Real Estate Tax Strategies for Physicians: Short-Term Rentals, REPS and Cost Segregation

Why most rental losses do not help physicians

Under the passive activity rules, rental real estate is passive regardless of how involved you are, and passive losses can only offset passive income. The $25,000 special allowance for active participants phases out completely by $150,000 of modified AGI, so it does not help attending physicians. Unused losses carry forward until you have passive income or sell the property.

The short-term rental strategy

The regulations exclude from the definition of rental activity any property where the average period of customer use is seven days or less. Such a property is treated as a business. If you materially participate, for example by spending more than 100 hours on it and more than anyone else, or 500 hours in total, its losses are non-passive and can offset W-2 or practice income. Combined with a cost segregation study and bonus depreciation, the first-year loss can be large.

The rules are strict. Hours must be documented, time spent by a property manager can defeat the test, and average stay must be calculated correctly. This strategy draws IRS attention and should be planned before purchase.

Real estate professional status (REPS)

A taxpayer who spends more than 750 hours a year in real property trades or businesses and more than half of their working time in them, and who materially participates in the rentals, can treat rental losses as non-passive. Full-time physicians generally cannot meet the half-of-working-time test, but a spouse who does not work full time elsewhere can. On a joint return, that spouse's status lets the couple's rental losses offset the physician's income.

Cost segregation and bonus depreciation

A cost segregation study breaks a building into components (such as 5-, 7- and 15-year property) that depreciate faster than the 27.5 or 39 years for the structure. 100% bonus depreciation was made permanent for property acquired after January 19, 2025, so those components can often be deducted in the first year. State conformity varies; California, for example, does not follow federal bonus depreciation.

Limits to watch

• The 2026 excess business loss limit of $256,000 (single) or $512,000 (joint) caps how much net business loss can offset other income in one year.
• Depreciation is recaptured when the property is sold, unless deferred with a like-kind exchange.
• Losses beyond your at-risk amount and basis are suspended.

Owning your practice building

Practice owners can hold their building in a separate entity, lease it to the practice and depreciate it. Rent paid by the practice is not subject to payroll tax, and the building can be retained after the practice is sold. See practice owner planning.

This article is for general educational purposes and is not tax, legal or investment advice. Tax law changes often and its application depends on your facts. Figures reflect 2026 rules as published by the sources listed above. Consult a qualified professional before acting. See our editorial policy.