K
enji Asakura and Letizia Alto, co-creators of Semi-Retired MD, started investing in real estate in 2015 to achieve financial freedom. They leveraged Real Estate Professional Status (REPS) to offset their clinical income as physicians. To qualify for REPS, individuals must spend over 750 hours a year on real-estate activities and have more than half of their working hours dedicated to real estate.

    The couple used REPS to shelter their clinical income with rental real estate losses. Typically, these losses are considered passive and can only offset passive income. However, as real estate professionals, they could fully deduct rental losses against active forms of income, including W2 and 1099 earnings. This strategy allowed them to "zero out" their income taxes for seven years.

    Alto worked in medicine until 2020, while Asakura transitioned to a part-time hospitalist in 2015 to qualify for REPS. Only one spouse needs to qualify, making it possible for Alto to continue working and deduct real estate losses from her clinical income. The couple provides an example on their blog: if they earn $250,000 as doctors and generate $150,000 in real estate losses, they can deduct the losses against their income, reducing their tax liability.

    To qualify for REPS, individuals must document their hours spent on real-estate activities, including mileage driven to visit properties. Asakura keeps track of his hours in a Google calendar with detailed notes. If you spend a substantial amount of time on your portfolio, REPS is worth exploring – and don't assume your CPA knows about the status.

    The couple's main real estate-specific tax strategy involves rehabbing properties to create losses, which can be written off as expenses. This approach has been beneficial for their business, allowing them to increase property value and cash flow while reducing their tax liability.