By Sean Graham, CPA – Maven Cost Segregation
If you make good money, you’re probably paying a lot in taxes. But what if there was a legal way to bring that number down, without working more or changing careers?
That’s exactly what some high earners are doing by investing in passive real estate deals, known as syndications.
Let’s break down how it works (without the complicated tax jargon).
When You Invest, You Get a Piece of the Tax Benefits
In a syndication, a group of investors pools money to buy a big property, like a $10 million apartment complex. Each investor owns a small piece, but everyone gets their share of the profits and the tax breaks.
One of the biggest tax breaks comes from something called depreciation — basically, the IRS lets property owners write off part of the value of a building each year.
But there’s a tool called cost segregation that allows investors to front-load those write-offs instead of spreading them out over decades. That means big losses on paper, even if the property is actually making money.
What Is Cost Segregation?
Normally, a building depreciates slowly over 27.5 or 39 years. That means a small tax deduction each year.
But when the sponsor does a cost segregation study, they break the building into parts — flooring, cabinets, landscaping, light fixtures — and some of those parts can be written off much faster (like over 5 or 15 years instead of 39).
And when bonus depreciation is in play? Many of those components can be deducted all at once, in year one.
What That Looks Like for You
Let’s say the property qualifies for bonus depreciation, and the cost seg study finds that 25%–35% of the building can be written off right away.
If you invest $100K in a deal like this, you might get $60K–$90K in first-year paper losses on your tax return. These losses don’t come out of your pocket, they just show up on the K-1 form you get from the deal.
Can You Use Those Losses to Offset Your W-2 or Business Income?
Here’s where most people get tripped up.
By default, those losses are passive — and the IRS says passive losses can only offset passive income (like rental cash flow or gains from other investments).
But there’s a way to unlock even more value: if you (or your spouse) qualify as a Real Estate Professional, you may be able to use those paper losses to offset your active income — like W-2 wages or business profits.
To do that, you need to meet all three of these conditions:
- Real Estate Professional Status (REPS):
You or your spouse must spend 750+ hours per year on real estate activities and more time in real estate than any other job. - Grouping Election:
You need to file a formal election with your tax return to treat all your rental activities (including syndications) as one combined activity. - 500-Hour Material Participation Test:
You must spend at least 500 hours across your grouped rental activities to qualify as materially participating.
If you meet all three, your losses could directly offset active income — potentially saving you tens of thousands in taxes.
Want the full breakdown? Check out our in-depth blog post on this strategy for more details on how each requirement works.
Why This Strategy Matters
If you’re a high earner looking for tax-smart ways to invest, passive real estate syndications can offer big upside — especially when sponsors are doing cost seg studies to maximize year-one depreciation.
Talk to your CPA about whether this strategy fits your situation. And make sure the deals you invest in are using cost segregation. Otherwise, you might be leaving serious tax savings on the table.
