What is the hour test?

It is a simple comparison of what an hour of your effort is worth in two places. An hour at a high-paid day job is your salary divided by the hours you actually work: on a $1,000,000 salary at 65 hours a week, that is about $296 an hour. An hour spent managing a short-term rental that produces a cost segregation deduction is the deduction divided by the hours it takes to earn it: a $500,000 first-year deduction over 100 hours is $5,000 an hour of deduction, roughly seventeen times more.

Is a deduction the same as cash?

No, and the card says so plainly. A deduction lowers your taxable income rather than paying you directly. At a combined marginal rate of 32 to 40 percent, $5,000 of deduction per hour is worth roughly $1,600 to $2,000 of reduced tax per hour. That is still far more than the after-tax value of the day-job hour, which is the point, but it is a tax saving, not a paycheck.

How does an hour on a rental produce a deduction?

A short-term rental you materially participate in produces non-passive losses under the seven-day rule, and a cost segregation study accelerates depreciation into a large first-year loss. The hours you spend setting up and running the property are what make the loss usable against your active income. A real engineered study sizes the actual deduction; your CPA confirms how it applies.

01 · The hour test

Make 17x more by managing your home versus your tech job

An hour at the day job

$296/hr

Salary$1,000,000

Hours / week65

Salary divided by hours actually worked, across the year.

An hour on the cottage

$5,000/hr in deduction

Deduction earned$500,000

Hours to earn it100

A deduction is not cash. It lowers taxable income. At a 32 to 40 percent combined marginal rate that is roughly $1,600 to $2,000 of reduced tax per hour.

A short-term rental owner standing beside his cottage

Same hour. One paid a wage. The other bought a Beach Cottage and earned 17x more.

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The same hour is not worth the same everywhere.

The card above is a directional comparison, and you can change every number in it. An hour at a day job is your salary divided by the hours you actually work. An hour spent setting up and running a short-term rental can produce a cost segregation deduction, and that deduction is worth its cash value at your marginal rate. On the default figures the rental hour is worth about seventeen times the day-job hour.

A deduction lowers your taxable income rather than paying you directly, so the honest way to read it is at your combined marginal rate. The card shows that range. A real engineered study sizes the actual first-year deduction on a real property, and your CPA confirms how it offsets your income before you rely on any figure.

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