Last week, we looked at the Venn diagram with unlikely circles representing "social media influencers" and "sound tax advice." If you missed it, you’ll be shocked, shocked to discover very little overlap. In most cases, narrators start with a valid concept, like hiring your kids, the Augusta Rule, or depreciating your truck. They hype it like they’re ripping the lid off the Illuminati Vault of Tax Secrets. They whet your appetite with salacious headlines like, "write off 100% of the cost of your SUV!" Then they leave out important details like, "but only if you use it 100% for business," and "you’ll have to pay back some of that benefit when you re-sell it down the road."

But just in case you thought it was safe to open TikTok again, here’s another example of a too-good-to-be-true social media tax claim that turns out to be, well, too good to be true.

Specifically, there’s a video floating around that promises, "How to avoid 100% of your income taxes every year." It’s called the "paper loss" strategy, and of course, to use it every year, you have to know the rules. Does avoiding 100% of your taxes every year sound good? Heck yeah! Here’s the "secret":

1. Buy an investment property – it can be an Airbnb or a long-term rental.

   

   
   

2. As soon as you buy it, write off everything on the inside – appliances, tubs, cabinets, etc. This is a called a "cost segregation study," and breaking those assets out really does give you bigger up-front deductions because they depreciate over 5 years, rather than the usual 27.5 for residential real estate.
   

   

3. This creates a big enough loss to offset income from your W-2, your 1099s, your stocks, and your crypto.

   

Genius, right? Well, not so fast.

If your adjusted gross income is under $100,000, you can deduct up to $25,000 in rental real estate losses. As your AGI grows past $100,000, it starts phasing out until it disappears entirely at $150,000. Beyond that, you can’t deduct real estate losses against ordinary income at all, unless you qualify under special rules as a "real estate professional." Which you probably won’t. Thousands of high-income W-2 employees and business owners buy real estate every year "for the tax breaks," then discover they can’t take them!

Even if you can deduct your real estate losses, you’re going to need to buy a lot of property to offset your other income. Let’s say your taxable income is $200,000 per year. Ordinarily, your first-year depreciation on rental real estate is about 1.8% of your depreciable basis in the property, which doesn’t include land. A proactive cost segregation study might bump that up to, say, 5%. That means, to create $200,000 of deductible paper losses, you’ll need to buy $4 million of depreciable property – plus land value. Can you even do that on $200,000 of income? Are you sure you want to do it, to save probably $40-50,000 per year in tax?

(Having said all that, the passive loss rule doesn’t apply to property taxed as a business – i.e., an Airbnb. Of course, that’s even more work than a plain old rental.)

So, does the "paper loss" strategy really avoid 100% of your taxes every year? Magic Eight Ball says, "My response is no." It’s perfectly legal. It just doesn’t deliver what the influencer says it will. It’s one of those things like communism, or The Matrix sequels, that work in theory, but not in the real world.

Once again, have fun with the tax videos that pop up on your social media feed. But understand that most of them are more sizzle than steak. Happy scrolling!

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