Client Profile

Rather than reaching for a new entity structure or a more aggressive (and audit-risky) strategy, we looked at the resources the household already had.

1. Qualified the non-working spouse as a Real Estate Professional (REPS). The tax code doesn't require both spouses to work in real estate — it requires that at least one spouse meet the real estate professional tests under IRC §469(c)(7): more than 750 hours per year in real property trades or businesses, and more than half of the taxpayer's total personal service hours for the year. Because the client's spouse was not otherwise employed, she was well-positioned to meet — and substantiate — both tests through active, documented involvement in managing the rental portfolio.

Once qualified, rental losses were reclassified from passive to non-passive, allowing them to offset the physician's W-2 income directly.

2. Performed cost segregation studies on the rental properties. Cost segregation breaks a property down into its component parts — flooring, fixtures, land improvements, appliances — many of which depreciate on 5-, 7-, or 15-year schedules instead of the standard 27.5- or 39-year straight-line schedule for real property. Combined with bonus depreciation rules, this front-loads a significant portion of the property's depreciation into the current tax year.

3. Filed without creating any new entities. No LLCs, no restructuring, no added complexity or ongoing compliance costs. The strategy worked entirely within the couple's existing situation — it simply used tools already available under the tax code that hadn't been applied.

Case Studies - CASE sTUDY 1

This is the kind of strategy that gets missed constantly — not because it's exotic, but because it requires connecting the dots between a household's whole financial picture (a non-working spouse, existing rental properties, a high W-2 income) rather than looking at each piece in isolation. Most tax preparers file the return in front of them. Proactive tax planning means looking for what isn't on the return yet.

If you're a high-earning professional with rental real estate and you feel like you've maxed out every deduction available to you, there may be more room than you think.

Have another question? Email us at info@crescentcpaadvisors.com

How a $1M+ Earning Physician Recovered Over $100,000 in Taxes — Without Creating a New Business

W-2 physician earning $1M+ annually, paying over $300,000 per year in federal income taxes. Spouse not employed outside the home. Client owned several rental properties and was already maximizing retirement plan contributions.

High-earning W-2 professionals — physicians, executives, attorneys — often hit a wall when it comes to tax planning. Salary is reported on a W-2, withholding is automatic, and most of the "easy" levers (maxing out a 401(k), contributing to an HSA) are already pulled. Beyond that, options seem to dry up.

This client had done everything the traditional playbook recommends. Retirement contributions were maxed. There was no side business to lean on for deductions. And with rental real estate in the mix, the household was running into one of the most common — and most misunderstood — roadblocks in the tax code: passive activity loss limitations.

Under IRS rules, rental real estate losses are generally treated as passive, meaning they can't be used to offset active W-2 income — no matter how large the losses are — unless the taxpayer qualifies as a real estate professional. For a full-time physician working clinical hours, that designation is almost always out of reach.

The result: substantial paper losses sitting on the rental properties, doing nothing to reduce a six-figure tax bill.

The Problem

What We Did

The Result

Why This Matters

By combining real estate professional status with accelerated depreciation from the cost segregation studies, the household's rental losses became fully deductible against active income for the year. The outcome: a refund of over $100,000 when the return was filed — with no new business entity, no added ongoing complexity, and no change to how the properties were owned or operated.

This case study reflects an actual client engagement with identifying details removed for privacy. Individual results vary based on each taxpayer's specific facts and circumstances, including material participation, property type, and income composition. This content is for informational purposes and does not constitute individualized tax advice.