Reducing Tax Burden for 2025/2026. What to do.

[Rick Recker]

Asking for a friend in Minnesota...

Husband has earned approximately 900k in W2 income for 2025. This is expected to drop to @ 600k for 2026. they got wrecked on taxes for 2024 due to 100% reliance on W2 income.

A few existing conditions:

A paid for 900K-ish primary residence on a nice lake which has an adjacent undeveloped 100' lake lot that is flex zoned for SF, MF, or commercial (500k value). A healthy 401k and IRA savings for their age (early 50s), a paid for little old commercial building valued at 200k that is currently being renovated for wife to start a small business out of. There are probably 100k in bills for that building coming up late this year and hopefully the business will be open by the end of this year. Zero dollars of any kind of debt but not much cash on hand due to paying off real estate and kids college. There is @ 100k of available cash right now, and will be additional 250k or so cash in February. The wife is very adamantly opposed to debt (Dave Ramsey). Husband is also anti-debt but is willing to consider a good business case if it will create opportunity to ease the upcoming tax burden.

The primary residence is on a lake and could easily be converted into a triplex that would be 1/3 primary residence, and 2/3 STR and/or family visit spaces. Would need some light remodeling to do this but the general layout is already there.

I've been hearing about changes in bonus/accelerated depreciation that sound interesting including some STR stuff, but haven't exhaustively researched them.

Again, the main goal is to reduce tax burden but there is also a long term plan to possibly hold some income producing real estate as a bridge income along with other investments to allow leaving W2 job in the next few years

What would you do in the remaining 2 months of 2025? What to do in 2026? It doesn't necessarily need to be real estate. I heard Robert Kiyosaki talking about billboards yesterday for example.

Feel free to ask further questions, offer your ideas, and I'll pass them on.

Thank you!

[Ricardo R.]

Hey Rick,

Your friend’s in a great position — high income, zero debt, and some solid real estate assets to work with. The challenge now is turning that W2-heavy profile into something that spins off tax-sheltered income. A few ideas to think through before the year ends and into 2026:

1. W2 income = no write-offs.
That’s the root problem. When all your income comes from a paycheck, the IRS doesn’t give you much room to maneuver. The best way to ease the burden is to create or buy something that generates business or passive income — because business owners and investors get to deduct everything it takes to earn that income.

2. The small business buildout could help a lot.
That $100k going into the wife’s commercial building? If it’s tied to an active business, most of that can be depreciated or expensed — especially under Section 179 or bonus depreciation. Get a good CPA to classify those improvements correctly. Every dollar you can expense through the business helps offset that 2025 income.

3. The lake house conversion idea has potential — but tread carefully.
If they carve out 2/3 of the property into a short-term rental, they could qualify for STR bonus depreciation if managed as an active business (not just passive). That means cost-segregating the property, depreciating furniture, appliances, etc., and writing off a big chunk upfront. The catch: they need to materially participate (track hours, manage bookings, etc.) and the property has to be in service by year-end for 2025 benefits.

4. The adjacent lake lot:
Could be a sleeper move. If they're open to development or even selling it under an installment sale, they can control when gains hit their tax return. Alternatively, contributing it into an LLC and partnering with a developer could defer or spread income while creating write-offs from early expenses.

5. Other moves before year-end:

• Max out 401k/IRA/HSA contributions. Basic but still effective.

• Consider a Solo 401k or SEP if either spouse has side income.

• Fund depreciation-heavy investments (real estate, equipment, even billboards like Kiyosaki mentioned). Anything with upfront write-offs works better than passive index investing at their bracket.

• Talk to a CPA about cost segregation on any rental or business-use property. That’s where the big tax savings are hiding.

6. 2026 and beyond:
Once income drops to $600k, it’s the perfect time to get a couple of rentals or a small commercial property into service. The depreciation will hit hard against that W2 income and smooth the transition into semi-retirement.

My Advice: if they do nothing, they’ll keep getting hammered because W2 income offers zero flexibility. If they strategically activate the business, short-term rental, or a depreciation-heavy investment before year-end, they can write off tens (maybe hundreds) of thousands legitimately. But they’ll need a proactive CPA who understands real estate — not a typical “file and forget” accountant; Rick I really hope this helps you help your friend, I sent you DM on BP, it's one of the reasons I do this, I hope you can assist.