and legally too...

you know what they say: when you can't beat the system, use the system.

the trick, though, is that it requires some level of effort and money. every year, people pay $10,000+ in taxes and live day by day letting the system drain their hard-earned bread.

as a w2 employee, there aren't many ways to save on taxes:

• contribute to a 401(k)
• use an hsa
• harvest losses

but this barely gets your taxes down...

we want $0

again, to use the system, you still need some money and effort but that doesn't mean succession money

personally, i believe in generating more income and worrying about taxes when the bag accumulates but that's another skillset.

1) get a rental property ("no kidding")

buying a rental property helps in strategically generating losses that offset w-2 income.

2) make your str active

usually, properties are classified as passive.

but if the average stay is less than 7 days, the short-term-rental (str) isn't considered a rental activity (section 1.469-1t(e)(3)(ii))

3) material participation (irs pub. 925)

here's the effort portion. this means participation of:

for more than 500 hours, or for 100 hours and at least as much as any other individual involved in the activity, including employees, contractors, etc.

this means spending one full day each week on maintenance and booking, which is about 9 hours per week. it's quite manageable.

4) run a cost segregation study (irs pub 5653)

commercial property can be depreciated over a 39-year straight line, while residential property can be depreciated over a 27.5-year straight line

a cost segregation study reclassifies some building costs into 5, 7, and 15-year property, speeding up depreciation.

here's a breakdown:

• buy a rental property for $350,000. (typically, 80% is building and 20% is land, so ~$280,000 can be depreciated)
• conduct a cost segregation study to reclassify 20-40% of the building.
  • assume 30% (~$84,000) is reclassified into 5/15-year property.
• use bonus depreciation to expense the 5/15-year property immediately (irs pub 946).
  • bonus depreciation is 60% in 2024, leading to ~$52,000 in deductions.

this with building depreciation, mortgage interest, or renovations, and it could mean a $55-$60,000 loss in year 1.

use tax savings for another str

a $60,000 loss could save around $20,000 in taxes, depending on the tax bracket. this could help cover a chunk of the down payment for another rental.

---

when it's time to sell the rental, you'll be subject to depreciation recapture.

however, you can

use a like-kind exchange to defer the gains (irc section 1031), or pass it to heirs for a step-up in basis

again, for this to work...

you need to generate income by renting out to short-term rental websites like airbnb or anywhere that is good for stays under 7 days

...if you just plan on purchasing a property for tax savings, you WILL lose more money overall

good luck, and have fun!

-- david