The S-Corp + Cost Segregation Strategy Real Estate Investors Keep Hearing About: The Actual Math

Disclaimer: I'm a real estate broker. I'm not a CPA, a tax advisor, or an attorney, and nothing in this post is tax, legal, or accounting advice. Tax rules change and depend on your facts. Please use this to ask better questions of your own CPA and tax attorney, not to make decisions.

A client asked me last week about a tax strategy they heard about from a tax educator, Karlton Dennis. Dennis is an Enrolled Agent who teaches small business owners and real estate investors to plan ahead instead of waiting until filing season. His public material leans on two ideas: an S-corp election and real estate depreciation, especially cost segregation.

I haven't worked with him and I don't endorse any course or service. But the ideas are real, and the math is easy to get wrong. So I ran the numbers. Everything below is federal only. Florida has no state income tax.

Lever 1: The S-corp election

If you are a self-employed agent, broker, or contractor, you pay both halves of Social Security and Medicare on your net profit. That is 15.3% up to the Social Security wage base, then 2.9% above it. The 2026 wage base is $184,500.

An S-corp lets you pay yourself a salary and take the rest as a distribution. Payroll tax applies to the salary. It does not apply to the distribution.

Here is a $200,000 net profit example in the 24% bracket, with a $100,000 salary:

	Sole prop / LLC	S-corp, $100k salary
Payroll or SE tax	about $28,234	$15,300
Taxable income after deductions	about $148,706	about $173,880
Extra income tax at 24%		about $6,042

Payroll tax saved: about $12,934. Less the extra income tax: about $6,042. Less payroll service and S-corp return costs, about $2,500. Net: roughly $4,400 a year.

Why does taxable income go up? You lose the deduction for half of self-employment tax. And the 20% qualified business income deduction shrinks, because it only applies to the profit left after your salary.

The catch is the salary. The IRS expects it to be reasonable for the work you do. The lower you set it, the bigger the audit risk. This is a conversation for your CPA.

Lever 2: Rental depreciation and cost segregation

Rental buildings depreciate. Residential rentals use 27.5 years. Short-term rentals, where the average stay is short enough to count as transient lodging, are generally 39 years. Land never depreciates.

A cost segregation study breaks the building into components. Carpet, cabinets, appliances, and landscaping can move into 5-, 7-, and 15-year property. With 100% bonus depreciation, which the 2025 tax law made permanent for qualifying property, those pieces can be deducted in year one.

Take a $600,000 short-term rental:

• Land at 20%, so the depreciable basis is $480,000.
• A study reclassifies 25%, or $120,000, which is deducted in year one.
• The remaining $360,000 depreciates over 39 years, about $9,200 a year.
• Year-one depreciation is about $129,000. Straight-line alone would be about $12,300.
• With $30,000 of net rent before depreciation, the paper loss is about $99,000.

If that loss is nonpassive, it offsets other income. At 24%, that is about $23,800 of federal tax. At 32%, about $31,700.

Note that many online examples use 27.5 years for the building. For a true short-term rental, 39 is the safer assumption, and it trims the number slightly.

"If" number one: the loss has to be nonpassive

This is where most of the hype breaks down. A rental loss generally can't offset your commissions or wages unless it is nonpassive. Two common routes:

1. Short-term rental rule. The average guest stay is 7 days or less and you materially participate. The tests are specific. Documented hours matter.
2. Real estate professional status. You spend 750 or more hours a year in real property trades or businesses and more than half of your working time. For a working broker, the hours may exist. They still have to be logged, and on a joint return the test is generally applied to one spouse.

If you don't qualify, the loss is typically suspended and carried forward against future passive income. You still get the depreciation. You just don't get the check this year.

"If" number two: it is a deferral

When you sell, depreciation comes back. Gain on the reclassified five-, seven-, and 15-year pieces is generally taxed as ordinary income, up to 37%. The building portion is taxed up to 25%. There are three common ways to avoid or postpone that:

• Hold the property.
• Exchange into another property under Section 1031.
• Hold until death, when heirs generally get a stepped-up basis.

Each has its own rules and risks. Cost segregation also isn't free. Studies often cost a few thousand dollars, and it is worth asking whether the first-year deduction is worth it if you expect to sell in two or three years.

Putting it together

On these illustrative numbers, the S-corp piece nets about $4,400 and the rental piece saves about $23,800 in federal tax in year one. That is roughly $28,000 combined. It is not a prediction for you. It is the shape of the math.

Most of that benefit comes from the rental, and the rental piece is the one that depends on hours you can prove.

Run your own numbers

I built a free calculator that runs both pieces with your inputs, including the 27.5- versus 39-year choice and the passive versus nonpassive toggle: Real Estate Tax Strategy Calculator. If the property you are considering is a vacation rental, start with the short-term rental estimator so the income side is realistic.

What to ask your CPA

• Does an S-corp make sense at my profit level, and what salary is defensible?
• Would I qualify as a real estate professional, or would a short-term rental pass the material participation tests?
• Is a cost segregation study worth its cost for this property and my holding period?
• What will recapture look like when I sell, and does a 1031 exchange fit my plans?
• How do state rules and my other income change the answer?

If you are weighing a Central Florida rental and want property-level numbers before you talk to your CPA, reach out. I can pull rents, comps, and expense assumptions. Your tax professional decides what it means for your return.

Disclaimer: MaxLife Realty and Ryan Solberg are real estate professionals, not certified public accountants, tax advisors, or attorneys. This article is for general education only and is not tax, legal, or accounting advice. No CPA-client or attorney-client relationship is created by reading it or using the calculator. Figures are illustrative, federal only, and based on 2026 assumptions that may change. Consult a qualified CPA or tax attorney about your situation.