Unfortunately, situations like this can happen when properties aren’t structured or overseen the right way.If you're interested in investing in real estate, don't let situations like this scare you.

Most of our clients in similar situations don’t withhold once their real estate losses offset their W-2 income.

For example, has anyone here done a subject-to, wraparound mortgage, or seller-financing hybrid in a similar situation?

You'll probably get all $250K of gain tax-free. 

Obviously, we are paying a lot of tax, but we have never seriously thought about reducing the tax that we are paying.

Quote from @Scott Green: I need some advice for the current situation that I am facing.

They must have lived there for at least two of the past five years to qualify, and any depreciation claimed  during the rental period is taxed separately at up to 25%.

On paper, they looked like a strong borrower, but the tax-return complexity from multiple businesses made things messy.Here’s what ultimately worked for them:✔️ Used a closed-end second to tap equity✔️ Qualified using a 1-year P&L instead of full tax returns✔️ 738 FICO✔️ 81% CLTV✔️ $225K loan amount✔️ The lower-documentation structure brought DTI from 61% → 49%, which finally made the renovation feasibleWhat stood out in this situation was how alternative documentation options can make a real difference for people with layered income or complex business activity.

Cost segregation helps in some situations but not in other situations.Here is a post to get you an introduction:  https://www.biggerpockets.com/forums/51/topics/1075919-five-... 

Yessss, Rohullah I appreciate all the feedback regarding taxes!