A client came to me on October 1, 2025 with a very real problem: His prior accountant completely dropped the ball and never did his bookkeeping for the 2024 tax year. This client had two LLCs — one S-Corp and one single-member LLC that flowed through his 1040. He had already paid about $150K in estimated taxes to the IRS and Massachusetts. While his CPA filed an extension for his personal return (giving him until October 15, 2025), the CPA missed the filing deadline for the 1120-S.
Oh well — better late than never. The immediate question was: Could I clean up an entire year of bookkeeping and quarterback the tax filings within 10 days?
His business looked simple on paper but was messy in real life. He runs events at bars and restaurants — bar crawls, Halloween parties, New Year’s events, etc. A lot of the money flowed through Venmo and Cash App, with dozens of contractors who should have received 1099s (a story for another day). Once everything was reconciled, the damage became clear: he still owed another $150K by October 15, 2025 for his 2024 taxes, and was projected to owe around $300K in January 2026 for his 2025 taxes.
Ouch. Talk about taxing the rich. Naturally, he asked the million-dollar question:
“Instead of paying $300K in taxes every year, is there a way I can invest that money, lower my tax burden, and build long-term wealth at the same time?”
That led us straight into real estate.
Using Real Estate to Minimize the Tax Burden
He already owned a condo in Boston, but all he was getting was a tiny home office deduction — a couple thousand bucks. Nowhere near enough to move the needle on $1M+ of annual income. So we started looking at rental real estate as a strategy. Here’s where the tax rules get weird.
If you’re not a real estate professional under IRS rules (i.e. you don’t spend >750 hours and majority of your working time in real property trades ), then your ability to use rental losses to offset W-2 or active business income is extremely limited. By default, rental activities are passive, so losses generally can’t offset non-passive income unless you meet certain exceptions . In plain English, a high-income event promoter can’t just buy a rental property and use the paper losses to wipe out his business profits – unless he finds a loophole.
Traditional long-term rentals (tenants on 12-month leases or more) do offer some tax write-offs:
- Property taxes and operating expenses
- Mortgage interest
- Straight-line depreciation over 27.5 years (for residential property)
On a $1M residential rental, that 27.5-year depreciation gives roughly $36K per year in depreciation expense (plus maybe a few thousand in property tax, insurance, and repairs). It’s something – but if you’re trying to offset, say, $1M in annual income, $40K of rental losses is basically a rounding error. You’d still be writing a huge check to the IRS.
Why Short-Term Rentals Are the Loophole Most High-Income Earners Don’t Know About
If you’re not a real estate professional under IRS rules, the only way to unlock big upfront depreciation (and use those losses against active income) is through short-term rentals – properties where the average guest stay is under 7 days. In the tax code, short-term rentals are treated more like active hotel businesses than passive rentals. In fact, if the average period of customer use is 7 days or less, the activity is not classified as a rental activity at all . This means:
- No real estate professional status required. You don’t need to meet the 750-hour real estate pro test to use the losses. The short-term rental “loophole” allows investors to use rental losses to offset W-2 or business income without qualifying as a real estate professional (as long as you materially participate in the STR business).
- Losses can offset active income. Income and losses from a qualifying short-term rental aren’t automatically passive – they count as active income/loss if you materially participate. In other words, rental losses from an Airbnb can directly offset your high-income promoter business profits .
- Cost segregation + bonus depreciation in Year 1 is on the table. This is the big one – you can take an investment property, do a cost seg study, and front-load a huge chunk of depreciation in the first year. Those losses will actually count against your active income because the short-term rental isn’t passive in the IRS’s eyes.
That last part is the whole strategy: buy assets that throw off big first-year tax deductions instead of sending $300K to the IRS every year.
Cost Segregation + Bonus Depreciation in 2025: The Real Leverage
Here’s how we put real estate depreciation to work. A cost segregation study is a tax analysis that breaks a property into components with different depreciable lives :
- Land – not depreciable
- Building structure – 27.5-year life for residential (straight-line)
- 5, 7, or 15-year property – personal property and land improvements: e.g. appliances, flooring, lighting, cabinets, countertops, certain electrical and plumbing, HVAC components, landscaping, etc.
In practice, roughly 20–30% of a residential property’s cost can often be reclassified into 5, 7, or 15-year assets via cost segregation . Instead of one big 27.5-year building, the study might say: “out of your $1M purchase, about $300K is short-life assets we can depreciate faster.” And “faster” is an understatement when bonus depreciation comes into play.
Bonus depreciation rules in 2025: Under the 2017 Tax Cuts & Jobs Act, 100% bonus depreciation was set to phase down each year after 2022. Originally it looked like this :
- 2022: 100% bonus depreciation
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0% (bonus completely phased out)
However, in mid-2025 Congress changed the game. The “One Big, Beautiful Bill” (OBBB) was enacted on July 4, 2025, and it permanently restored bonus depreciation to 100% for qualifying property . Essentially, any asset with a tax life of 20 years or less that is acquired and placed in service after Jan 19, 2025 is eligible for 100% first-year bonus depreciation . (Thank you, Donald!). This was huge for our strategy – it meant the client could still get a full 100% write-off in 2025 on any short-term rental purchases, rather than being limited to 40% bonus under the prior schedule.
Quick example: Suppose our client buys a $1,000,000 short-term rental property in late 2025. He puts $200K down (finance the rest). We get a cost segregation study done, and it identifies, say, $300,000 of assets that qualify as 5-year or 15-year property (about 30% of the basis). Here’s the first-year depreciation he could claim:
- $300,000 – Bonus depreciation (100%) on those short-life assets identified by cost seg (thanks to the restored 100% bonus rule) .
- Plus ~$15,000 of standard depreciation on the remaining building basis (the other ~70% of the property still depreciates over 27.5 years).
That’s roughly a $315,000 first-year write-off on a $1M property. This ~$315K loss can directly offset his active income from the promotions business because the property meets the short-term rental rule and he materially participates. If he bought two such properties, you can imagine the deductions would scale up near his entire $1M income. By contrast, if bonus depreciation had been only 40% in 2025 (as originally scheduled), that same cost seg study would yield just $120,000 in immediate bonus deduction (40% of $300K), plus normal depreciation – maybe ~$135K total in year one. The new law literally more than doubled the first-year deduction in our example – real leverage in turning tax dollars into wealth-building assets.
Improvements and furnishings count too: any money he puts into the property that falls in those 5, 7, 15-year buckets (furniture, new appliances, HVAC upgrades, landscaping, etc.) also qualifies for 100% bonus expensing in year one . The strategy is clear – instead of handing $300K to the IRS, he can use that cash as a down payment on real estate, buy an appreciating asset, and generate a huge paper loss to shield his other income. That’s real tax alchemy.
(At this point the client’s eyes were lighting up – we’d effectively found a way for him to buy two beach houses and have Uncle Sam subsidize the purchases via tax savings.)
Where This Story Goes Next
The client also had a side hustle in collectible sports cards – think high-end rookie cards and autographed memorabilia (LeBron James rookies, Tom Brady autos, that level of stuff). He was buying and selling cards for profit, but all that activity (inventory, sales) was being run through his event promoter S-Corp. Not ideal from an accounting perspective.
This is where our tax planning forked into another strategy. We wanted to separate the sports card venture and take advantage of inventory accounting rules for small businesses. Under IRC §471(c) (from the TCJA 2017 reforms), “small taxpayers” under the $25M gross receipts test can opt out of traditional inventory accounting . In plain language, a qualifying business can choose to:
- Use the cash method of accounting for inventory, and
- Treat inventory as non-incidental materials and supplies, or conform to its own bookkeeping method for inventory.
What does that mean? Essentially, you don’t have to track inventory and use accrual accounting in the traditional way. If done properly, you can elect to deduct inventory purchases as expenses (COGS) when paid, instead of waiting until the items are sold . The IRS’s own guidance (via the Joint Committee on Taxation) indicates that if you meet the $25M exception and your books/financials reflect the same treatment, you “should be able to expense inventory items when payment is made rather than waiting until it is sold.” This is a huge timing benefit.
For our client, we saw an opportunity: He could front-load inventory purchases in December 2025 (buy a large batch of high-value sports cards), deduct those purchases as cost of goods sold for 2025, and thereby push taxable income into next year. It’s like a legal way to create a big tax deduction now for inventory he’ll sell later. This would reduce his 2025 taxable income (buying him time and saving taxes due in Jan 2026), and he can then sell the cards in 2026 when we expect his real estate losses to kick in and offset those profits.
To do this cleanly, we set up a new LLC (taxed as an S-Corp) just for the sports card business. We moved all the card-related activity out of his promoter business via due-to/due-from accounting entries. Now the event promotions income is separate, and the sports card venture stands on its own with the new inventory-friendly accounting method. The result was a lower taxable income on his 2025 return and a proper alignment of his business activities. (Yes, we did file the necessary accounting method change forms to stay in the IRS’s good graces.)
(I talk more about this inventory strategy in another post titled “Turning Your Side Hustle Into a Tax Asset,” where we dive into the mechanics of expensing inventory for tax savings.)
By the end of this whirlwind 10 days, the client’s immediate tax crisis was solved. We filed the overdue S-Corp return, the personal return with all the new deductions, and mapped out a plan where his dreaded $300K annual tax bill would be dramatically reduced going forward. Instead of writing huge checks to the IRS, he’s redirecting that money into short-term rental properties and valuable collectibles – building assets and equity for himself. It’s the ultimate win-win: he turned a $300K tax problem into a wealth-building strategy for the future. And that is tax planning at its finest.
Sources:
- IRS Passive Activity Rules (Real Estate Professional status)
- IRS Publication 925 – Rental activities and 7-day rule exception
- One Big, Beautiful Bill (2025 law restoring 100% bonus depreciation)
- R.E. Cost Seg – Short-Term Rental Loophole and Cost Seg benefits
- Joint Committee on Taxation/IRS guidance on §471(c) inventory expensing
- Cherry Bekaert Tax Advisory – Trump’s 2025 Tax Bill (P.L. 119-21)
