Real Estate and Taxes: More Benefits Than Most People Realize
Owning rental property comes with significant tax advantages, but many investors don’t know how to use them effectively. “I think what generally happens is people just don't know how to utilize these benefits,” says CPA Amanda Han, who runs Keystone CPA with her husband, Matthew MacFarland. Both are full-time CPAs and part-time real estate investors.
The couple points to several overlooked strategies that can dramatically reduce taxable income — including one they call the “marital loophole.”
The Power of Real Estate Professional Status (REPS)
Normally, rental property losses are considered passive losses, which can only offset passive income. But if you qualify for real estate professional status (REPS), those losses can be used to offset active income like W-2 wages or 1099 earnings.
Key rules for REPS:
- Spend 750+ hours per year on real estate activities
- More than half of your working hours must be in real estate
- Must materially participate in managing rentals (day-to-day involvement)
For high earners, this distinction is game-changing. Without REPS, someone earning $250,000 would pay taxes on the full amount. But if a spouse qualifies for REPS and their rentals generate a $150,000 loss (often thanks to depreciation and renovations), taxable income drops to $100,000.
The “Marital Loophole”
Here’s where it gets even more interesting. If one spouse qualifies for REPS, their rental losses can offset both spouses’ W-2 income.
Han explains: “It’s what we call the ‘marriage loophole.’ You could continue to have your high W-2 income — as long as your spouse is a real estate professional, then the rental losses can offset both of your incomes.”
That makes it possible for couples to keep one spouse in a high-income career while the other focuses on real estate, lowering the household’s overall tax liability.
The Short-Term Rental Tax Loophole
If REPS isn’t an option, investors can still benefit through the short-term rental (STR) strategy.
Unlike long-term rentals, short-term rentals are not automatically treated as passive by the IRS. If you self-manage and materially participate in the business, you can use paper losses from depreciation and expenses to offset W-2 income.
Examples of material participation:
- Spending 500+ hours per year managing the rental
- Spending 100+ hours while no one else spends more time than you
- Spending more time on the property than all others combined
Han illustrates: If you earn $500,000 and turn a property into a short-term rental that produces a $200,000 paper loss, that loss can directly offset your W-2 income — potentially saving you around $74,000 in taxes.
Best of all, this loophole applies regardless of income level. For middle-income earners, the impact can be even more life-changing than for millionaires.
Why These Strategies Matter
Real estate tax advantages hinge on one concept: you can often show a paper loss while still enjoying positive cash flow. Depreciation, renovations, and expenses allow investors to lower taxable income without losing real money.
For investors who structure their activities carefully, these IRS provisions can:
- Lower taxable income significantly
- Unlock long-term savings
- Free up capital to reinvest into more properties
As MacFarland puts it: “If you can strategically create losses on paper and maximize your deductions, you can use those losses to offset W-2 income.”
The Bottom Line
Between REPS, the marital loophole, and the short-term rental tax strategy, real estate offers powerful ways to reduce tax liability. While these approaches require strict IRS compliance and active involvement, the potential payoff can be substantial.
For couples willing to plan strategically, these tax-saving opportunities can turn real estate into not just an investment — but a wealth-building tool.