How a High-Income Earner
Legally Reduced Taxable Income by $414,000
While Building Long-Term Wealth Through Real Estate
2-Phase Strategy
Bonus Depreciation
DSCR Loan Investment
Quick Summary
At a Glance
Taxable Income Reduction: $414,000 (Year 1)*
Estimated Tax Savings: $120,000 –$165,000**
Investment Type: Short-Term Rental Property
Financing Used: Home Equity Loan + DSCR Loan
Location: Hawaii
Client Profile: High W-2 Income Earner
*Actual results depend on your tax situation
**Estimated based on combined federal and state tax brackets
The Problem
The Tax Challenge Facing High-Income Earners
High-income W-2 earners often face limited options when it comes to reducing taxes. Unlike business owners, most income is taxed at the highest marginal rates with few deductions available.
Client Situation
High W-2 income
Annual tax liability exceeding $120,000
Significant assets held in the stock market
Home equity in a Los Angeles primary residence
Limited liquid cash for large real estate investments
Seeking legal, compliant tax reduction strategies
The Core Question
How can a high-income earner reduce taxes without selling assets, increasing risk, or using aggressive tax strategies?
A 2-Phase Real Estate Investment Strategy
This case study used a two-phase financing approach to convert existing equity into a tax-advantaged investment property.
PHASE 1: UNLOCKING HOME EQUITY
Using Home Equity Without Selling Investments
Instead of liquidating stocks or waiting years to save cash, existing home equity was leveraged.
Financing Details
Loan Type: Home Equity Loan (Second Lien)
Amount: $335,000
Interest Rate: 7.875%
Collateral: Owner-occupied Los Angeles property
Purpose: Investment property down payment
This allowed the client to access capital while keeping their long-term investment portfolio and their low rate first lien mortgage intact.
PHASE 2: ACQUIRING THE INVESTMENT PROPERTY
DSCR Loan for Short-Term Rental Investment
The investment property was financed using a DSCR loan, which qualifies borrowers based on property income rather than personal income.
Property Details
Property Type: Townhouse
Location: Hawaii
Use: Short-Term Rental
Purchase Price: $1,475,000
Down Payment: $335,000
Loan Amount: $1,180,000
Interest Rate: 7.125%
Loan-to-Value: 80%
Key Advantage:
No W-2 income verification was required for the DSCR loan.
Why This Strategy Works
Bonus Depreciation
Under current tax law, certain components of investment properties can be depreciated faster in the first year, creating large paper losses.
Short-Term Rental Tax Treatment
When a property qualifies as a short-term rental (average stay of 7 days or less) and the owner materially participates, depreciation losses may be used to offset W-2 income—subject to CPA guidance.
Cost Segregation Study
A professional cost segregation study identified components eligible for accelerated depreciation.
Preliminary Results
First-Year Depreciation Deduction: $414,000
Built-In Wealth Creation
This strategy also delivered long-term financial benefits:
Short-term rental cash flow
Property appreciation in a high-demand market
Mortgage paydown through rental income
Portfolio diversification
Scalable real estate investment foundation
The Results
Immediate Tax Impact
(Year One)
Potential depreciation deduction: $414,000*
Estimated tax savings:
$120,000–$165,000
Long-Term Wealth Impact
Ongoing rental income
Equity growth in a $1.475M property
Preserved stock market investments
Increased net worth through leveraged real estate
Financing Efficiency
No liquidation of existing investments
DSCR loan qualification based on property income
Strategic use of home equity
Optimized leverage for long-term growth
WHO THIS STRATEGY IS FOR
This strategy may be a fit if you:
Earn $200,000+ in W-2 income
Pay $50,000+ annually in taxes
Have equity in your primary residence
Want to invest in real estate for tax efficiency
Are open to managing or participating in a short-term rental
Prefer legal, conservative tax strategies
Have a long-term investment horizon (5+ years)
IMPORTANT REQUIREMENTS
Material Participation
To offset W-2 income using short-term rental losses, IRS material participation standards must be met. This typically includes:
500+ hours of annual participation
Active involvement in management or operations
*Please consult your Tax Advisor to check updated Material Participation requirements
Financial Requirements
Sufficient home equity for a down payment
Credit score typically 680+
Cash reserves (6–12 months of expenses)
Ability to qualify for a home equity loan
Property Requirements
Average guest stay of 7 days or less
Sufficient income to meet DSCR guidelines
Operated as a short-term rental, not a long-term lease
WHY WORK WITH A SPECIALIZED REALTOR & MORTGAGE BROKER
This strategy required coordination across multiple disciplines:
Short-term rental investment expertise
DSCR loan structuring
Investment-focused home equity lending
Knowledge of tax-aware real estate strategies
Coordination with CPAs and cost
segregation providers
Multi-loan transaction execution
Most professionals handle only one piece.
This strategy required all of them working together.
NEXT STEPS
See If This Strategy Could Work for You
Schedule a consultation to:
Review your tax exposure
Evaluate available equity and financing options
Assess short-term rental investment opportunities
Coordinate with tax professionals
Build a personalized tax-aware investment plan
Vinay Chinni
Licensed Realtor & Mortgage Broker
California DRE #: 02108108
NMLS #: 2259383
Serving Los Angeles, California and connecting clients with investment opportunities nationwide.
© 2025 Chinni Realty Group. This case study is based on an actual client transaction. Numbers and results are specific to this client's situation and should not be considered typical or guaranteed. All prospective investors should conduct their own due diligence and consult with qualified professionals before making investment decisions.