Short Term Rental - W2 employees/high earners

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Short Term Rental - W2 employees/high earners

Jeremy Horton
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

I had a thought recently regarding selling my LTRs. One of the big benefits to real estate investing is the tax deductions, primarily depreciation. I think there's a lot of us that have to pass these deductions on whether that's because you have a W2, you're a "high earner" or not a REP for whatever other reason. 

Recent insurance increases here on the Gulf coast and lack of appreciation compared to the average, combined with not being able to take depreciation really makes RE not that good of a deal (in this area, in my opinion). You either leave a good bit of cash in the deal to get cashflow then have a low ROE. Or minimize your cash in the deal resulting in zero cashflow (or losses). The strategy here is basically quick flips, wholesaling, or entirely using OPM to finance deals (creative financing, syndicating etc). Those latter strategies that "work" are very time consuming and essentially businesses in and of themselves. Can you do this with a W2 - maybe so by outsourcing most of the work. Does it make sense to do when you're getting taxed 35-37% - likely not. 

Now long term capital gains on the other hand is 15-20%. So I'm saving 15% at the minimumby investing in the market - with minimal time, no cold calling, DIYs, driving to projects and managing contractors etc. So the stock market (in my opinion) makes more sense for high earners/non REPs.

Now if you still want to invest in RE as a high earner/non REP - where would it make sense? STRs. How? Material participate, spend 100 hours via your log book, and possibly do a cost segregation study. In addition you can consolidate multiple properties into 1 - I personally like this idea - one roof, one HVAC system etc. 

I'm not sure why it took this long to figure - I would assume I needed a little time to build and then roll the equity from the LTRs over to the STR (1031 exchange). I need to see if there is a sort of passive RE fund to invest money into that would allow you more time to identify a new property. The equity I have now should be enough to be a nice downpayment on a cabin in Tennessee - the cashflow should be fine with 50% or so down, and I'd save tens of thousands in taxes by being allowed to deduct from my W2.

I need to find a good tax strategist & new CPA at this point. And a great realtor in the Gatlinburg/Pigeon Forge/Sevierville Tennessee area. Anything you all see that I'm missing? Is there anything that you would do differently/better? 

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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
9mo

I think there's a lot here in this post. 

1. When markets shift and cash flow dries up or isn't as good as the past, you're wondering what your options are and I like that you're willing to pivot strategies.

2. You mentioned doing a 1031 exchange into an STR. This is possible but I did want to highlight you may not get as much in tax benefits as you think.

Let's say you're deferring out $500k of gain and the new STR is $1M. Your new basis will be $500k ($1M - $500k). From there, you'll have to split out between building and land. So now let's saying building is 80% ($400k) and land is 20% ($100k). If you met the STR loophole requirements and did a cost seg accelerating losses and got $100k of bonus depreciation, your loss would be adjusted by this amount, which is still a lot but may be less than what you're thinking.

3. there's a lot of great CPAs on here. I'd recommend reaching out to a few and seeing who you connect well with and deciding from there. With tax season approaching, you'll want to do get on it sooner than later

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    9mo

    I think there's a lot here in this post. 

    1. When markets shift and cash flow dries up or isn't as good as the past, you're wondering what your options are and I like that you're willing to pivot strategies.

    2. You mentioned doing a 1031 exchange into an STR. This is possible but I did want to highlight you may not get as much in tax benefits as you think.

    Let's say you're deferring out $500k of gain and the new STR is $1M. Your new basis will be $500k ($1M - $500k). From there, you'll have to split out between building and land. So now let's saying building is 80% ($400k) and land is 20% ($100k). If you met the STR loophole requirements and did a cost seg accelerating losses and got $100k of bonus depreciation, your loss would be adjusted by this amount, which is still a lot but may be less than what you're thinking.

    3. there's a lot of great CPAs on here. I'd recommend reaching out to a few and seeing who you connect well with and deciding from there. With tax season approaching, you'll want to do get on it sooner than later

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  • Bill HamptonBusiness Member
    Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 978 votes
    9mo

    @Jeremy Horton

    I recommend finding a tax strategist/tax accountant who specializes in real estate taxation and is proactive instead of reactive when providing advice.

    Working remotely with your accountant will expand your options.

    I would also recommend looking for an accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

    Happy to answer any questions. Good luck.

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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 94 votes
    9mo

    @Jeremy Horton, hi. 

    Suspended LTR depreciation/losses often aren’t lost, they can carry forward and may be released when you sell, so the “can’t use it” point may be overstated.

  • Real estate sale taxes aren’t just 15–20% LTCG: depreciation recapture, possible 3.8% NIIT, and state tax can raise the effective rate.

  • A 1031 has strict deadlines (45 days identify / 180 days close); if you need more time, consider reverse 1031 or a more passive “parking” option like DSTs.

  • STRs can potentially offset W-2 income, but it’s more complex than “100 hours”—material participation rules and documentation matter.

  • Cost segregation can be powerful but only if the deal supports it; it accelerates depreciation and can affect future recapture.

  • Consolidating into fewer properties can reduce operational risk, but watch market/regulatory/insurance volatility.

  • Best next step: compare hold vs sell taxable vs 1031 with full tax/return components (recapture, NIIT, suspended losses, timing risk).

    Always consult with a CPA who specializes in real estate. Location isn’t an issue as long as they’re accessible via video meetings, phone calls, text, or email.

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  • Jeremy Horton
    OP
    Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
    9mo
    Quote from @Fulton Abraham Sanchez:

    @Jeremy Horton, hi. 

    Suspended LTR depreciation/losses often aren’t lost, they can carry forward and may be released when you sell, so the “can’t use it” point may be overstated.

  • Real estate sale taxes aren’t just 15–20% LTCG: depreciation recapture, possible 3.8% NIIT, and state tax can raise the effective rate.

  • A 1031 has strict deadlines (45 days identify / 180 days close); if you need more time, consider reverse 1031 or a more passive “parking” option like DSTs.

  • STRs can potentially offset W-2 income, but it’s more complex than “100 hours”—material participation rules and documentation matter.

  • Cost segregation can be powerful but only if the deal supports it; it accelerates depreciation and can affect future recapture.

  • Consolidating into fewer properties can reduce operational risk, but watch market/regulatory/insurance volatility.

  • Best next step: compare hold vs sell taxable vs 1031 with full tax/return components (recapture, NIIT, suspended losses, timing risk).

    Always consult with a CPA who specializes in real estate. Location isn’t an issue as long as they’re accessible via video meetings, phone calls, text, or email.


    • Suspended LTR depreciation/losses often aren’t lost, they can carry forward and may be released when you sell, so the “can’t use it” point may be overstated.

    Best next step: compare hold vs sell taxable vs 1031 with full tax/return components (recapture, NIIT, suspended losses, timing risk).


    Two good points right here. The first is interesting - I currently have a ton of passive disallowed losses. One of my biggest fears is locking in these passive losses. From what I understand I can only use passive losses to offset passive gains - meaning stock/account dividends in the future. I can't deduct from my W2, I'm not a REP either.

    How could I use these when I sell? It seemed like I would be stuck w/ the depreciation recapture (which wouldn't effect much since I haven't been able to take it) and capital gains/losses. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    9mo

    Hey Jeremy, you’re not off base at all, but you do have a lot going on, so it's really important to talk to someone and work through all of this, and don't overcomplicate things. What you’re describing is a very common realization for high earners who aren’t REPs, especially in markets where insurance and expenses have eaten away the upside.

  • From a tax perspective, LTRs lose a lot of their appeal when depreciation is suspended. On paper you have losses, but they don’t actually help you today. Meanwhile, the capital is tied up, ROE drops, and you’re still dealing with insurance hikes and operational risk. That’s a frustrating spot to be in.

    Your comparison to the stock market is fair. Paying 15–20 percent long-term capital gains with minimal effort often beats earning taxed-at-37-percent real estate income that requires time, stress, and active management. For many high earners, that’s the reality.

    STRs are usually where the tax math starts working again for non-REPs. Material participation plus short average stays can allow depreciation and cost seg to offset W2 income, which is a real shift. Rolling multiple LTRs into one well-performing STR can also simplify things operationally.

    A couple things to keep in mind. Cost seg should support a good deal, not justify a weak one. STR income is lumpier, so reserves matter more. And a 1031 into an STR can work, but personal use and timing rules have to be handled carefully.

    Your suspended passive losses aren’t lost or locked in, they carry forward until they can be used. While they generally can’t offset W-2 income or dividends, they can offset income from other passive activities and, most importantly, gains when you sell a rental property. Even though depreciation recapture still applies, those released losses often significantly reduce the overall tax hit, which is why selling a passive property can be the moment those losses finally become valuable with the right planning.

    But you definitely want to get with a CPA to make sure all of this is correct in your situation and goes with your overall financial picture and future goals. This is just about aligning your real estate and investments with your tax reality and time constraints and happens a lot. It's a smart move.

    Good luck, and happy to connect.

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  • Bo SmithPro Member
    Hinton, WV · Member since 2026 · 1k+ posts · 373 votes
    8mo

    One thing W2 folks miss: your tax situation changes completely with STR. You can actually write off a ton more than people realize - part of your home if you manage remotely, travel to properties, even some meals. But you gotta track everything from day one, not scramble at tax time. Are you setting up separate accounts and tracking systems before you even close on the first property?

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