Why “Buy Real Estate and Do Cost Segregation” Is Bad Tax Advice

The Myth You’ve Probably Heard

If your accountant ever told you to simply “buy real estate and do cost segregation” to cut your taxes, they left out the most important part of the story.

Real estate tax strategies can be incredibly effective, but they need to be implemented the right way.

If you don’t have the proper setup, you might find yourself feeling let down when those deductions don’t lower your tax bill as much as you had hoped.

The Reality for High-Income Earners

For business owners and entrepreneurs earning six figures or more, real estate is often pitched as a tax haven. You buy an investment property, order a cost segregation study, and expect to write off a huge portion of the purchase price through bonus depreciation.

Sounds fantastic, right? Here’s the catch:

• Real estate losses are passive losses

• Business or W-2 income is ordinary income

• Passive losses can’t offset ordinary income (unless you meet specific IRS criteria)

That means the tax savings your accountant hinted at might not materialize, unless you align your real estate investments with a proven tax strategy.

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FAQ: Real Estate Tax Strategy and Bonus Depreciation

Can I offset my business income with real estate losses?

Not unless you qualify under REPS, use short-term rental rules, or apply self-rental strategies.

Why does everyone talk about cost segregation?

Cost segregation identifies assets with shorter depreciation schedules, which makes them eligible for bonus depreciation, especially important in 2025.

Is real estate still worth it if I can’t offset my ordinary income?

Yes. Even if losses are passive, they can offset future rental income and capital gains. Plus, the long-term wealth-building benefits of real estate remain unmatched.

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How to Make Buying Real Estate Work as a Tax Strategy

1. Qualify for Real Estate Professional Status (REPS)

REPS allows you to convert passive losses into active losses that offset ordinary income. To qualify for REPS, you or your spouse must:

• Spend 750+ hours per year in real estate activities, and

• Pass the 500-hour material participation test.

This is one of the most effective ways to unlock cost segregation tax benefits.

2. Leverage Short-Term Rental Strategies

Short-term rentals (like Airbnb or VRBO) are treated differently under the IRS rules. If your property qualifies as a short-term rental, you don’t need REPS to use passive losses against ordinary income. This is a powerful real estate tax strategy for investors who prefer flexibility.

3. Use Self-Rental Rules

If you own a business and rent property to yourself, the IRS allows you to reclassify those real estate losses as non-passive. This can create a direct path to offsetting your business income.

Avoid These Common Mistakes

• Holding property in an S Corporation – complicates depreciation and can limit flexibility.

  
  

• Overestimating passive partnerships – yes, you can still benefit from depreciation, but don’t assume it offsets your active income without planning.

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Why Bonus Depreciation 2025 Changes the Game

Bonus depreciation has returned to 100% in 2025 under the One Big Beautiful Bill. That means investors can immediately deduct the full cost of qualifying property identified in a cost segregation study.

Combined with the right real estate tax strategy, bonus depreciation creates massive opportunities to:

• Accelerate depreciation deductions

• Offset taxable income (when rules are met)

• Improve cash flow in the year you acquire property

Don’t miss this window, your tax planning should anticipate these changes now.

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Don’t Settle for Half the Truth

The advice to “buy real estate and do cost segregation” oversimplifies how taxes really work. With the right real estate tax strategy (whether that’s REPS, short-term rentals, or self-rental rules) you can actually use cost segregation and bonus depreciation 2025 to reduce your tax bill and free up cash flow.

Hire a cost segregation provider who is certified. Don’t settle for generic advice, make sure your strategy is tailored to your situation.

I’d love to hear your thoughts in the comments below.

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✌️ Out -Rick