Wiping Out W-2 Income: The Power of REPS & Partial Dispositions

The Challenge

A household with high combined income felt they were "bleeding out" in taxes. The husband earned a high W-2 salary as a corporate executive, while the wife managed a growing portfolio of small multi-family properties.

Despite having significant real estate assets, their previous accountant treated the rental losses as "passive," meaning they could only offset rental income, not the husband’s high W-2 salary. They were effectively paying 37%+ tax on their income while sitting on unused deductions.

The Solution

We recognized that the wife met the IRS time requirements for Real Estate Professional Status (REPS). We implemented a "Stacking Strategy" to maximize the impact of this status:

• Formalized REPS: We established a rigorous time-tracking log to convert their rental losses from "passive" to "non-passive."

• Cost Segregation & Bonus Depreciation: On a newly acquired $1.3M property, we performed a detailed engineering study. This allowed us to reclassify 39-year building components into 5, 7, and 15-year assets, accelerating depreciation into the first year.

• The "Renovation" Deduction (Partial Disposition): The property required a roof and HVAC replacement shortly after purchase. Instead of capitalizing the new costs on top of the old ones, we elected a Partial Disposition. This allowed us to immediately expense the remaining book value of the old components upon removal.

The Result

By combining the accelerated depreciation from the Cost Segregation study with the immediate write-off of the old building components, we generated a total $360,000 paper loss in the first year.

Because of her REPS status, this loss flowed through to their joint return, offsetting the husband’s W-2 income dollar-for-dollar. This resulted in over $125,000 in actual cash savings that would have otherwise gone to the IRS.