How high-earners are using real estate and a little-known rule to slash their tax bills

"When she and her husband started investing in real estate about six years ago to create an additional revenue stream, she learned about a little-known IRS designation called real estate professional status, or REPS. It's a strategy some tax experts have nicknamed the " marital loophole." The rule allows qualifying investors to use real estate losses to offset W-2 income, something most high earners can't typically do. Here's how Green and other couples are using it to significantly shrink their tax bills while growing their rental portfolios."

"Under normal IRS rules, rental real estate is considered a passive activity. That means rental losses can offset rental income, but they cannot offset W-2 income, such as a physician's or accountant's salary. So if you're a doctor earning $250,000 and your rental property shows a $150,000 loss on paper, you're still taxed on the full $250,000. There is one small exception: a $25,000 "special allowance" for long-term rental losses, but it phases out between $100,000 and $150,000 of income and disappears entirely above $150,000. For high-income earners, that benefit isn't an option."

A physician experienced heavy tax burdens and began investing in rental real estate with her spouse. The couple discovered real estate professional status (REPS), which can reclassify rental losses from passive to active for qualifying taxpayers. Passive rental losses normally cannot offset W-2 wages, so high earners typically cannot use property losses to reduce salary tax. A $25,000 special allowance exists but phases out between $100,000 and $150,000 of income and vanishes above $150,000. If one spouse meets the real estate professional criteria, rental losses can offset active income, enabling significant tax savings while expanding rental portfolios.

Read at Business Insider