Tax Savings Through Real Estate Ownership

A Guide for Highly Compensated Medical Doctors 

Medical doctors earning high annual W-2 wages can leverage the short-term rental (STR) loophole, to significantly reduce their taxable income. Below are five real estate-related tax strategies, with a focus on the STR loophole and other relevant options, tailored to high-income professionals like doctors who may not qualify for Real Estate Professional Status (REPS). These strategies assume active involvement and compliance with IRS rules. 

1. Short-Term Rental (STR) Tax Loophole

The STR loophole allows you to treat income from short-term rentals (e.g., Airbnb and VRBO) as non-passive. This technicality enables you to offset W-2 income with rental losses, such as depreciation, without needing Real Estate Professional Status. The STR tax loophole is particularly powerful for high income earners, like doctors, who can’t dedicate 750+ hours to real estate to qualify as a real estate professional (REP). 

How It Works:  
Under IRS Regulation §1.469-1T(e)(3)(ii)(A), if the average guest stay is 7 days or less, or 30 days or less with substantial services (e.g., cleaning between stays, guest communication), the rental is classified as a trade or business, not a passive rental activity. You must also meet one of the IRS’s material participation tests (e.g., spending 100+ hours and more than anyone else, or 500+ hours annually on the STR). This allows non-passive losses (like depreciation) to offset your W-2 income. 
 
Example:  
You purchase a $1,600,000 vacation home and rent it out on Airbnb with an average stay of 4 days. You (or a spouse if you file jointly) spend 120 hours managing bookings, guest communication, and maintenance, meeting the 100-hour material participation test. A cost segregation study identifies $400,000 in assets (e.g., appliances, carpet, ceiling fans, etc.) eligible for 100% bonus depreciation (for properties placed in service after January 19, 2025, per the OBBB legislation). This creates a $400,000 non-passive loss, reducing your W-2 income by $400,000, potentially saving $148,000 in taxes at a 37% federal rate.  

Key Considerations: 

• Document Material Participation: Log hours spent on tasks like marketing, guest check-ins, or coordinating repairs using apps or spreadsheets to prove active involvement
  
  
• Avoid Excessive Personal Use: Personal use exceeding 14 days or 10% of rental days annually can disqualify the property as a business under IRS §280A, limiting deductions.
   
• Local Regulations: Ensure compliance with local STR laws (e.g., licensing in New York City or occupancy taxes in Florida) to avoid fines that could impact deductions.
   

Why It’s Ideal for Doctors:  
The STR loophole doesn’t require REPS, making it accessible for busy professionals. You can manage the property part-time while leveraging depreciation to create significant tax savings.

2. Cost Segregation for Accelerated Depreciation

Even outside the STR loophole, cost segregation studies can accelerate depreciation deductions for any rental property, including long-term rentals, to reduce taxable income. 

How It Works:  
A cost segregation study reclassifies components of a property (e.g., fixtures, landscaping, appliances) from the standard 27.5-year depreciation period (for residential rentals) to shorter periods (5 or 15 years). For STRs, combining this with 100% bonus depreciation (available for assets placed in service after January 19, 2025) allows you to deduct a significant portion of the property’s cost in the first year. 

Example:  
On a $1 million rental property, a cost segregation study might identify 20–30% ($200,000–$300,000) as 5 or 15-year property. With 100% bonus depreciation, you deduct the full $200,000–$300,000 in year one, reducing taxable income. For non-STRs, these losses are passive unless you qualify for REPS, but doctors can carry them forward to offset future passive income. 

Why It’s Ideal for Doctors:  
This strategy maximizes deductions early in property ownership, aligning with high-income years. For STRs, it amplifies the loophole’s benefits by generating larger non-passive losses. 

3. 14-Day Rule (Masters Exemption or Augusta Rule)

The 14-day rule allows you to rent out your primary or secondary home for 14 days or fewer per year without reporting the income to the IRS, making it tax-free, though no deductions are allowed. 

How It Works: 
Under IRS §280A(g), if you rent your home for 14 days or less annually (e.g., during a major event like the Masters golf tournament), the rental income is excluded from taxable income. This is ideal for occasional rentals but doesn’t allow expense deductions like depreciation or maintenance. 
 

Example:  
You rent your vacation home for 10 days during a local festival, earning $20,000. This income is tax-free, saving you $7,400 at a 37% tax rate. However, you can’t deduct related expenses, so weigh this against the STR loophole’s larger deduction potential. 

Why It’s Ideal for Doctors:  
This is a low-effort strategy for doctors with a second home in a high-demand area, providing tax-free income without the need for active management. 

4. Deductible Rental Expenses

For any rental property (STR or long-term), you can deduct a wide range of expenses to reduce taxable rental income. This is especially useful if the STR loophole’s non-passive status isn’t achievable. 

Eligible Expenses:  
Deduct mortgage interest, property taxes, insurance, utilities, repairs, maintenance, cleaning supplies, platform fees (e.g., Airbnb), marketing, and travel for property management. If you maintain a home office for managing rentals, you may deduct a portion of household expenses (e.g., utilities, mortgage interest) using the simplified or actual expense method. 

Example:  
You own a rental property generating $50,000 in income annually. Deductible expenses (e.g., $10,000 mortgage interest, $5,000 property taxes, $5,000 maintenance, $3,000 platform fees) total $23,000, reducing taxable rental income to $27,000. For STRs with non-passive status, these expenses can further offset W-2 income if paired with depreciation losses. 

Why It’s Ideal for Doctors:  
These deductions are straightforward and don’t require extensive time commitment, fitting busy schedules. Proper record-keeping (e.g., using software like Landlord Studio) ensures compliance and maximizes savings. 

5. Section 179 and Bonus Depreciation for Property Improvements

Beyond cost segregation, Section 179 and bonus depreciation allow you to deduct the cost of qualifying property improvements (e.g., HVAC systems, furniture) in the year they’re placed in service, further reducing taxable income. 

How It Works:  
Section 179 allows expensing up to $2.5 million (2025 limit) for equipment or improvements used in an active trade or business, like an STR. Bonus depreciation (100% for assets placed in service after January 19, 2025, per OBBB) applies to assets with a useful life of 20 years or less, such as appliances or renovations. For STRs meeting material participation, these deductions are non-passive and can offset W-2 income. 

Example:  
You spend $50,000 on new furniture and an HVAC system for your STR. Using Section 179 or 100% bonus depreciation, you deduct the full $50,000 in year one, reducing your W-2 income.  

Why It’s Ideal for Doctors:  
This strategy is effective for STR owners who actively manage properties and make regular improvements, providing immediate tax relief without REPS. 

Additional Notes and Cautions 

Common Pitfalls: 
Over-Reliance on Property Managers: Hiring a full-service manager may disqualify you from material participation for the STR loophole, as you must be actively involved. Use half-service managers or handle key tasks yourself. 

Misclassifying Stays:  
Ensure the average guest stay is 7 days or less (or 30 days with substantial services) by tracking bookings accurately. Consecutive short leases by one tenant count as a single stay. 
 

Excessive Personal Use:  
For STRs, personal use over 14 days or 10% of rental days can trigger IRS §280A rules, limiting deductions to rental income. 

Local Compliance:  
Check city-specific STR regulations (e.g., San Francisco’s Form 571-STR for business personal property taxes) to avoid fines that could jeopardize deductions. 
 

• Documentation: Maintain detailed records of hours worked, expenses, and guest stay durations using tools like Landlord Studio or time-tracking apps to substantiate material participation and deductions during IRS audits. 

Consult with a CPA:  
Given the complexity of these strategies and your high income, work with a real estate-specialized CPA to ensure compliance and optimize savings. Tax laws, including bonus depreciation phase-outs (40% in 2025 pre-OBBB), are subject to change, and professional guidance is critical. 

Applicability to Foreign Properties:  
The STR loophole can apply to foreign rentals if the 7-day or 30-day rules and material participation are met, but additional U.S. tax reporting (e.g., Form 2555 or 1116) may be required. 

Why These Are Ideal for Doctors 

These strategies are particularly suited for doctors with high W-2 incomes because they don’t require REPS, which is impractical for full-time medical professionals. The STR loophole, combined with cost segregation and bonus depreciation, can generate substantial non-passive losses to offset W-2 income, while deductible expenses and the 14-day rule offer simpler ways to reduce taxable income. By strategically investing in real estate and maintaining proper documentation, you can legally lower your tax burden while building wealth. 

To learn more about cost segregation for your short erm rentals, or other tax strategies that may benefit your properties, please reach out.  

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