Don’t Apologize for Making Money: How to Offset Your Liquidity Event

Don’t Apologize for Making Money: How to Offset Your Liquidity Event

By: Jason Watson / Posted Thursday, January 1, 2026
Posted By: Jason Watson

Overview of Offsetting High Income

  • High income isn’t a problem, it’s leverage. A big tax bill usually means a liquidity event happened, and liquidity is exactly what makes advanced tax strategies possible in the first place.
  • STRs flip passive losses into active weapons. Weapons of tax destruction. Ok, went too far. Got it. Anyway, when average guest stays are seven days or less and you materially participate, STR losses become non-passive and can offset W-2 income, bonuses, and RSUs.
  • REPS is powerful but not casual. Real Estate Professional Status can unlock non-passive losses from long-term rentals, but it requires real time, real documentation, and usually a spouse with bandwidth (since W-2 earners rarely qualify for REPS).
  • Cost segregation is the engine, bonus depreciation is the fuel. Cost seg identifies short-life assets, and 100% bonus depreciation (back for 2025 and beyond) allows you to deduct them immediately instead of waiting decades.
  • Timing can make or break the strategy. Losses created before the income hits may carry forward inefficiently, and failing material participation in future years can strand deductions where they’re least helpful.
  • Retroactive cost seg is the ace in the hole. You can delay a cost segregation study and later pull years of depreciation into one high-income year using Form 3115 and IRC Section 481(a), as long as the rental property and your participation qualify in the current year.

Let’s be honest for a second… even three seconds: having a massive tax bill usually means you had a really, really good year, right?

Maybe you finally vested. Maybe you exited. Maybe grandma left you a retirement account that is now forcing distributions (stretch IRAs went away with the 2019 SECURE Act, the first one). Whatever the source, you have cash. And now, the IRS has its hand out. We are equally surprised as you are.

There is a tendency in the tax world to treat high income like a problem to be solved with a somber face. We disagree. We think you should celebrate it. You earned it. This is a liquidity event as nerdy finance and accountants say- a moment where cash flows into your life and changes your financial landscape.

But celebrating doesn’t mean writing a blank check to the U.S. Treasury. It means being strategic. It means understanding that the tax code is just a series of incentives, and if you play by the rules, you can keep a lot of the wealth you’ve built. Aren’t taxes a success tax anyway? Sure, doesn’t make you feel any better, we get it.

Let’s talk about the spikes, the strategy, and the “Ace in the Hole” you can keep in your back pocket.

The Spikes: What Just Happened?

First, let’s define a “liquidity event.” It isn’t just selling a business for eight figures. In our world, a liquidity event is any specific trigger that dumps taxable income into your lap and spikes your marginal tax rate. Here are the usual suspects that might have you staring at a 37% federal tax bracket (plus state, plus NIIT):

  • Restricted Stock Units (RSUs) & Options: The golden handcuffs finally unlocked. Whether it’s a vesting schedule hitting all at once or a strategic exercise of options, W-2 income just went through the historical tax roof.
  • The “Big Bonus” Year: You crushed your KPIs, and the company rewarded you. Suddenly, your withholding looks like a rounding error compared to what you actually owe.
  • Severance & Golden Parachutes: You’re leaving a high-level position, and they paid you to go away quietly. That lump sum is fully taxable ordinary income. As an aside… was it hush money? You can trust us with your secret. Oh, do tell!
  • Profit Harvesting: You’ve been holding Tesla, Apple, or NVIDIA since they were trading for pocket change. You decide to sell high to diversify or grab some profit or both. Regardless, that creates massive capital gains, which is a disguised way of saying “taxes.”
  • Roth Conversions: You are intentionally spiking your income today (paying tax now) to move money from a traditional pre-tax IRA into a tax-free Roth IRA for massive future growth. It’s a brilliant long-term play, but it hurts in April.
  • Inherited IRAs: The “Stretch IRA” scheme from inherited IRAs is dead as of 2019. As such, if you inherit a retirement account, you generally have to drain it within 10 years. That means mandatory distributions that stack on top of your normal salary. And, rather than spread the pain out, you take one big or a handful of big chunks out at once.

If you see yourself on this list, congratulations. Now, let’s get to work on wiping out the tax bill. Well, not entirely, but we certainly went from piquing your interest to having your attention with just a few words.

The Strategy: The Perfect Tax Storm

To fight high active income (like wages and bonuses), you need a heavy hitter. You need a strategy that generates non-passive losses to offset active or earned income like W-2 and portfolio income like capital gains.

Let’s kick this off with real estate which is usually “passive,” meaning its losses can only offset passive income (like other rentals). That doesn’t help your RSU problem. But when we combine specific elements, we can fight some tax fire with offsetting fire.

short-term rental loophole1. The Short-Term Rental (STR) Loophole

The tax code has a quirk: if the average guest stay at your rental property is seven days or less, the IRS does not view it as a “rental activity” under IRC Section 469. They view it as a business.

This is the “STR Loophole.” But there is a catch: You must materially participate. You generally need to meet one of these tests:

  • The 100-Hour Rule: You spend at least 100 hours on the activity, and no one else spends more time than you (including cleaners!).
  • The 500-Hour Rule: You spend 500 hours on the activity (harder to do, but bulletproof).
  • Substantially All Hours Rule: You did all the work, regardless of how many hours (still need to demonstrate a business purpose with regular and continuous involvement, so saying 12 hours is material participation might be adorable yet unlikely to pass the smell test).

If you pass one of these material participation tests, the losses from the rental property are non-passive. They are now powerful enough to offset your W-2 wages, your bonus, and your RSU income.

2. The Power Move: Real Estate Professional Status (REPS)

What if you hate the idea of turning over an Airbnb guest every 4 days? You want a long-term tenant, but you still want those juicy non-passive losses.

Enter Real Estate Professional Status (REPS). This is the heavyweight champion of tax status, but it requires serious commitment. To qualify, you (or your spouse!) must:

  • Spend more than 750 hours a year in real estate trades or businesses.
  • Spend more than 50% of your working hours in real estate trades or businesses.

The Spouse Factor: If you are the high-income earner working 50 hours a week in tech or medicine, you will almost never qualify for REPS. You simply cannot prove you spend more time in real estate than your “day job.” But your spouse can. If one spouse qualifies as a Real Estate Professional and you materially participate in your rental properties (aggregate those hours between spouses!), the losses from your long-term rentals become non-passive on your joint tax return. This is the ultimate strategy for married couples where one partner has high W-2 income and the other manages the real estate portfolio.

3. The Engine: Cost Segregation

Okay, you have the property (STR or LTR with REPS). Now we need the paper loss.

Standard depreciation is boring—it takes 39 years to write off a commercial building including short-term rentals (which are deemed non-residential) or 27.5 years for residential. We don’t have 39 years to wait for the tax death of a thousand, well, 39 cuts; we have a tax bill now.

A cost segregation study is an engineering report that slices and dices your property. It identifies assets that aren’t really “the building” such as carpeting, special electrical, decorative lighting, countertops, and landscaping. These are reclassified as 5-year, 7-year, or 15-year property.

On a $1.2M purchase, a cost seg study might identify $200,000 worth of these “short-life” assets (assume that $800,000 is the building, and about 23%ish is identified… or $184,000ish).

4. The Fuel: Bonus Depreciation (Thank You, OBBBA!)

Here is where 2025 gets exciting.

Under the old rules, bonus depreciation was fading away. But thanks to the One Big Beautiful Bill Act (OBBBA) passed earlier this year, 100% Bonus Depreciation is back for qualified property placed in service after January 19, 2025. This is the rocket fuel. Instead of depreciating that $200,000 of furniture and fixtures over 5 years, you can deduct 100% of it in Year 1.

The Result: You generate a $200,000 paper loss on your tax return. That loss moves over to the income side of your tax return and wipes out the tax liability on your $200,000 bonus. Or your $200,000 capital gain. Or your $200,000 whatever whatever. Either way we say, Yeah, baby!

But I Don’t Want to Change Sheets

structured equipment leaseLook, running a short-term rental or logging 750 hours for REPS isn’t for everyone. After all a short-term rental is a business like any other and has baked in headaches (if it was easy, then everyone would do it). If you want tax efficiency without the hospitality version of business headaches, there are other sophisticated avenues.

We cover these in depth on our Advanced Tax Strategies page, but here are today’s heavy hitters:

  • Working Interest in Oil & Gas: This is the only investment that is statutorily “non-passive” regardless of your participation, provided you hold a working interest (general partner liability). You can often write off a massive chunk of your investment (Intangible Drilling Costs) in Year 1 against W-2 income and other typical income sources.
  • Structured Equipment Leasing: By purchasing equipment and leasing it to an end-user, you can leverage bonus depreciation. These are complex, structured deals, but they can create significant upfront tax deductions similar to real estate.
  • Yacht or Airplane Leasebacks: Have you always wanted an airplane? If structured correctly as a business where you lease the asset to a charter operator, you may be able to utilize bonus depreciation to offset income. Warning: The IRS loves to audit these, so your “business purpose” and usage logs must be impeccable.

Keep in mind these three considerations- any decent tax reduction strategy takes-

  • Cash or debt, and
  • Participation in the business / investment activity, and
  • Financial risk.

If you want a riskless tax deduction, sent $50,000 to your favorite charity. Not really what you had in mind? Yeah, we didn’t think so.

A Cautionary Tale: The Timing Trap

We have to be the buzzkill for a moment because this is where people get hurt. Timing is everything.

We often see a client who expects a massive liquidity event such as a $500,000 severance package in February 2026. Excited about the tax savings, they rush out and buy a luxury STR in December 2025. They do the cost seg, they materially participate, and they generate a huge loss for their 2025 tax return.

The Problem

The income hasn’t happened yet. They have a $200,000 loss in 2025 with standard income. Sure, the loss creates a Net Operating Loss (NOL) that carries forward, but NOLs can be complex and sometimes less efficient than a direct offset.

The Bigger Problem

Qualification is an annual sport. To use that carry-forward loss effectively, or to offset the income that finally hits in 2026, you generally need to qualify as a material participant in 2026 as well (yes there are some workarounds, but stay with us for a minute on this one).

If you buy the wealth building tax reduction rental property in 2025, do all the work to set it up, and then hand it over to a property manager in 2026 because “the work is done,” you fail the test for 2026. Your rental loss becomes passive. Your massive 2026 income gets fully taxed, and your losses are stuck in a passive bucket and carried forward for eternity (well, not really, but sounds more dramatic this way).

Pro Tip: The “Ace in the Hole” Strategy

But wait… what if you already bought the property in 2025, but your big liquidity event is delayed until 2028? Did you waste the tax deduction from a cost seg done in 2025?

Absolutely not. You just inadvertently stumbled into one of our favorite advanced strategies: The Retroactive Cost Seg.

You do not have to perform a cost segregation study in Year 1. You can wait.

Buy the property in 2025. Place it in service. Depreciate it slowly (the boring way).

Wait. Take a beat.

Strike in a High-Income Year. In 2028, when you sell your business or hit a huge vesting cliff, we perform the cost segregation study retroactively for the 2025 purchase. Technically with full-on geek speak, we file Form 3115 (Application for Change in Accounting Method) with your 2028 tax return. This allows us to take all the depreciation you “missed” from 2025, 2026, and 2027 and claim it as a single, lump-sum deduction in 2028. This is called a Section 481(a) adjustment. The IRS can call it what they want; we call it sexy.

The bonus depreciation rules are locked in based on the year you placed the property in service, not the year you do the study. So, if you bought in 2025 (a 100% bonus depreciation year thanks to OBBBA), you get to claim that 100% bonus in 2028 when you actually need the tax deduction.

You effectively bank the tax savings for a rainy (or very wealthy) day.

Advanced Tax Reduction Strategy

WCG CPAs & Advisors are experts in typical tax reduction techniques including advanced tax strategy. Learn more about the various ways to offset high W-2 income and large one-time income spikes.

Learn More

Ready to Rock This

Strategic tax planning isn’t just about saving money; it’s about time travel. You are pulling future wealth into the present by leveraging the tax code today.

Whether it’s a surprise bonus, a planned RSU vest, or a calculated Roth conversion, don’t let the tax tail wag the dog.

At WCG CPAs & Advisors, we specialize in the intersection of high income and strategic tax planning. We can help you determine if you qualify for the STR loophole or REPS, run the numbers on a cost seg study, and ensure you play your “Ace in the Hole” at the perfect moment.

Let’s turn that liquidity event into a legacy event. Yeah, Ok, you can roll you eyes at that one. Permission granted. Congratulations ghost rider, the pattern is open.

I Just Got A Rental, What Do I Do?

I just got a rental, what do I do? Purchasing a rental property is certainly challenging, but operating one to build wealth and find tax efficiency is equally challenging. This is our second book. Our first book, Taxpayer’s Comprehensive Guide to LLCs and S Corps, was first published in 2014 and was well-received by small business owners and tax professionals, so we thought a book on rental properties and real estate investments would be equally helpful. So, here we are with our second iteration, or the 2025 edition. We update it frequently throughout the year (last update was October 6, 2025).

Our rental property book starts with entity structures and moves into asset management such as acquisition, cost segregation, rental safe harbors, repairs versus improvements, accelerated depreciation, partial asset disposition, and 1031 like-kind exchange. From there we discuss various rental considerations like passive activity losses, short-term rental loophole, real estate professional status, and material participation including what time counts, and what time doesn’t count.

Finally, the good stuff! Rental property tax deductions such as travel, meals, automobiles, interest tracing, home office and common expenses. Fun!

It is available in paperback for $19.95 from Amazon and as an eBook for Kindle for 15.95. Our book is also available for purchase as a PDF from ClickBank for $12.95.

We Are Real Estate CPAs

WCG has a team of real estate CPAs ready to assist you with your rental property and real estate investments. Very few tax professionals and CPA firms specialize in real estate to provide you solid consultation, tax planning including tax reduction strategies, and tax return preparation. We are experts in-

This book is written with the general rental property in mind. Too many resources tell you the general rule but don’t bother to back it up with Internal Revenue Code, Treasury Regulations and Tax Court cases. Our book lays it all out, explains the madness, adds some humor and various conundrums. Example? Water heaters and hot tubs- crazy stuff to consider.

Enjoy! And please send us all comments, hang-ups and static. This book is as much yours as it is ours, except the tiny royalty part- that’s ours. Stop by and we’ll buy you a beer with the pennies.

How To Purchase Our Rental Property Book

If you buy our 480-page book and think that we didn’t help you understand rental property tax laws, let us know. We never want you to feel like you wasted your money. If you are ready to add some insightful reading into your day, click on one of the preferred formats. Amazon is processed by Amazon, and the PDF is safely processed by ClickBank who will email you the PDF as an attachment.

$19.95 $15.95 $12.95

Frequently Asked Questions

What counts as a liquidity event for tax planning purposes?

In our world, a liquidity event isn’t just selling a business. For tax planning, it is any concentrated spike in income that pushes you into a high marginal tax bracket. Common examples include RSU vesting, exercising stock options, receiving a large performance bonus or severance package, executing a Roth conversion, or taking a large distribution from an inherited IRA. If it spikes your tax rate, it counts.

Why is short-term rental (STR) income treated differently than long-term rental income?

It comes down to the average period of customer use. Under Treasury Regulation Section 1.469-1T(e)(3)(ii)(A), if the average guest stay is seven days or less, the IRS treats the activity as a business rather than a passive rental activity. This critical distinction is what allows losses—if you materially participate—to be reclassified as non-passive and offset your W-2 or active business income.

Do I really need to “materially participate” in my short-term rental?

Yes. We just said it, right? Ok… sorry for being grumpy pants but this is non-negotiable. Without meeting one of the seven material participation tests (like the 100-hour or 500-hour rules including the substantially all rule), your rental losses remain passive. Passive losses generally cannot offset active income like wages, RSUs, or bonuses; they can only offset other passive income. Material participation is the key that unlocks the tax savings.

Is the 100-hour test enough to qualify for STR material participation?

It can be, but there is a major trap. The rule states you must spend more than 100 hours on the activity AND spend more time than anyone else involved. This includes cleaners, handymen, and property managers. If your cleaner spends 105 hours turning the unit and you only spend 102 hours managing it, you fail the test. This is measure on a per human basis (not the entire entity like a property management company).

Can I qualify for Real Estate Professional Status (REPS) if I have a full-time W-2 job?

It is mathematically nearly impossible. To qualify for REPS, you must spend more than 50% of your total working hours in real estate trades or businesses. If you work 2,000 hours a year as a surgeon or engineer, you’d need to work 2,001 hours in real estate to qualify. However, a spouse who does not have a W-2 job can often qualify for REPS, allowing you to take the deduction on a joint tax return.

Why is Cost Segregation so critical for this STR or REPS strategy?

Cost segregation is the engine that creates the loss. By reclassifying building components (like flooring, cabinets, and landscaping) into shorter recovery periods (5, 7, or 15 years), you accelerate depreciation. Instead of waiting 39 years to write off these assets, you deduct them quickly and create the large paper loss needed to wipe out a sudden income spike.

Is 100% Bonus Depreciation really back for 2025?

Yes! Thanks to the One Big Beautiful Bill Act (OBBBA) passed in 2025, 100% bonus depreciation has been restored for qualified property (assets with a class life of 20 years or less) placed in service after January 19, 2025. This allows you to deduct the full cost of eligible assets in the first year rather than spreading it out.

What happens if I generate the tax loss in 2025 but my big income hits in 2026?

You enter the “Timing Trap.” The Bermuda Triangle of tax deductions. If you generate a non-passive loss in 2025 without income to offset it, it may become a Net Operating Loss (NOL). While NOLs carry forward, they can be complex. The bigger risk is that if you fail to materially participate in 2026 (the year the income actually hits), your carried-forward loss might get stuck or be treated differently. Aligning the deduction year with the income year is crucial.

Do I have to perform a cost segregation study in the first year of ownership?

No, and waiting is often a smart move (our “Ace in the Hole” strategy). You can perform a cost segregation study retroactively in a future year when you actually have a high-income event. We file Form 3115 (Application for Change in Accounting Method) to claim all the “missed” depreciation as a single, massive Section 481(a) adjustment in that future year. Must and can are not synonymous.

Is this STR tax strategy risk-free?

Not even close. The IRS does not give away tax deductions for free. A valid tax reduction strategy requires three things: Cash (or debt), Participation (real work), and Economic Risk. If you are doing this solely for the tax break without a legitimate profit motive or without doing the actual work, you are walking into audit trouble. Always document your hours and treat it like a real business.

Getting Started with WCG CPAs & Advisors

Want to talk to us about tax return preparation, tax planning and strategy, and all the other things that go with it? We are eager to assist! The button below takes you to our Getting Started webpage, but if you want to talk first, please give us a call at 719-387-9800 or schedule an discovery meeting.

Getting Started

Jason Watson, CPA is a Partner and the CEO of WCG CPAs & Advisors, a boutique consultation and tax preparation CPA firm serving clients nationwide with 7 partners and over 90 tax and accounting professionals specializing in small business owners and real estate investors located in Colorado Springs.

He is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps and I Just Got a Rental, What Do I Do? which are available online and from mostly average retailers.

Related Blogs

OBBBA
December 5, 2025

One Big Beautiful Bill Act + SECURE Act 2.0

Overview of OBBBA and SECURE Act 2.0 100% bonus depreciation is back and it’s loud. From January 19, 2025 through
advisory services
December 2, 2025

Why WCG CPAs & Advisors Is Different (Planning-First CPA Firm for Real People)

Overview of Why WCG Is The CPA Firm For You The missing middle needs real advisors, not form-fillers. Most firms
reduce taxable income
November 23, 2025

Tax Strategies for High-Income W-2 Earners: Smart Ways to Reduce Taxable Income

Overview of How to Reduce Taxable Income STRs Are the Heavyweight Champion. Short-term rentals with material participation remain the strongest,
November 20, 2025

Short-Term Rentals Are a Real Business: Why Success Requires More Than a Good Property

Overview of Short-Term Rental as a Business STRs are real businesses, not real estate hobbies. They require daily decisions, real
November 2, 2025

Mileage Myths Busted: Khan v. Commissioner Puts Landlords and Small Businesses on Notice

Overview of Mileage Logs and Substantiation Strict really means strict. The Tax Court wasn’t being poetic — IRC 274(d) requires
October 27, 2025

The Perfect Tax Marriage: Short-Term Rentals Meet Bonus Depreciation

The Perfect Tax Marriage: Short-Term Rentals Meet Bonus Depreciation Marriage isn’t just for people—it’s for tax strategies too. Bear with
Posted Thursday, January 1, 2026
Tax Planning Season

Tax planning season is here! Let's schedule a time to review tax reduction strategies and generate a mock tax return.

Tax Planning Services
Bookkeeping Services

Tired of maintaining your own books? Seems like a chore to offload?

Accounting Services

Offsetting High W-2 Income

Did you have questions about how this works? Do you need to bounce some ideas off of our tax strategists?

The tax advisors, business consultants and rental property experts at WCG CPAs & Advisors are not salespeople; we are not putting lipstick on a pig expecting you to love it. Our job remains being professionally detached, giving you information and letting you decide within our ethical guidelines and your risk profiles.

We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”

Let’s chat so you can be smart about it.

We typically schedule a 20-minute complimentary quick chat with one of our Partners or our amazing Senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax strategy and planning? Rental property support?

Text WCG Offices

Text WCG Offices

Need to get in touch through a quick text? We'll respond within a day.

Chat our amazing team

Call Our Team

Need to speak to a tax professional now? Give us a call 719-387-9800 and we'll get you connected.

Chat with a tax pro

Chat With a Tax Pro

Taxes can be tricky. Chat with a WCG human now and get questions answered.

After almost 6 years with this CPA group, there is NO ONE else we would trust to do our taxes.

L. Matisek

See Review

We've worked with multiple bookkeepers and accountants over the years and WCG has completely blown us away.

N. Sellden

See Review

As a novice business entrepreneur they provided me with the tools to both structure and tax my business efficiently

Mayon Hight

See Review

They've made my taxes a breeze and are worth every dime I pay them for the peace of mind their services provide.

Lynn Shannon

See Review

The good folks at WCG have impressed me, as being highly competent, patient & friendly.

Fred LeBlanc

See Review

They've made my complicated business life simple and I'd recommend them to anyone with a slightly complicated-to-overwhelmingly complicated tax strategy!

Nic J

See Review

For nearly nine years, I have had the privilege of working with WCG and their team of exceptionally knowledgeable and experienced CPAs.

Alex Hickman

See Review

Amanda - WCG CPA - You guys have been invaluable in helping us get this business and tax planning setup properly and executed correctly.

Lance Dodd

See Review

WCG is extremely knowledgable, timely and attune to the unique aspects of our businesses.

Carl Protsch

See Review

WCG CPAs are professional and a pleasure to work with.

Nakapan P.

See Review

They go beyond the call of duties to assist me not only with Tax return matters but with any questions on other personal and company tax matters.

Juan Mayorga

See Review

I've always dreaded tax season, but WCG has made things so easy, even as we changed to an S corp. So happy we found them!

Paige de Kock

See Review

It was great to find an accounting firm eager to take on new clients, answer initial questions in depth, and support our “keep it simple” philosophy.

Stuart B.

See Review

Working with WCG was so easy, shout out to Sally Rhoades who handled my complicated tax situation this year wonderfully and was available for all my questions.

Stefani Cinto

See Review

I am so thankful to be a client of WCG CPAs & Advisors.

Carol Kersten

See Review

It's a wonderful and rare treat to find a company like WCG these days with their high level of service, personal approach, and deep knowledge of accounting.

Jeffree Hilton

See Review

Such a great firm. Great communicators, great attention to detail and overall great people.

Jeff Owens

See Review