Guide · High-income tax strategy
You’ve maxed the 401(k). Now what?
Above a few hundred thousand dollars of salary, the ordinary shelters run out and most of every extra dollar goes to tax. Real estate is the one asset class the code lets you depreciate against that income, if you do it a specific way. Here are the two ways, who they fit, and the traps.
Updated October 2026. Not tax advice; bring it to your CPA.
Where the usual shelters stop
- 401(k) deferral
- 2026 employee limit; more if 50+
- $24,500
- HSA, family
- needs a high-deductible plan
- $8,750
- Backdoor Roth
- tax-free later, no deduction today
- $0 now
- Charitable gifts
- good, but it's giving, not sheltering
- Costs a dollar to save ~45¢
- State and local taxes
- the SALT cap still bites in California
- Capped
Add it up and a household earning $600,000 can shelter perhaps $50,000 to $80,000 the conventional way. Everything above that is taxed at the top.
The two routes
Rental losses can offset salary in exactly two situations.
The short-term rental route
Buy a short-term rental where it's permitted, run it yourself in year one (100+ hours and more than anyone else), and keep personal use under the cap. A cost segregation study with 100% bonus depreciation creates a large year-one loss, and because the activity isn't a 'rental' under the passive rules, the loss offsets your salary.
Fit · Fits a single high earner or a household where both work. The cost is one year of real involvement.
The full mechanism →The real estate professional route
If you or your spouse spends more than 750 hours a year in real estate and more time there than in any job, and materially participates in the rentals, all rental losses become non-passive. Long-term rentals qualify too. With a portfolio and cost segregation studies, this is the deeper of the two routes.
Fit · Fits households where one spouse doesn't have a full-time W-2 and will genuinely run the properties.
Talk it through with us →Both routes run on the same engine: a cost segregation study plus 100% bonus depreciation, which is permanent again for property acquired after January 19, 2025.
Who this is for
The same strategy, four different plans.
Physicians and dentists
High, steady W-2 or practice income, often with a spouse who can take the real estate professional role, and a schedule that makes a short-term rental possible with discipline. The year-one hours are the honest conversation.
The physician guide →Tech employees with vesting stock
RSUs are ordinary income when they vest, taxed like salary. A year with a large vest is the year to create the loss. Timing the purchase to the vest schedule is most of the plan.
Executives and founders
A bonus year, a liquidity event, or the first year after a sale. The deduction is most valuable against the highest bracket you'll ever be in. Coordinate with the people handling the transaction.
Dual-income households
Two W-2s and no obvious spare time. The short-term rental route works if one of you commits to it; the property's location matters more here than anywhere, because the hours have to be real.
What doesn’t work
Four ways people lose the deduction.
Buying a long-term rental and expecting to write it off
A rental you don't materially participate in is passive. Its losses only offset passive income, and the $25,000 allowance for small landlords disappears entirely above $150,000 of income. The loss isn't lost; it waits. But it doesn't touch your salary this year.
Letting a manager run the STR in year one
If someone you pay does more hours than you, you fail the material participation test and the loss goes passive. Co-management, where you do the decision and guest work and log it, is the model that holds up.
Using the house
More than 14 nights, or 10% of rented nights, and it's a residence under the tax code. Losses are capped. Family weekends count.
Skipping the study
Without a cost segregation study, depreciation on the whole property is slow and the year-one loss is small. The study is what turns a rental into a deduction.
Questions
How big can the deduction be?
On a furnished short-term rental, studies commonly move 30–45% of the purchase price into 5- and 15-year property, all deductible in year one with 100% bonus. On a $1.5 million property that's a loss in the $400,000–$650,000 range before income. What it's worth to you depends on your bracket; at a combined federal and California rate in the mid-40s, every $100,000 of loss is roughly $45,000 of tax. Your estimate puts the real numbers next to the study fee.
Does this work if my income is under $250,000?
It can, but the math is less compelling: the deduction is worth less at lower brackets, and the time cost is the same. Below about $150,000 the small-landlord allowance may already cover you. It's a conversation, not a rule.
I'm self-employed or on a 1099. Same thing?
Yes. The strategy offsets ordinary income, whatever the form it arrives in. Business owners also have entity-level options that a W-2 employee doesn't; that's a CPA conversation we're glad to set up.
Isn't this an audit flag?
A large loss against a large salary gets attention, which is exactly why the documentation matters: an engineering-based study, booking data showing the average stay, and a contemporaneous hour log. Done that way, it's a well-settled part of the code, not a position you're defending.
What about depreciation recapture when I sell?
You pay some of it back on sale, at rates that depend on the property class. The deduction is still worth taking: a dollar saved at your top bracket this year is worth more than a dollar repaid years from now, and a 1031 exchange can defer recapture further.
Where does Realm fit?
We help you decide which route fits, find and underwrite the property, run the cost segregation study with Veritax, and co-manage year one so the hours are real and logged. We don't prepare your return or form your entity; we introduce you to the tax professionals who do.
Find out which route fits, before this tax year closes.
Five questions and a call. You’ll leave knowing whether real estate is the answer for you this year, and what it would take.