So, you’re making serious money and thinking about real estate as your next big move. Smart choice but don’t assume rental property tax write-offs will be your golden ticket to lower taxes. High earners like you don’t always get the same tax breaks as everyone else. Before you bank on big deductions, let’s clear up a few myths and make sure your investments are working for you, not the IRS.
1. Think You Can Deduct Rental Losses? Not So Fast.
You’ve heard the advice: “Buy a rental property, write off the losses, and lower your tax bill.” Sounds great until you realize the IRS has different rules for high earners.
- If your adjusted gross income (AGI) is over $150,000, rental loss deductions are completely phased out for passive investors.
- Translation? You can’t just offset your W-2 or business income with rental losses unless you qualify for specific exemptions.
- Many entrepreneurs don’t realize this until tax time—when it’s too late to adjust the plan.
This is where working with a CPA firm in Austin, Texas can make or break your strategy. A little planning now can save you a lot of tax headaches later.
2. Are You an Active or Passive Investor? It Matters.
Not all rental property owners are taxed the same way, and knowing where you fall could mean the difference between major deductions or getting shut out.
- Passive investors can only deduct losses against other passive income, not your business profits or salary.
- Active participants (meaning you materially participate in managing your rentals) can deduct up to $25,000 in losses if your AGI is under $100,000 (phasing out at $150,000).
- Real estate professionals—those who spend at least 750 hours per year actively managing properties—can deduct rental losses against any
The IRS doesn’t just take your word for it, though. Work with an experienced Austin tax accountant to make sure your real estate activity is structured the right way.
3. Depreciation Is Your Best Friend If You Use It Right.
Depreciation is one of the best tax benefits of owning rental property but most investors don’t take full advantage of it.
- You can deduct the cost of your rental over 5 years to reduce taxable income.
- Want bigger deductions sooner? A cost segregation study lets you accelerate depreciation, meaning you keep more of your money now instead of waiting decades for small deductions.
- Selling the property? Watch out for depreciation recapture, unless you use a 1031 exchange to defer taxes.
This isn’t just about ticking a box on your tax return. A small business CPA in Austin can help structure your depreciation strategy to maximize your real estate profits.
4. High Earners, Watch Out for Extra Taxes on Rental Income.
Once your income hits $250,000 (married) or $200,000 (single), there’s another surprise tax waiting for you: the Net Investment Income Tax (NIIT) at 3.8%. That means more of your rental income is getting taxed.
- Rental losses are often capped, meaning your real estate investments might not offset your income like you expected.
- If you’re a passive investor, this tax could take a bigger chunk out of your profits than you anticipated.
- Smart investors use real estate professional status, cost segregation, and tax-deferred exchanges to legally reduce taxable income.
A solid tax advisor in Austin can make sure you’re playing the tax game to win, not just reacting when the bill comes due.
5. If You’re Not Tax Planning Before Buying, You’re Doing It Wrong.
Most entrepreneurs focus on real estate deals first and tax planning second. That’s backward.
- Not all properties offer the same tax benefits. Some are better investment vehicles than others.
- How you structure ownership—personally, through an LLC, or in a partnership—impacts your tax liability.
- The right financing, depreciation strategy, and Austin accounting service can ensure you’re setting yourself up for maximum deductions and minimum tax surprises.
If you wait until tax season to figure all this out, you’ve already lost money.
Make Sure Your Rental Property Works for You, Not the IRS.
Owning rental property is a great move but only if you’re playing the tax game the right way. High earners face unique tax challenges that most generic advice doesn’t cover. The difference between saving thousands and overpaying comes down to strategy.
Let’s make sure your real estate investments are building your wealth, not your tax bill. Book a tax strategy session with Insogna CPA, one of the top Austin CPA firms, today...