The Problem: High Income, Higher Taxes—Even With Real Estate
When Dr. Varun Bhalla joined us, he was already earning a substantial income as a physician and owned multiple rental properties. However, after selling one of those properties, he faced a massive tax bill, and his current CPA had no plan to help mitigate it.
As a high-income W-2 earner, Dr. Bhalla was already in a high federal tax bracket. The property sale added significant capital gains on top of that, pushing his Adjusted Gross Income (AGI) even higher.
He was dealing with:
- A six-figure capital gains tax from the property sale
- A rising AGI, which made him ineligible for certain deductions and credits
- A lack of proactive tax planning from his CPA
Why AGI Matters
Your Adjusted Gross Income (AGI) is your total income after specific adjustments, like real estate losses, retirement contributions, and business expenses.
The IRS uses your AGI to determine:
- What tax bracket do you fall into
- Whether you qualify for certain deductions and credits
- If you'll face phaseouts, penalties, or surcharges
In short: The higher your AGI, the more you pay in taxes.
Our goal was to bring Dr. Bhalla’s AGI down, without lowering his actual income.
Our Strategy: Maximize Deductions & Manage the Gain on Sale
Once Dr. Bhalla partnered with our firm, we created a personalized, forward-thinking plan tailored to both his physician salary and real estate goals.
Here’s how we made the tax code work in his favor:
Cost Segregation Study
What it means:
Typically, when you own a rental property, the IRS allows you to depreciate it evenly over 27.5 years. However, with cost segregation, we break down the property into its individual components, such as flooring, appliances, cabinets, electrical systems, and more.
How it works:
Many of those components wear out faster (in 5, 7, or 15 years), so we can depreciate them much quicker and claim larger deductions sooner.
Why it matters for Dr. Bhalla:
These accelerated deductions created “paper losses” that helped offset his physician income in the year he sold the property. That gave him a massive deduction right when he needed it most.
Strategic Gain Management
What it means:
When you sell a rental property, the profit (or gain) is usually taxed. But how and when you report that gain can make a huge difference.
How it works:
We structured the sale and lined it up with the cost segregation deductions and other available write-offs. That allowed us to reduce how much of the gain was actually taxed.
Why it matters for Dr. Bhalla:
Without a strategy, his income would have skyrocketed from the gain, triggering more tax. Instead, we smoothed out the spike and minimized the impact, keeping him out of even higher brackets.
AGI Optimization Through Grouping & Deductions
What it means:
By default, the IRS treats rental real estate as “passive,” which limits your ability to use those losses. But if you’re active enough and meet specific rules, you can reclassify those losses to offset regular income.
How it works:
We utilized a tax strategy known as a grouping election to consolidate Dr. Bhalla’s real estate activities into a single entity. This helped him qualify for more deductions under the material participation rules.
We also uncovered other above-the-line deductions and credits that helped bring his AGI even lower.
Why it matters for Dr. Bhalla:
We reduced his AGI from over $600K to $355K, which opened up additional tax breaks and protected him from phaseouts that penalize high earners.
The Results
- $123,000 in tax savings in a single year
- Avoided a major capital gains spike
- More cash flow for reinvestment and long-term wealth growth
Thanks to strategic tax planning, Dr. Bhalla was able to reinvest those savings into more real estate, creating a compounding effect that supports his wealth-building goals year after year.
Are You Overpaying in Taxes?
If you're a high-income earner with rental properties but you're still facing big tax bills, it’s not your income that’s the problem.
It’s your strategy.
At INVESTOR FRIENDLY CPA®, we help professionals, business owners, and real estate investors turn the tax code into a powerful wealth-building tool.
[Book Your Strategy Session Now]
Let’s build a plan to help you keep more of what you earn and use it to grow real, lasting wealth.
