The Challenge
Michael had meaningful depreciation potential across his growing rental portfolio. However, because of his substantial W-2 income, passive activity limitations risked trapping rental losses—reducing the ability to generate immediate tax relief.
At the same time, several strategic decisions required careful coordination:
- Pursuing REPS while maintaining W-2 employment
- Sequencing cost segregation to accelerate depreciation efficiently
- Determining proper treatment for a $150,000 renovation
- Timing charitable giving for maximum impact
Without disciplined execution, significant tax leverage could remain unused.
The Gelt Strategic Approach
REPS Qualification & Documentation Framework
We evaluated eligibility under the IRS REPS requirements:
- 750+ hours per year in qualifying real estate activities
- Material participation standards met
- More time spent in real estate than other trades/businesses
Because Michael’s schedule allowed for the required hours, REPS was viable—provided documentation was audit-ready.
We implemented:
- A structured daily time log framework
- Clear definitions of qualifying activities
- Property-level tracking standards
If successfully qualified, rental losses could offset W-2 income instead of being limited as passive losses.
Cost Segregation Planning
We identified properties suitable for cost segregation studies.
Key considerations:
- Reclassification of shorter-life components (5, 7, 15-year property)
- Typical acceleration range discussed: ~20–30% of property basis
- Timing flexibility for study completion within allowable windows
Professional studies were recommended to ensure defensibility and clean integration into year-end filings.
$150,000 Renovation Review
We initiated internal review to determine the optimal and defensible classification of renovation expenses, evaluating capitalization, depreciation pathways, and interaction with cost segregation.
Proper classification materially affects both current-year deductions and future recapture exposure.
Opportunity Zone Considerations
We reviewed Opportunity Zones primarily as a capital gains deferral strategy, assessing potential reporting complexity and strategic fit relative to anticipated gains.
Charitable Timing Strategy
Michael planned a $5,000 donation to a medical school.
Given the aggressive depreciation strategy for the current year and broader SALT planning considerations, we recommended:
- Delaying the cash donation until January 1
- Collecting documentation for non-cash donations during the current year
Long-Term Planning Alignment
We aligned on broader strategy principles:
- “Buy, borrow, die” wealth positioning
- Depreciation recapture awareness
- 1031 exchange planning for future dispositions
Results & Implementation Roadmap
Immediate (0–60 Days)
- Launch REPS time-tracking system
- Clean and reconcile Stessa records
- Organize donation documentation
90–120 Days
- Finalize renovation treatment
- Initiate cost segregation studies where warranted
- Run year-end projections comparing REPS vs. non-REPS scenarios
Ongoing Strategy
- Monitor acquisition pipeline
- Evaluate disposition strategies
- Revisit Opportunity Zone planning if capital gains timing supports it
If REPS qualification is achieved and cost segregation is implemented on eligible properties, projected deductible losses could reach $200,000–$400,000+, translating to $85,000–$140,000 in estimated first-year tax savings depending on final income levels.
Conclusion
By combining REPS qualification, cost segregation acceleration, renovation clarity, and disciplined documentation, Michael positioned his growing real estate portfolio as a powerful tax optimization engine, without sacrificing defensibility.
We knew real estate had tax advantages, but we didn’t realize how much structure and documentation mattered. Gelt helped us turn a concept into a clear, defensible plan.
— Michael Carter, Redstone Residential Holdings
Disclaimer: This case study is based on a real client engagement. Certain names, locations, and identifying details have been changed to protect client confidentiality. The challenges, strategies, and outcomes described reflect actual facts. Show more
This material is provided for informational and educational purposes only. It does not constitute, and should not be relied upon as, tax, legal, or accounting advice. Each individual’s circumstances are unique, and readers should consult their own qualified professional advisors before making any decisions.
To comply with U.S. Treasury Department regulations (Circular 230), we inform you that any tax information contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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