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April 15, 2024 | Reading Time: 1.5 Minutes
The cost segregation strategy gives you the opportunity to create losses that can offset your W-2 income, potentially wiping out any money owed to the IRS. Let’s dive into a real-life scenario involving our friend Luke. He’s a W-2 employee earning $300,000. Initially, Luke faced a tax bill of $125,000 to both the IRS and the state.
However, he discovered the short-term rental loophole. Instead of handing over that hefty sum to the IRS, he decided to invest in a $650,000 Airbnb property, putting down 20%, which amounted to $130,000, just $5,000 more than what he owed the IRS.
By employing the cost segregation strategy, Luke was able to utilize bonus depreciation of around 30% of the property’s value, totaling $195,000, in the first year. Despite not being a real estate professional, he leveraged this loophole by purchasing an Airbnb, allowing him to slash his W-2 income from $300,000 to just $105,000 by writing off depreciation.
Consequently, he only had to pay taxes on the reduced income, amounting to about $25,000 to both the Fed and state, saving a whopping $100,000 in taxes while also gaining equity in a rental property.
