules, and paper loss strategies

If you're wondering whether you're missing out, you probably are.

Need Help Creating Your Own REPS + Roth Strategy?

Just like we helped Dr. Garlick and his spouse, we can help you optimize your tax planning to save big. Whether it's through REPS qualification strategies, cost segregation, or Backdoor Roth IRA execution, our team at INVESTOR FRIENDLY CPA® has the expertise to guide you every step of the way.

Schedule a FREE Consultation today and start building your own tax-free wealth strategy. You can also see how an Account Executive saved $55,000 in one year using cost segregation and accelerated depreciation, even without qualifying for REPS.