Understanding the STR Loophole- with realistic numbers

Recently an investor made a Facebook post about the STR loophole and why it was going to cause booming housing markets in 2026.

When a CPA friend of mine corrected several issues with the post the author responded: 

"this article comes form BiggerPockets, a highly respected and trusted resource in the real estate community" 

And while that is absolutely true....I am here to tell you something which, while devastating to that person's standpoint, is really great for me as a tax professional.

Of the hundreds of thousands of members on Bigger Pockets- very, very few of us are qualified tax professionals. It's just not as sexy as being a real estate investor honestly.

So - No hate to the original blog author at all; but

Lets address the example from the Original Blog Post:

"Here’s an optimized example:

-A physician earning $600K per year has a tax rate of 35%, equating to $210K in taxes.

-The investor purchases a $1M STR property with 20% down ($200K), with $600K in depreciable assets.

-The investor still has to put the money down and still has the mortgage and associated obligations (ideally covered by rental income), but is effectively able to swap paying the tax bill for a real estate asset."

This example hangs on the following implications:

1. Taxpayer makes $600k and pays $200k in taxes

2. Taxpayer can instead swap paying that $200k tax bill for paying $200k as a down payment for a $1M STR Property

3. The implication being this works because the taxpayer will have $600k of depreciable assets which will utilize the new bonus depreciation and bring their taxable income to $0. Resulting in $0 tax.

Now Lets address the Misconceptions with this example :

The Investor purchases a $1mil asset with $600k in depreciable assets. 

(Which also means 40% of this property is land value...which...maybe they bought in Seattle, but lets roll with it)


On average, a cost segregation study can identify about 25% of the depreciable value into 5/7/15 year assets which would qualify for bonus depreciation. 

So with a $1M purchase that has $600k in depreciable assets we would have $150,000 in 5/7/15 year assets which qualified for bonus depreciation. 

$600,000 * 25%= $150,000 

Taxable income would go from $600k to $450k.  

The taxpayer would not even reduce their taxable Income by $200k....let alone reduce their taxes by $200k. 

Excess Business Loss Limitation: 

It's also important to know that there is a limit on the amount of W2 Income you can offset with these losses, for 2026 that amount is $512,000. Lets keep that in mind as well. 

Now Lets look at an example with real numbers: 

Example 1: 

-A Physician earns $600k 

-They buy a $1M property with 15% land value so they have $850,000 of depreciable assets. 

-A cost segregation study identifies $212K of bonus qualifying assets 

Taxable income would go from $600k to $387K. 


Shoot- We did not get to $0 Taxable Income. Lets Try again. 

Example 2: 

- A Physician earns $600k 

-They buy a $2M property with 15% land value so they have $1,700,000 of depreciable assets. 

- A cost segregation study identifies $425,000 of bonus qualifying assets 

Taxable income would go from $600k to $175,000 

Double Shoot- We still did not get to $0 Taxable Income. 

One Last time- No whammies. 

Example 3: 

- A Physician earns $600k

-They buy a $3M property with 15% land value so they have $2,550,000 of depreciable assets. 

-A cost segregation study identifies $637,500 of bonus qualifying assets 


Taxable income would go from $600K to $88,000

Wait ...

The losses exceed the  income now....why are we STILL not at $0 taxable income ?? 

Remember that Excess Business Loss Limitation I mentioned earlier....It means we can not reduce W2 Income by more than $512,000 no matter how big the loss is. 

In Conclusion, Even With: 

-Allocating 25% more to depreciable basis than the original example 

             $850,000 vs. $600,000

-Spending $2,000,000 more than the original example 

             $3,000,000 vs. $1,000,000             

- Paying  $400,000 more in down payment than the original example 

              $600,000 vs. $200,000

We still would not bring the physician's income to $0. 

Is the STR Loophole Worth it? 

As with all things in tax the answer is "it depends". But for many taxpayers it is still absolutely worth it. This is an incredibly powerful tax strategy I've personally implemented for thousands of taxpayers. 

But - 

It is also important to have reasonable expectations for the outcome, savings, and potential downsides.

And lastly- 

It's important to remember - tax savings will be a fraction of your income reduction. 

So if the goal is saving $X in taxes, you will need to reduce your taxable income by 3X.