Source: White Coat Investor —
Lots of high-income professionals involved in direct real estate investing get really excited when they learn about qualifying themselves or their spouse as a real estate professional. The general presumption by the IRS is that real estate rental activities are passive, and passive losses cannot be used against active income, i.e. the income from your W-2 job. However, if you (or your spouse if you file jointly) qualify for Real Estate Professional Status (REPS), you could use depreciation losses from your real estate investments against your normally highly taxed professional income, reducing your taxes dramatically—potentially even to $0.
However, this is not nearly as easy to do as you might imagine. If you claim REPS inappropriately and then are audited, you may find yourself paying hundreds of thousands of dollars in taxes, penalties, and interest. This can be a huge deduction, so it pays to really understand the rules surrounding REPS.