Is this a viable REPS strategy?

[Jim Jones]

I'm looking into qualifying as a real estate professional, as I currently don't have a w2 job. I would like to purchase a property, manage it and use losses to offset my spouse's high w2 income. I have the basic concept and understand the rules to qualify as a REP, but am wondering if the following blueprint is possible.

1. 1) Purchase a multi-family or vacation property for $1M
2. 2) Do a cost segregation study to qualify for accelerated depreciation to incur losses of say $200K
3. 3) Manage property throughout the year to qualify as REP
4. 4) Use $200K loss, to deduct from my spouse's w2 income on our joint return
5. 5) Sell property using a 1031 exchange and repeat the process doing 1 property per year

Is this doable? I know I need to talk to a tax pro, but conceptually is this possible?

[Dave Foster]

@Jim Jones, if you cost seg and then just sell.  You'll pay tax through the nose because all of the accelerated depreciation will be recaptured without the 1031.  So you pay tax on gain and tax on depreciation recapture.

The 1031 is critical to maintain the tax deferral savings you want.  And the best news out of tax court this year is that it looks like cost segregation on real estate will still allow you to use the 1031 to shelter the accelerated depreciation.