The Hidden Tax Trap Software Engineering Leaders Face (and How To Escape It)
Restricted Stock Units (RSUs) and performance bonuses are one of the smartest incentive structures in the technology industry—especially for software engineering leaders.
In a world where roadmaps shift, orgs reorganize, and markets can turn fast, equity compensation does what it was designed to do: reward impact, promote ownership, and align teams around shared outcomes.
If you’re an Engineering Manager, Senior Engineering Manager, Director, or a Staff+ leader with org-level influence, you’ve likely seen the upside firsthand.
But there’s a quiet downside that isn’t obvious until it hits:
The tax bill.
The RSU tax trap (the problem isn’t RSUs—it’s the surprise)
John is a Senior Engineering Manager at a public company.
Salary + bonus: $300,000
RSUs vesting this year: $200,000
Total income: $500,000
John assumed that because his company “withheld taxes” when the RSUs vested, he would be fine.
But here’s the trap:
RSUs are taxed like W-2 income the day they vest.
Not when you sell. Not later. That day.
So the IRS treats John’s $200,000 RSU vest like a $200,000 cash bonus—even though it shows up as stock.
His company withheld taxes at vesting. For many high-income employees, withholding on equity compensation is often done at a flat supplemental rate. Keeping it simple:
Withheld on RSUs (example): 22% of $200,000 = $44,000
But John’s real tax rate at his income level is higher once you factor in bracket + state + Medicare effects. So a clean approximation is:
True tax on that RSU income (example): 40% of $200,000 = $80,000
Now the surprise shows up:
True tax: $80,000
Withheld: $44,000
What John can expect to owe in April: $36,000
That “April surprise” is the RSU trap for engineering leaders: your income is high, your RSUs are meaningful, and withholding is often not aligned with what you actually owe.
Why real estate is where the ultra-wealthy go for tax efficiency
After that year, John started asking a different question:
“If RSUs create taxable income immediately, what’s the cleanest way to reduce taxable income without creating a second job?”
That’s when he started learning what the ultra-wealthy have used for decades:
Real estate.
Real estate is heavily incentivized in the tax code because it directs private capital into housing and community infrastructure—areas the U.S. widely recognizes as structurally undersupplied.
And the tool that matters most is depreciation: a paper expense that can reduce taxable income even when the investment is producing cash flow.
How John fixed it (and why he got a refund)
The next vest cycle, John did one thing differently:
He stopped treating RSUs like “wealth” and started treating them like what they really are at vesting: taxable income delivered in stock.
When his $200,000 vested, he sold and reallocated that amount into a passive real estate investment designed to generate accelerated depreciation.
That year, the investment allocated John:
$100,000 of depreciation
Now here’s the “in certain circumstances” part that matters:
To use that depreciation to offset W-2/RSU income, John’s household needs to qualify under IRS rules (commonly Real Estate Professional status and material participation). This is where your CPA determines whether it’s allowable in your situation.
Assuming John qualifies, here’s what happens:
Depreciation deduction: $100,000
Tax savings at a 40% marginal rate: $100,000 × 40% = $40,000
Remember John’s old RSU shortfall?
The April bill used to be: $36,000
So now the end of the story changes:
The $40,000 in tax savings wipes out the $36,000 tax bill
And the remaining difference becomes a refund:
Refund: $40,000 − $36,000 = $4,000
So instead of writing a check in April, John gets money back—because his final tax liability dropped and his withholding ended up higher than what he ultimately owed.
The part that mattered even more: John is now diversified and getting paid
The tax result got John’s attention.
But what made him commit long-term was what happened next:
That $200,000 wasn’t sitting in one ticker anymore.
It was diversified into a real estate asset that began paying monthly or quarterly cash distributions.
And here’s the second benefit engineering leaders appreciate once they see it:
Depreciation can also offset some of the taxable income from those distributions, depending on the investment’s tax profile and how the deductions flow through.
So John didn’t just eliminate the RSU surprise.
He built a structure where:
he’s less dependent on employer stock,
he’s receiving ongoing cash flow,
and depreciation can reduce the tax drag on that cash flow as well.
“Couldn’t I do this with short-term rentals?”
Sometimes, yes.
Short-term rentals can create similar depreciation dynamics, but they are typically active. They require operational bandwidth, staffing, and ongoing attention.
Most top-performing software engineering leaders don’t want a second job. They want a strategy that fits their reality—meaning passive investing, professional management, and clear reporting.
Next Steps
If you want to explore whether this can work for you, the next step is simple:
Schedule a call to understand if you qualify under the IRS rules and whether passive real estate investing aligns with your investment goals.
Educational only; not tax or investment advice. Tax outcomes depend on individual facts and should be reviewed with a qualified CPA.
