3 Tax Scams (and 2 Risky Strategies) Real Estate Investors Need to Watch Out For

As tax season heats up, real estate investors are being bombarded with so-called strategies that promise massive deductions and minimal effort. But not all tax-saving tactics are created equal. In this episode of the Tax Smart REI podcast, Thomas & Ryan break down three tax scams and two questionable strategies that investors should approach with serious caution.

Why This Matters

Each year, new tax strategies show up across TikTok, YouTube, and investor forums. They’re marketed as easy ways to slash your tax bill, but many don’t hold up under IRS scrutiny. Misapplying these can lead to audits, penalties, and a much larger tax bill than you expected.

Here’s what you need to know.

Scam #1: Equipment Leasing with Bonus Depreciation

The pitch: Buy equipment, lease it to a company, claim bonus depreciation, and write off massive losses against your active income.

The problem? In almost every case, these losses are passive, meaning they can only offset passive income, not W-2 income or business profits. If you’re not materially participating, you’re not eligible to claim them against non-passive income. Promoters pushing this strategy often ignore this key detail.

Bottom line: If you’re not actively involved and they say it’ll offset your job or business income, it’s a scam.

Scam #2: Solar Credits Promising Non-Passive Losses

Solar credits themselves are legitimate. But some promoters promise you can take the credits and losses as non-passive without materially participating.

This violates the passive activity rules. Unless you are the sponsor or developer actively involved in the solar operation, any credits or losses you receive will be passive.

If you’re just an investor with no role in the operations, you’re not eligible to treat those benefits as non-passive.

Scam #3: Inflated Art Donations

This scheme involves buying artwork at a “discounted” price, having it reappraised at a much higher value, and then donating it for a large charitable deduction.

It’s been flagged by the IRS and is frequently audited. The deductions are based on inflated valuations, which rarely hold up under scrutiny. If the valuation is off or not defensible, the IRS can disallow the deduction and impose

penalties.
If you’re getting a $500,000 deduction for something you paid $100,000 for, that’s a major red flag.

Questionable Strategy #1: Discounted IRA Rollovers

This strategy involves converting a traditional IRA to a Roth IRA while claiming the value of the assets has dropped (based on an internal valuation), lowering the tax cost of the conversion.

While it’s a legitimate move with publicly traded assets during market dips, using questionable valuations for private investments can easily attract IRS attention. If the IRS disputes the valuation, your conversion may be taxed at the full, unadjusted value.

This isn’t a scam, but if the valuation doesn’t hold up, you’re at serious risk.

Questionable Strategy #2: Deferred Sales Trusts

With a Deferred Sales Trust (DST), you sell an asset to a trust, which then sells it to the buyer. The proceeds stay in the trust, and you get paid out over time, deferring your capital gains tax.

It’s a complex strategy with some similarities to monetized installment sales—an IRS-listed transaction that’s drawn heavy scrutiny. The main risk lies in how the structure is executed, particularly around who controls the trust and the funds. If you have too much control, the IRS may disqualify the arrangement.

While not inherently a scam, DSTs carry real risks and should only be used with experienced professionals.

Final Thoughts

There are legitimate ways to reduce your tax liability, but shortcuts often come with hidden traps. Before jumping into any strategy that promises significant deductions with little to no effort, ask yourself:

Am I materially participating? Is the valuation being used defensible? Is this strategy too good to be true?

Has the person promoting it disclosed the risks? Being proactive doesn’t mean being aggressive to the point of danger. Work with a knowledgeable tax advisor who understands the rules, so you can make smart decisions and protect yourself from audits.

Want help navigating these tax strategies?
Schedule a free discovery call with our team

Transcript

Intro: Why This Episode Matters

Thomas Castelli, CPA (00:00.59):
Today, we’re diving into three tax scams we frequently see online—and two “questionable” strategies that may seem appealing but come with major risks. Let’s help you avoid tax traps and keep more money in your pocket.

Scam #1: Equipment Leasing

Thomas Castelli, CPA (01:00):
The equipment leasing strategy involves buying equipment, leasing it via a master service agreement, and taking bonus depreciation to generate losses. But there’s a major catch…

Ryan Carriere, CPA (01:19.82):
It’s almost always passive. Under IRC Section 469, if you’re not materially participating in this “rental” business (which you usually aren’t), those losses can’t offset active income.

Thomas Castelli, CPA (02:55.426):
Yeah, exactly. This kind of falls into a rental business, but you’re not materially participating—making it passive.

Ryan Carriere, CPA (03:33.024):
It’s personal property, so you can’t use real estate professional status (REPS) to make it non-passive.

Passive vs. Non-Passive: A Deeper Dive

Thomas Castelli, CPA (04:49.352):
Rental activity includes any rental—not just real estate—and defaults to passive. You’d need substantial services or material participation to make it active.

Ryan Carriere, CPA (07:27.438):
And since this isn’t a real property trade or business, REPS doesn’t apply either.

Thomas Castelli, CPA (09:59.736):
Unless it’s structured to meet the short-term rental exception or the 7 material participation tests, it’s going to stay passive.

Summary: Why Equipment Leasing is a Scam

Thomas Castelli, CPA (18:26.19):
If you’re not materially participating and just leasing equipment under a master lease, it’s passive. The scam is being told it’s non-passive. You have to do the work to make it non-passive.

Ryan Carriere, CPA (20:05):
If they’re offering non-passive losses and you’re doing no work, red flag. That’s a scam (with rare exceptions like oil and gas).

Scam #2: Solar Credit Investments

Ryan Carriere, CPA (20:33.816):
Similar to leasing scams—invest in solar, get losses and credits, and claim them as non-passive. But again, unless you materially participate, that’s not how it works.

Thomas Castelli, CPA (22:19.214):
Solar credits are legit. But if you’re an LP investor and not doing the work, it’s passive. Promoting them as non-passive? That’s the scam.

Ryan Carriere, CPA (24:22.914):
The IRS even issued a notice in Fall 2024 warning about these solar credit promotions.

Defining “Scam”

Thomas Castelli, CPA (25:53.07):
We define a scam as something built on a kernel of truth but sold misleadingly. These strategies are being pushed hard with unrealistic promises.

Ryan Carriere, CPA (25:53.07):
It’s not always malicious, but it’s dangerous due to lack of clarity and understanding.

Scam #3: Art Donation Valuations

Thomas Castelli, CPA (27:30):
Buy art cheap, reappraise it higher, donate after a year, and claim a big deduction. Sounds great—but IRS is cracking down hard.

Ryan Carriere, CPA (27:51.63):
It’s on the Dirty Dozen list. The IRS is laser-focused on these inflated valuation donation schemes.

Questionable Strategy #1: Discounted IRA Rollovers

Thomas Castelli, CPA (29:53.474):
If your $50K investment is “valued” at $35K when rolled over into a Roth IRA—that discount can trigger IRS scrutiny. The issue? The valuation.

Ryan Carriere, CPA (33:31.18):
This is similar to conservation easement abuse. Manipulating valuations is the core issue.

Questionable Strategy #2: Deferred Sales Trusts (DSTs)

Thomas Castelli, CPA (35:45.85):
You sell to a trust, the trust sells to the buyer, and you get paid out over time to defer capital gains. Legal? Yes—but very risky if not done right.

Ryan Carriere, CPA (37:50.158):
The key issue: control. If you still have it, the IRS could view it as a sham transaction. Risk is high without proper structure.

Thomas Castelli, CPA (38:59.406):
It’s different from the now-flagged monetized installment sales, but similar enough to raise red flags. Also, setup and annual fees are steep.

Wrap-Up: Strategy vs. Risk

Thomas Castelli, CPA (41:22.722):
Again, DSTs and discounted IRA rollovers aren’t scams—but they’re risky and easily abused.

Ryan Carriere, CPA (43:11.578):
If you’re doing nothing but investing capital and getting huge tax benefits, something’s off. Be skeptical and informed.

Final Clarification & Resources

Thomas Castelli, CPA (43:54.966):
Quick recap:

• Scams: Equipment leasing, solar credits, and art donations when presented misleadingly.
• Questionable: Discounted IRA rollovers and DSTs—legal but risky if abused

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.