Tax Strategies for W2 Employees

Detroit, Michigan
Tax, SDIRAs & Cost Segregation
10moFollow

Tax Strategies for W2 Employees

Steve WilsonPro Member
Investor · Southeast Michigan · Member since 2024 · 23 posts · 15 votes

I'm getting ready to start investing in the Port Huron market in SE Michigan and had a question about depreciation; I spoke with a CPA who told me that unless I'm a Real Estate Professional, I can only use depreciation to reduce the taxable income from my investment property, whereas Real Estate Professionals can use their real estate income to reduce the taxable income from their W2 job as well. I assume the workaround isn't as easy as obtaining your real estate license in order to fulfill the criteria of Real Estate Professional if I'm not actually planning to sell much (if any) real estate with an ongoing W2 job, but I'm wondering if others have any experience with this. Thanks!

2Reply
183 views

Most Popular Reply

Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
10mo
Quote from @Steve Wilson:

I'm getting ready to start investing in the Port Huron market in SE Michigan and had a question about depreciation; I spoke with a CPA who told me that unless I'm a Real Estate Professional, I can only use depreciation to reduce the taxable income from my investment property, whereas Real Estate Professionals can use their real estate income to reduce the taxable income from their W2 job as well. I assume the workaround isn't as easy as obtaining your real estate license in order to fulfill the criteria of Real Estate Professional if I'm not actually planning to sell much (if any) real estate with an ongoing W2 job, but I'm wondering if others have any experience with this. Thanks!

You cannot qualify for REPS - real estate professional status - if you have a regular full-time W2 job. Maybe your wife can, assuming that's who is pictured with you, if she does not have a 40-hr job. Licensing has absolutely nothing to do with REPS. The person going after REPS needs to spend a lot of hours on hands-on real estate work, minimum 750 hrs per year. And real work, not listening to podcasts.

You can search Bigger Pockets for "REPS", we have a mountain of material to read and watch if you're interested in details. 

Your CPA is correct, although it is not about depreciation, it is about all deductions combined, including depreciation. If together they generate a loss, you cannot use this loss against your W2 income unless either:
a. your wife qualifies for REPS or
b. you invest in short-term rentals (STRs) like AirBnBs.

Both come with strings attached.

Unavailable losses are not wasted, they are kept for future use. Typically for when you sell a property.

2Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    10mo
    Quote from @Steve Wilson:

    I'm getting ready to start investing in the Port Huron market in SE Michigan and had a question about depreciation; I spoke with a CPA who told me that unless I'm a Real Estate Professional, I can only use depreciation to reduce the taxable income from my investment property, whereas Real Estate Professionals can use their real estate income to reduce the taxable income from their W2 job as well. I assume the workaround isn't as easy as obtaining your real estate license in order to fulfill the criteria of Real Estate Professional if I'm not actually planning to sell much (if any) real estate with an ongoing W2 job, but I'm wondering if others have any experience with this. Thanks!

    You cannot qualify for REPS - real estate professional status - if you have a regular full-time W2 job. Maybe your wife can, assuming that's who is pictured with you, if she does not have a 40-hr job. Licensing has absolutely nothing to do with REPS. The person going after REPS needs to spend a lot of hours on hands-on real estate work, minimum 750 hrs per year. And real work, not listening to podcasts.

    You can search Bigger Pockets for "REPS", we have a mountain of material to read and watch if you're interested in details. 

    Your CPA is correct, although it is not about depreciation, it is about all deductions combined, including depreciation. If together they generate a loss, you cannot use this loss against your W2 income unless either:
    a. your wife qualifies for REPS or
    b. you invest in short-term rentals (STRs) like AirBnBs.

    Both come with strings attached.

    Unavailable losses are not wasted, they are kept for future use. Typically for when you sell a property.

    2Reply
  • Steve WilsonPro Member
    OP
    Investor · Southeast Michigan · Member since 2024 · 23 posts · 15 votes
    10mo
    Thanks for the detailed response, that’s super helpful.
    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    10mo

    @Steve Wilson what type of tenants will you be targeting in Port Huron - Class B, C or D?

    [email protected]248-209-6824
    Logical Property Management4.9451 Reviews
    WebsiteView Page
    2Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    10mo

    if you aren't a real estate professional that materially participates in their rentals or do short term rentals, you generally wont be able to take losses against active income. 

    if you do have a loss, you'll roll the losses forward until you have passive income or until the property sells.

    The only exception to the above is if you make less than $150k. You could be able to deduct some rental losses against active income assume you are actively involved. 

    [email protected]
    Brick House CPAs53 Reviews
    WebsiteView Page
    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    10mo

    @Steve Wilson, 

    Your CPA is right, depreciation on long-term rentals can only offset rental income unless you qualify as a Real Estate Professional (REP). And getting a real estate license doesn’t qualify you. The IRS looks at your hours, not your credentials.

    To qualify as REP, you need:

    • 750+ hours in real estate activities
    • More hours in real estate than your W-2 job
    • Material participation in your rentals

    With a full-time W-2, that “more hours” rule is usually what stops people.

    If you ever want depreciation to offset W-2 income without REP status, some investors look into short-term rentals, because the STR rules are different, you only need to meet material participation, not REP.

    I just sent you a DM with resources that will be useful as you sort through this. Good luck, and happy to connect if you want to dive deeper.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    1Reply
  • Steve WilsonPro Member
    OP
    Investor · Southeast Michigan · Member since 2024 · 23 posts · 15 votes
    10mo
    Thanks Ashish!
    0Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 899 votes
    10mo

    If you’re working a normal full-time W-2 job, you generally can’t qualify as a Real Estate Professional under the tax rules. That status requires a lot of direct, hands-on involvement in real estate — at least 750 hours per year — and it must be your main occupation. Activities like listening to real estate podcasts don’t count. If your spouse doesn’t work full-time, there’s a chance they could potentially meet the requirements instead.

    There is plenty of information on BiggerPockets if you want to dive deeper into what’s needed to achieve REPS and what the benefits are.

    Your CPA is pointing you in the right direction: the key issue isn’t just depreciation on its own, it’s how all of your real estate deductions and losses interact with your income. Without REPS status (or unless you're operating short-term rentals under the special STR rules), losses from rental properties can't be used to offset W-2 income.

    Short-term rentals and REPS each provide a way to use real estate losses to offset other active income, but they each come with specific rules and challenges.

    Even if you can’t use the losses right now, they don’t disappear. They carry forward and can be used in future years — often becoming very valuable when you sell a property or when your income situation changes.

    Malabute & Company CPAs525 Reviews
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free