Real Estate & Taxes: How Short-Term Rentals Can Offset Your W-2 Income

In this episode of How to Lower Your Tax Bill, host Terrence Hutchins, a financial and tax advisor in the Dallas-Fort Worth area, explains how W-2 employees can leverage short-term rentals (STRs) to reduce their taxable income. Many new real estate investors expect immediate tax benefits—only to be caught by the passive activity loss rules. But by structuring rentals strategically, you can unlock deductible losses to offset your W-2 earnings.

Terrence covers:

• The three exceptions that allow real estate losses to offset W-2 income.
• The 7-day rule that distinguishes short-term rentals from passive real estate.
• Material participation tests and why tracking your hours is critical.
• The cost segregation study strategy to accelerate depreciation and maximize tax savings.
• The QBI deduction and how rental profits can qualify for an extra 20% tax deduction.

Featured Tax Fact: In the 1985 case Moss v. Commissioner, a group of attorneys tried to deduct their daily lunch meetings as a business expense. The IRS ruled against them, emphasizing that meals must be directly related to business—so no, your daily lunch with colleagues doesn’t qualify!

For more real estate tax strategies, subscribe to How to Lower Your Tax Bill on Spotify or Apple Podcasts. And remember: Keep More of What You Earn!