Case Study: Using STR Rules + Cost Seg to Offset a Huge Bonus Year

Client Type:

W-2 employee in a high-performing company who received a major bonus — nearly 3x their usual annual payout — and wanted to avoid handing too much of it over to the IRS.

The Situation:

This client had all year to plan. They’d received a sizable performance bonus and were committed to investing it smartly. They already owned two long-term rental properties (bought pre-COVID) and had hands-on experience with remodeling. But with home prices rising, they wanted a new angle — and we landed on short-term rentals (STRs) as both a strong investment and a tax strategy.

The Strategy:

They considered both short-term (STR) and mid-term rental (MTR) options, but we discussed how STRs stood out because of a key IRS rule:

If the average guest stay is 7 days or less and you materially participate, the rental losses can offset active income.

That meant if we met the requirements, they could use property depreciation to offset their W-2 income (aka: the bonus!).

Key steps:

• They used the bonus cash to purchase two NJ properties — one single-family and one two-unit — both in need of significant renovation (what they liked).
  
• I helped them choose STRs over MTRs based on tax benefits and navigate the material participation rules (they hit the >100 hours threshold and used rotating cleaners to protect the classification).
  
• We reassembled their tax basis since they’d spent heavily on upgrades but weren’t clear what counted as capital improvement vs. repair.
  
• I brought in a Cost Segregation firm and managed the #s on the studies on both properties.
  
• Helped them log and formalize their participation hours — from vendor texts to travel logs and mileage records — in case of audit.
  
• Built out a detailed tax projection, and helped them adjust their W-4 withholding mid-year to avoid giving the IRS more than needed.
  
• Planned ahead to file early, so they could get their refund fast once the W-2 landed.
  

The Results:

• $73K in federal taxes deferred in a single year, that they turned around and used to invest in another property the following year
  
• STR losses directly offset their high W-2 income
  
• Timing worked — both properties remodeled and placed in service with availability on booking sites by year-end
  
• NJ doesn’t follow federal depreciation rules, so we didn’t adjust their state withholding. They were fully prepared for that and didn’t have any unpleasant surprises.
  
• They learned a valuable lesson about land value’s impact on depreciation: one property had a high land allocation, which reduced the immediate tax benefit, but future improvements helped rebalance that.
  

What the Client Said:

They were thrilled that this didn’t just feel like a tax move — it felt like an investment that played to their strengths. They handled the remodels, we handled the strategy, and the results were exactly what they’d hoped for.