Real estate has long been celebrated as a powerful wealth-building tool. But beyond rental income and property appreciation, real estate offers unique tax advantages that many investors fail to maximize.
Certified Public Accountants Amanda Han and Matthew MacFarland, co-founders of Keystone CPA and experienced real estate investors themselves, specialize in helping property owners uncover these often-overlooked strategies. Among them: the “marriage loophole” and the short-term rental loophole — two approaches that can dramatically reduce taxable income.
Why Real Estate Tax Benefits Are Underutilized
“People know real estate has tax benefits — that’s no surprise,” Han told local press. “What generally happens is people just don’t know how to utilize these benefits.”
Rental property owners often generate taxable paper losses despite having positive cash flow, thanks to deductions like depreciation, renovations, and operating expenses. When leveraged properly, these losses can offset more than just rental income.
The “Marriage Loophole” and Real Estate Professional Status (REPS)
Normally, real estate rental losses are considered passive. That means they can only offset other passive income — not W-2 wages or 1099 earnings. But with an IRS designation known as Real Estate Professional Status (REPS), those losses can be applied against active income.
Here’s where the “marriage loophole” comes into play.
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To qualify for REPS, an investor must:
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Spend 750+ hours a year in real estate activities.
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Devote more than half of total working hours to real estate.
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Materially participate in rental operations.
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That can be difficult for full-time employees. But if one spouse qualifies for REPS — even if the other works a high-paying W-2 job — both spouses benefit.
👉 Example: One spouse earns $250,000 as an accountant. Their joint rental business generates $150,000 in losses. Without REPS, they’d be taxed on the full $250,000. With one spouse claiming REPS, they’re taxed on only $100,000.
Han and MacFarland said some couples have used this strategy to “zero out” their income taxes for years.
The $25,000 Special Allowance
For households earning under $100,000 annually, there’s another benefit: up to $25,000 in rental losses can offset W-2 income without REPS.
This allowance phases out between $100,000 and $150,000 and disappears entirely above $150,000 — which is why REPS or the “marriage loophole” become crucial for higher earners.
The Short-Term Rental Loophole
Not everyone can qualify for REPS — but real estate investors still have another powerful option: the short-term rental (STR) loophole.
Here’s how it works:
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The IRS treats STRs differently from long-term rentals.
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If the average guest stay is seven days or less, and the owner materially participates in managing the property, losses can offset W-2 income directly.
“Generally speaking, the IRS looks at real estate as passive. But with short-term rentals, if you self-manage and strategically create losses through depreciation, you can offset W-2 income,” explained MacFarland.
👉 Example: Someone earning $500,000 in W-2 income turns a property into a short-term rental and generates a $200,000 tax loss. That offsets W-2 wages, potentially saving $74,000 in taxes.
Meeting the Material Participation Test
To qualify, investors must satisfy at least one IRS requirement for material participation. Han notes the three most common are:
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Spending 500+ hours annually managing the STR.
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Spending 100+ hours annually on the STR, provided no one else spends more time.
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Spending more hours than all others combined (e.g., you log 80 hours vs. 50 hours from cleaners and landscapers).
Anyone — regardless of income level — can benefit. But for middle-income earners, the savings can be life-changing.
“If you make $1 million and save some tax, great. But if you make $80,000 and save a significant amount in taxes, that’s a lot more impactful,” Han said.
Why These Loopholes Matter Now
With inflation raising costs across housing, healthcare, and everyday life, many investors are looking for ways to keep more of their earnings. These strategies — when applied correctly — allow real estate owners to reduce taxable income, reinvest savings, and accelerate long-term wealth building.
Han and MacFarland stress that these approaches aren’t shady tricks, but IRS-approved strategies designed to encourage investment in housing.
For investors who qualify, the “marriage loophole” and STR loophole can be the difference between an average tax return and a transformative one.
