I recently joined Kathy Fettke on the Real Wealth Show to address widespread misconceptions about cost segregation that cost investors millions in missed opportunities, or worse, trapped deductions they cannot use.
The 2017 Revolution Nobody Talks About
While everyone focuses on the 100% bonus depreciation restoration, I shared a crucial perspective with Kathy's audience:
"Everyone's talking right now about the one big beautiful bill and 100% bonus. Don't get me wrong, that's a big deal. But 2017 was the real story. From only new buildings to every property that's ever traded."
The 2017 Tax Cuts and Jobs Act transformed cost segregation by extending benefits to existing properties. You can now purchase a 1970s mini storage facility and accelerate depreciation just like new construction. This change expanded cost segregation from a niche strategy to a mainstream tax tool.
The High-Income Earner Trap
The most important revelation from our conversation concerns passive loss limitations. High-income professionals consistently misunderstand this critical restriction.
"A lot of folks come to me who are saying, I'm a doctor, I'm a highly paid sales guy. I need deductions. And you go, you can't write somebody a $100,000 check and have them go buy an apartment building, because all the depreciation is going to be stuck in this passive bucket."
Congress created these rules in 1986 specifically to prevent high earners from eliminating taxes through real estate losses. Today, if you earn over $150,000 from W-2 wages, your rental property losses cannot offset that income unless you qualify as a Real Estate Professional, requiring 750 hours annually and more than half your working time in real estate.
Three Escape Routes
During the podcast, I outlined three legitimate strategies for high earners:
1. Real Estate Professional Status: Meet strict IRS time requirements and document everything meticulously.
2. Short-Term Rentals: Properties with average stays under seven days qualify as active businesses. Kathy shared her success: "We got like $120,000 deduction on one of our short-term rentals."
3. Spousal Strategy: A non-working or part-time spouse can qualify as a Real Estate Professional while the high earner maintains their W-2 job.
Newton's Law of Tax
I introduced my concept of depreciation recapture:
"I always say it's like Newton's Law of Tax, what goes down must come back up."
Every accelerated deduction creates future tax liability. When you sell, you repay those benefits unless you execute a 1031 exchange or hold until death. Kathy highlighted this challenge for syndication investors who cannot use 1031 exchanges.
Who Actually Benefits
Through our partnership with Real Wealth, we've identified investors who genuinely benefit from cost segregation:
- Business owners purchasing their facilities
- Real estate professionals meeting IRS requirements
- Active short-term rental operators
- Investors with existing passive income
- Long-term holders planning 1031 exchanges
Listen to the Complete Conversation
Ready to discover whether cost segregation actually works for your situation? The full Real Wealth Show episode covers additional strategies I didn't have space to detail here, including specific examples of successful short-term rental setups, how business owners can maximize deductions on their own facilities, and warning signs that cost segregation might hurt rather than help your tax position.
Kathy and I also discuss real client scenarios, walking through the exact numbers and outcomes for different investor profiles. Plus, you'll hear Kathy's personal experience with her $120,000 short-term rental deduction and the recapture surprise that changed her exit strategy.
The complete conversation provides the framework you need to evaluate cost segregation for your portfolio.
