How to Lower Your Tax Burden Using Real Estate as a Doctor

For the majority of doctors, taxes are their #1 expense. And while taxes are a reality of our world, we can do things to lower our tax burden. We are not obliged to pay the maximum amount. In fact, I think it is helpful to look at the IRS tax code as incentive-based. When you do what they want you to do, you pay less taxes. And through this tax code, real estate becomes a very effective vehicle to lower your tax bill.

But these tax rules and incentives can seem confusing and intimidating.

Thankfully, they don’t have to be. Selenid and I use real estate to massively reduce our tax burden and grow our wealth. We ultimately learned these strategies through a lot of self-education as well as leveraging the knowledge of expert tax advisors.

In that regard, I recently held a webinar with key resources Paul and Lubna Channo from Tax Planning Boutique. Paul broke down the rules and strategies around taxes and real estate in a really helpful and clear way.

So I want to share the highlights of that webinar which you can also see in its entirety below. From here, Paul will take it away!

lower tax real estate — *Check out the full webinar here!*

Why tax planning?

We can’t emphasize the importance of tax planning enough. It is not sufficient just to file your taxes. You need to develop a strategy to improve your financial defense by minimizing one’s largest expense – taxes.

Doctors are really good at financial offense by making that money and putting it in our pocket. But what we really need to do is practice financial defense.

Financial defense is minimizing our expenses, and our number one expense for most of us here, is taxes. Number two, the reason why tax planning is so important is because it guarantees results. If you’re buying your next rental property, I can guarantee you tax savings. And number three, beating the IRS is so much fun.

Income basics for tax planning

So in the tax code, there are three different types of income and loss. There’s active, passive and portfolio.

Active income (e.g., regular job, medical practice)
Passive income (e.g., rental properties)
Portfolio income (e.g., stock sales)

Like anything, there are pros and cons of passive income/losses

The benefits are avoiding self-employment tax and Medicare/Social Security tax. However, the downside is that net passive losses are limited and can only offset other passive income, not active income for high income earners like doctors with W2 or 1099 income.

For instance, if you make less than $100,000, you can deduct up to $25,000 in passive losses against your active income. But for those making more than $150,000 (AKA doctors), passive losses cannot offset active income.

Using real estate to lower your tax burden

What real estate investing allows you to do when you meet certain requirements is to convert passive losses (that would only offset passive income) into active losses (that can offset active income like W2 income).

There are two key strategies in real estate investing to actively lower your tax burden:

Short-term rentals (e.g., Airbnb) – To convert passive losses into active losses, you must meet the “material participation” requirement. This requires averaging 7 days or less per occupant throughout the year.
Long-term rentals – To convert passive losses into active losses, you must achieve “real estate professional” status. This requires performing more than 750 hours of service in real property trades or businesses and having more than 50% of your total work hours in those activities.

It is paramount that you meticulously track your hours to substantiate material participation or real estate professional status, should you be audited by the IRS. There are many cautionary tales including a 2020 court case where the taxpayer’s estimated log was deemed unreliable, resulting in a $14,596 tax bill.

Another tool is cost segregation, which involves:

Separating the land value from the building value
Further dividing the building assets into different depreciation classes (e.g., 5-year, 7-year, 15-year)
Compared to the standard 27.5-year or 39-year depreciation for residential and commercial properties

By pairing cost segregation with bonus depreciation (which allows you to expense these shorter-lived assets in the first year), you can achieve significant tax savings upfront.

An example to illustrate the impact:

$200,000 property purchase
$25,000 land value (non-depreciable)
$175,000 building value
$52,500 in 5-year, 7-year, and 15-year assets

Without planning, the annual depreciation deduction (i.e. passive loss that could be used against active income if requirement above are met) would be $6,349.

But with cost segregation and bonus depreciation, the first-year deduction jumps to $56,940, with only $4,440 in annual depreciation for the remaining years.

Combine this with Real Estate Professional Status and you can deduct the nearly $57,000 from your active income in one year for just this one property!

Key take-aways

Proactive tax planning is so important.

It’s similar to how a doctor treats a patient: assess the situation, diagnose the issues, and provide a prescription (tax planning strategies) to achieve significant tax savings.

In terms of tax planning with real estate, these are the key take away points…

Real estate tax planning strategies:

Short-term rentals (e.g., Airbnb)

Meet “material participation” requirement by averaging 7 days or less per occupant
Convert passive losses into active losses to offset other active income

Long-term rentals

Achieve “real estate professional” status
Perform more than 750 hours of service in real property trades/businesses
More than 50% of total work hours in those activities
Can use spouse’s real estate professional status if requirements are met
Convert passive losses into active losses to offset other active income

Cost segregation/Bonus depreciation

Separate land value from building value
Further divide building assets into 5-year, 7-year, 15-year depreciation classes
Pair with bonus depreciation to expense shorter-lived assets in Year 1
Offset greater amounts of income with greater “phantom” losses in a shorter time period

Quick hitters from the Q&A

And here are some relevant discussion points that came up in the Q&A related to real estate tax saving strategies.

Participation hours for new constructions

Participation hours begin once the property is placed in service and available for rent

Tax benefits of real estate syndications

The rules for syndications are different from individual rental properties
For syndications, the tax benefits are more limited due to the passive activity loss rules
The level of ownership percentage in the syndication is a key factor in determining the available tax benefits and whether they are active or passive. In most cases for limited partners investing in a syndication, available losses will only offset passive income

Impact of LLCs on taxes

LLCs provide liability protection but do not directly affect the taxes owed
The tax treatment is determined by the entity election made for the LLC (e.g., sole proprietorship, partnership, S-corporation, C-corporation)

Bonus depreciation and future legislation

Bonus depreciation is currently scheduled to be reduced in the coming years, phasing out completely in 2026
However, there is optimism that there may be future bipartisan legislation to extend or reinstate more favorable bonus depreciation rules
It is likely that at least 50% bonus depreciation will persist in the future

Conclusion

Real estate is a very powerful tool to mitigate your tax burden as a physician. And I hope this post and Paul’s information helps to illustrate how that can be achieved.

Now you see just how powerful real estate can be, I encourage you to check out these posts to see how you can put this into action like Selenid and I have:

What do you think? How do you lower your tax burden? Is real estate part of your plan? Why or why not? What other strategies have you used? Let us know in the comments below!