how to offset capital gains from income investment?
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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votesTiming is going to be crucial on this. If you sell the crypto in 2025 and then buy the STR AND meet all of the requirements of the STR loophole in 2026, you won't be able to offset 2025's gains.
Id connect with a cpa to go through various scenarios so you understand the tax side. That said, if it makes sense to sell crypto, you should sell it . Don't let the tax tail wag the dog!
Brick House CPAs53 Reviews
15 Replies
- Accountant · Shiloh, IL · Member since 2019 · 8 posts · 10 votes11mo
When it comes to how income and losses show up on your tax return, everything generally falls into one of two categories: passive or non-passive.
• Passive losses can only offset passive income.
• Non-passive losses can offset both non-passive and passive income.
W-2 income is non-passive, and in most cases, capital gains from selling investments (brokerage accounts, crypto, etc.) are also non-passive.
Real estate losses, by default, are considered passive.
There are two main ways to convert those real estate losses into non-passive losses (which is what you’d need to offset W-2 income):
1. Qualify as a Real Estate Professional (REP) under the tax code.
• This requires significant hours and material participation in real estate activities.
• For someone working a full-time W-2 job, this is very difficult to achieve legitimately.
2. Use the Short-Term Rental (STR) exception.
• If the average stay is fewer than 7 days, and you materially participate in the activity, the STR can be treated as non-passive even if you are not a Real Estate Professional.
• This is often called the “short-term rental loophole.”
Based on what you shared, the short-term rental route may be the relevant path here.
There are very specific requirements to document material participation, average stay duration, guest interaction levels, etc., so the details matter.
I would strongly recommend working with a tax professional who has experience with STR structuring to make sure it's set up correctly and documented in a way that will stand up in an audit.
Quote from @Matthew Hamilton:
When it comes to how income and losses show up on your tax return, everything generally falls into one of two categories: passive or non-passive.
• Passive losses can only offset passive income.
• Non-passive losses can offset both non-passive and passive income.
W-2 income is non-passive, and in most cases, capital gains from selling investments (brokerage accounts, crypto, etc.) are also non-passive.
Real estate losses, by default, are considered passive.
There are two main ways to convert those real estate losses into non-passive losses (which is what you’d need to offset W-2 income):
1. Qualify as a Real Estate Professional (REP) under the tax code.
• This requires significant hours and material participation in real estate activities.
• For someone working a full-time W-2 job, this is very difficult to achieve legitimately.
2. Use the Short-Term Rental (STR) exception.
• If the average stay is fewer than 7 days, and you materially participate in the activity, the STR can be treated as non-passive even if you are not a Real Estate Professional.
• This is often called the “short-term rental loophole.”
Based on what you shared, the short-term rental route may be the relevant path here.
There are very specific requirements to document material participation, average stay duration, guest interaction levels, etc., so the details matter.
I would strongly recommend working with a tax professional who has experience with STR structuring to make sure it's set up correctly and documented in a way that will stand up in an audit.
It looks like capital gains are not considered passive or non-passive but rather portfolio income?
essentially, I am looking for a way to liquidate some assets for a down payment and offset the capital gains tax
someone mentioned a securities base line of credit, I’m wondering if maybe that’s the way to go- Accountant · Shiloh, IL · Member since 2019 · 8 posts · 10 votes11moCapital gains are considered “portfolio income,” and so are interest and dividends. Portfolio income, by default, is considered non-passive.
Quote from @Jorge D.:
Quote from @Matthew Hamilton:
When it comes to how income and losses show up on your tax return, everything generally falls into one of two categories: passive or non-passive.
• Passive losses can only offset passive income.
• Non-passive losses can offset both non-passive and passive income.
W-2 income is non-passive, and in most cases, capital gains from selling investments (brokerage accounts, crypto, etc.) are also non-passive.
Real estate losses, by default, are considered passive.
There are two main ways to convert those real estate losses into non-passive losses (which is what you’d need to offset W-2 income):
1. Qualify as a Real Estate Professional (REP) under the tax code.
• This requires significant hours and material participation in real estate activities.
• For someone working a full-time W-2 job, this is very difficult to achieve legitimately.
2. Use the Short-Term Rental (STR) exception.
• If the average stay is fewer than 7 days, and you materially participate in the activity, the STR can be treated as non-passive even if you are not a Real Estate Professional.
• This is often called the “short-term rental loophole.”
Based on what you shared, the short-term rental route may be the relevant path here.
There are very specific requirements to document material participation, average stay duration, guest interaction levels, etc., so the details matter.
I would strongly recommend working with a tax professional who has experience with STR structuring to make sure it's set up correctly and documented in a way that will stand up in an audit.
It looks like capital gains are not considered passive or non-passive but rather portfolio income?
essentially, I am looking for a way to liquidate some assets for a down payment and offset the capital gains tax
someone mentioned a securities base line of credit, I’m wondering if maybe that’s the way to go
That being said, capital gains are taxed at a different rate than ordinary income, but they can still only be offset through non-passive losses (which includes capital losses).
A Securities Backed Line of Credit (SBLOC) allows you to take low interest loans from your brokerage using your securities as collateral. This is nice because it gets you access to cash without triggering taxable income.
Different brokerages require different account minimums, so you would need to look into that. Also, there are a large element of risk using a volatile asset class likes stocks as collateral for debt. You’ll be want to do some deeper research on this before pulling the trigger to be sure this fits your risk profile and appetite.
- Member since 2024 · 238 posts · 132 votes11mo
Right now, capital gains are taxed at the lowest rate in recorded history. Every Demorat candidate running for national office would abolish the special capital gain tax and subject gains to ordinary income rates at a minimum. Hopefully they will never again be in charge. But I prepared my first return for a client when the highest incremental tax on earned income was 70% and capital gains at 35%. Maybe they will never be in charge. Maybe.
- 11moMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesJorge,
Quote from @Jorge D.:
i am interested in entering in the short term rental market in Nashville
i am wanting to put a down payment down on a unit.
in order to secure funds for a down payment, i would need to sell off some crypto i have in a wallet and some S&P500 funds i have in a brokerage account.
is there any way to reduce the capital gains tax from these assets using real estate?
would something like a cost segregation study offset this? or would it only offset my w2 income?
Generic answer is that cost segregation on short-term rentals CAN offset any income.
But generic answers are dangerous. First, your very question is missing the point. Why do you care which type of income is offset - W2 or crypto/mutual funds gains? All of your income is taxed, and your potential tax losses from STRs can offset your entire income, does not matter the source.
In fact, if you have a mixture of W2 income and capital gains, the losses will technically offset your W2 income first. And it's actually better for you this way! But again, it should not matter.
A far more important issue is timing. If you sell investments today, your gains will be part of your 2025 taxable income. However, if you buy an STR right now, in November, you very likely won't have enough time to place it in service this year and have two guest stays before the end of the year. Which means that you will NOT be able to apply the STR tax benefits to 2025. And your entire plan then collapses.
Here is an explanation of the challenges of buying an STR late in the year:
https://www.biggerpockets.com/forums/51/topics/1220969-expla...
Your line of credit idea is completely different. This is borrowing money from yourself without actually selling your investments. It has its pluses and minuses, and it is definitely worth considering.Quote from @Michael Plaks:
Jorge,Quote from @Jorge D.:
i am interested in entering in the short term rental market in Nashville
i am wanting to put a down payment down on a unit.
in order to secure funds for a down payment, i would need to sell off some crypto i have in a wallet and some S&P500 funds i have in a brokerage account.
is there any way to reduce the capital gains tax from these assets using real estate?
would something like a cost segregation study offset this? or would it only offset my w2 income?
Generic answer is that cost segregation on short-term rentals CAN offset any income.
But generic answers are dangerous. First, your very question is missing the point. Why do you care which type of income is offset - W2 or crypto/mutual funds gains? All of your income is taxed, and your potential tax losses from STRs can offset your entire income, does not matter the source.
In fact, if you have a mixture of W2 income and capital gains, the losses will technically offset your W2 income first. And it's actually better for you this way! But again, it should not matter.
A far more important issue is timing. If you sell investments today, your gains will be part of your 2025 taxable income. However, if you buy an STR right now, in November, you very likely won't have enough time to place it in service this year and have two guest stays before the end of the year. Which means that you will NOT be able to apply the STR tax benefits to 2025. And your entire plan then collapses.
Here is an explanation of the challenges of buying an STR late in the year:
https://www.biggerpockets.com/forums/51/topics/1220969-expla...
Your line of credit idea is completely different. This is borrowing money from yourself without actually selling your investments. It has its pluses and minuses, and it is definitely worth considering.Thanks for the info, I guess it will make most sense to buy in 2026
That’s probably what I’ll end up doing
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes11mo
No. If you take money from stock gain or crypto you will pay taxes on it- as mentioned you may get some deductions from real estate but it's deferred down the line
7e investments53 Reviews - 11moBryan MartinBusiness MemberAccountant · Springfield, IL · Member since 2022 · 190 posts · 100 votes
Quote from @Jorge D.:
hello all
i am interested in entering in the short term rental market in Nashville
i am wanting to put a down payment down on a unit.
in order to secure funds for a down payment, i would need to sell off some crypto i have in a wallet and some S&P500 funds i have in a brokerage account.
is there any way to reduce the capital gains tax from these assets using real estate?
would something like a cost segregation study offset this? or would it only offset my w2 income?
thanks for the help
Selling crypto or stocks = capital gains. Real estate write-offs = ordinary losses. Different tax buckets.
If you want to smooth out the gain hit:
- Pair gains with losses in the same year.
-Time sales across years to stay under the 15% long-term cap gain threshold.
- Move big gains into an Opportunity Zone to defer and reduce.
- Donate appreciated assets instead of selling them—no gain, full deduction. (Not what you’re looking for, but if you donate to charity otherwise, this is an option for taxes).
Short-term rentals help with income taxes, not investment gains.
Quote from @Bryan Martin:
Quote from @Jorge D.:
hello all
i am interested in entering in the short term rental market in Nashville
i am wanting to put a down payment down on a unit.
in order to secure funds for a down payment, i would need to sell off some crypto i have in a wallet and some S&P500 funds i have in a brokerage account.
is there any way to reduce the capital gains tax from these assets using real estate?
would something like a cost segregation study offset this? or would it only offset my w2 income?
thanks for the help
Selling crypto or stocks = capital gains. Real estate write-offs = ordinary losses. Different tax buckets.
If you want to smooth out the gain hit:
- Pair gains with losses in the same year.
-Time sales across years to stay under the 15% long-term cap gain threshold.
- Move big gains into an Opportunity Zone to defer and reduce.
- Donate appreciated assets instead of selling them—no gain, full deduction. (Not what you’re looking for, but if you donate to charity otherwise, this is an option for taxes).
Short-term rentals help with income taxes, not investment gains.
Great, thank you so much
I looked into a securities back line of credit, but I was offered much less than my total amount
I will probably just end up selling the investments and taking the tax hit, which would give me a larger overall value
Thanks again for the advice
- 11moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
If you do it in the same year, it might be possible.
I.E. Sell crypto in 2026 and buy the property in 2026.
However, it won't work if you sell the crypto in 2025 and then buy the property in 2026.
best of luck. Have a conversation with your accountant to go over details.
Basit Siddiqi CPA4.979 Reviews - 11moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Hey Jorge,
Great question, it’s awesome that you’re looking to enter the short-term rental market in Nashville. Really cool city with a lot of potential!
Unfortunately, buying real estate won’t directly offset capital gains from other assets. Strategies like cost segregation or bonus depreciation apply to the property itself and typically generate deductions that offset W-2 or other non-passive income, not capital gains from unrelated investments. Only capital losses, like losses on stock or crypto sales, can offset capital gains.
You might consider other options, such as borrowing again a life insurance policy or a securities-backed loan on your current portfolio, to free up funds for a down payment without triggering capital gains. Certain types of permanent life insurance, like whole or universal life, that build cash value over time, can sometimes be borrowed against through a policy loan, giving you liquidity for things like a down payment without triggering a taxable event.
I’d explore a few different paths before making a move with a financial advisor and your CPA. Good luck!
INVESTOR FRIENDLY CPA®5240 Reviews - Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes11mo
Quote from @Jorge D.:
hello all
i am interested in entering in the short term rental market in Nashville
i am wanting to put a down payment down on a unit.
in order to secure funds for a down payment, i would need to sell off some crypto i have in a wallet and some S&P500 funds i have in a brokerage account.
is there any way to reduce the capital gains tax from these assets using real estate?
would something like a cost segregation study offset this? or would it only offset my w2 income?
thanks for the help
I am not a tax expert and so can't tell you WHAT to do, but I can give you some things to look into at least....
Since you mentioned STRs you should look into bonus depreciation...
You also mentioned cost segregation. The only beneficiaries that I've seen are developers that are able to offset their other real estate income. Cost seg studies are not the holy grail that people think they are. They work for some people and not others...they are also not a tax avoidance tool, they are a tax deferral tool. Much like a 1031 - it doesn't avoid tax, it simply defers it.
If you want to discuss the local STR market in Nashville reach out anytime.
- 11moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
Timing is going to be crucial on this. If you sell the crypto in 2025 and then buy the STR AND meet all of the requirements of the STR loophole in 2026, you won't be able to offset 2025's gains.
Id connect with a cpa to go through various scenarios so you understand the tax side. That said, if it makes sense to sell crypto, you should sell it . Don't let the tax tail wag the dog!
Brick House CPAs53 Reviews - Dr · VA · Member since 2025 · 154 posts · 34 votes11mo
Stock trading generates portfolio income, which is subject to short-term or long-term capital gains tax depending on the holding period.
In contrast, short-term rentals (STRs) are treated as an active business activity, not as passive portfolio income.By purchasing a short-term rental property and performing a cost segregation study, you can accelerate depreciation and potentially create significant deductions. These deductions can then be used to offset capital gains from other sources—such as stock sales—if structured properly under current tax rules.
- 11moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 906 votes
Nashville is definitely a strong market for short-term rentals.
Just to clarify how the tax side works: buying a property won’t wipe out capital gains from selling other investments. Cost segregation or bonus depreciation only apply to the property itself, and those deductions generally offset W-2 income or other non-passive income. They don’t offset capital gains from things like stocks or crypto. The only thing that offsets capital gains is capital losses.
If your main goal is avoiding capital gains when freeing up cash for a down payment, you might want to look at alternative strategies — for example, using a loan against a life insurance policy or borrowing against your investment portfolio. Certain insurance products, like whole life or universal life, build cash value and can be borrowed against without triggering capital gains. Same with a securities-backed line of credit if you already have a sizable portfolio.
Before pulling the trigger on anything, I’d run a few scenarios with a financial advisor and your CPA so you know exactly what makes the most sense for your situation. Good luck!
Malabute & Company CPAs525 Reviews
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