Doctors turned real estate investors share the strategy they used to 'zero out' income taxes for 7 years

Letizia Alto and Kenji Asakura started buying real estate to supplement, and eventually fully replace, their incomes as doctors. They wanted to reduce their hospital shifts so they could spend more time together and with their kids.
Since buying their first investment property in 2015, they've expanded to more than 100 units that bring in six-figure rental cash flow. They both scaled back in the hospital and consider themselves "semi-retired," as they still work on their real estate portfolio and financial literary company, Semi-Retired MD.
Over the last decade of investing, the couple has learned that "there are six ways you make money in real estate," Alto told Business Insider, one of which is often overlooked: the tax benefits.
"The tax code is essentially a series of incentives to encourage certain behavior that the government wants," said Asakura.
They've spent years understanding how to use it to their advantage and, thanks to one strategy in particular, said they managed to "zero out" their income taxes for seven years.
Sheltering their clinical income with Real Estate Professional Status (REPS)
The couple's main real estate-specific tax strategy is one that allows qualifying individuals to shelter their income using an IRS designation known as "real estate professional status," or REPS.
Typically, rental real estate losses are considered passive and can only offset passive income. For example, if you're working as an accountant and invest in real estate on the side, then the losses from your real estate business offset your rental income, but you can't take that loss and offset your accountant income. That's because they're two unrelated activities. However, if you're considered a real estate professional, it all becomes one big activity, and you can fully deduct rental losses against active forms of income, including W2 and 1099 earnings.
In Alto and Asakura's case, they've used the status to offset their physician incomes.
The couple provides an example on their blog: Say you earn $250,000 as a doctor, and you and your spouse run a real estate business that generates $150,000 in losses. If neither of you qualifies for REPS, you're taxed on all $250,000. However, if one spouse claims REPS, you can deduct $150,000 from your $250,0000 income, meaning you'll only be taxed on $100,000, which can result in a significant difference in tax liability.
Note that you must generate a loss to get the tax benefit. It's fairly common in real estate to generate positive cash flow while showing a loss on your tax returns, they explained. That's because of deductions like depreciation — the IRS assumes buildings wear out over time and allows you to deduct a portion of your property's value each year as an expense — and expenses like renovations.
In 2015, the first year Asakura qualified for REPS, "we did a lot of rehabbing to create our losses," explained Alto. "When we rehabbed, we would be increasing the value of the property and increasing cash flow of the property, but the rehab was a write-off, which was insane. I hope people understand that rehabbing is such an incredible thing to do because it is tax beneficial, but you get to keep all the upside of it."
Qualifying for REPS
To qualify, real estate has to be your primary job. Being a real-estate agent automatically deems you a professional, but if you don't have that license, you may qualify if you meet certain requirements. The two main stipulations are:
1. You must spend more than 750 hours a year on real-estate activities.
2. More than half your working hours must be in real estate.
Asakura transitioned to a part-time hospitalist in 2015 so he could qualify for the status. Only one spouse needs to qualify, meaning Alto could continue working and deduct the real estate losses from her clinical income.
CPA Kristel Espinosa told BI that REPS is often abused and emphasized the importance of documenting everything, from how you spend your working hours to the mileage you drove to visit properties.
"You can have other jobs, but you just have to be able to show that to the IRS if ever audited that the real-estate business really is your main thing," she said. If you meet the requirements, "Then, of course, designate yourself as a real-estate professional. It obviously has huge benefits. But then also be aware that this is a highly scrutinized area by the IRS, too, so that's why you want to have your documentation in place."
Asakura keeps track of his hours in a Google calendar and includes detailed notes.
If you spend a substantial amount of time on your portfolio, REPS is worth looking into — and don't assume your CPA knows about the status.
"We'll run into people who have large real estate portfolios and they've never claimed it," said Alto. "They have all these losses that are just sitting there as passive losses because their CPA didn't know they were active, and they could have saved so much in taxes."

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