patrick.net

You have passive income that you write off against the 1/27.5 annual depreciation of the four properties. Thus, you pay no taxes on that passive income. Can this be done?
Yes, but remember, you pay the tax man at the time of sale (depreciation recapture). Also, you lose the benefit of leverage (and writing off the interest) on the fourth property. Then again, if you are already bumping up against passive loss phaseouts due to income (starts at $100k of income and is totally phased out at $150k), it might not be a bad idea. IANL. IANLL. NTA.

The other method is to live in the home and make that your place of residence for a qualifying period to take advantage of 500K exemption, but that may not be possible.
You can't get the full $500k exemption anymore; this was part of the The Housing and Economic Recovery Act of 2008 . The $500k capital gains exemption in now prorated: $500k * time occupied as principal residence/(rental time + principal residence time). Older rentals/second homes are grandfathered (time used as rental before 2009). The NAHB also has a nice summary.

EBGuy says

The other method is to live in the home and make that your place of residence for a qualifying period to take advantage of 500K exemption, but that may not be possible.

You can’t get the full $500k exemption anymore; this was part of the The Housing and Economic Recovery Act of 2008 . The $500k capital gains exemption in now prorated: $500k * time occupied as principal residence/(rental time + principal residence time). Older rentals/second homes are grandfathered (time used as rental before 2009). The NAHB also has a nice summary.

Can't escape the taxman.

Don't rentals make money when there paid? The mortgage will reduce your profit to a bare minimum so holding it for 30yrs making payments would be a pain in the neck. Unless your 25yrs old and got the time.

SF Ace,

Depreciation Recapture: Upon sale your previous depreciation will be taxed as ordinary income, not as a capital gain. The capital gains tax rate will only apply to that portion of the gain applicable as though you had never depreciated the property. So, you pay the ordinary income tax rate on the depreciaition recapture, and the capital gains tax rate on any gain above that.

Two key elements to cosider: Will you be in a different tax bracket in the future? And what is the value of the timing (deferral) benefit?

Zephyr says

SF Ace,
Depreciation Recapture: Upon sale your previous depreciation will be taxed as ordinary income, not as a capital gain. The capital gains tax rate will only apply to that portion of the gain applicable as though you had never depreciated the property. So, you pay the ordinary income tax rate on the depreciaition recapture, and the capital gains tax rate on any gain above that.
Two key elements to cosider: Will you be in a different tax bracket in the future? And what is the value of the timing (deferral) benefit?

I'm currently in the highest tax bracket. When I retire, my tax bracket can only go down. Does that make a difference?

Depreciation is a non-cash expense that you are allowed to deduct for tax purposes. It is not a real expense, but a notional provision for theoretical deterioration of value. The effect of this deduction is that you can shelter profits from current taxation. But it is only a deferral to the future for that taxation. The current deduction and the future recapture will both be treated as ordinary income items.

I have been a real estate investor/landlord for about 30 years. I buy during market lows (like now) and have only sold during market highs (1989 and 2006). I have also used the 1031 exchange provision. So I have been through the accounting process. I can say with certainty that when you sell, the taxman will collect.

E-Man,

The IRS requires depreciation. I don't know why. I always set the depreciation as low as I can plausibly justify so that the depreciation does not dwarf the cash profit. The reason I do this is that I cannot use a current loss (due to the income rules).

Since only the structure (improvements) is depreciated, I use the most pessimistic (but plausible) assumptions for the valuation of the structure. This minimizes the depreciation. But you must recapture the entire depreciation at the time of sale. Of course, if you never sell...

Burritos,

Tax bracket timing does make a difference. And your status is as mine has been for many years. So, you cannot reduce your other current income with a net loss from passive real estate activities. This means that depeciation greater than your cash profit is pretty much pointless. You cannot use that excess depreciation until the real estate shows a net profit after depreciation (and then only to the extent of those profits). So the tax benefit will not be of use until those (distant?) future years. The accumulated tax loss carryforwards will then shelter the net income for a while. When you retire you might want to have such healthy profits.

The excess depreciation could work against you. If you can't use the all of it now, it will be deferred until distant future years when you might be in the lower tax bracket, making the deduction of little value. Then when you sell the recapture will be ordinary income and perhaps taxed at a rate that is higher than the rate that you had when you finally took the deduction.

Zephyr says

Burritos,
Tax bracket timing does make a difference. And your status is as mine has been for many years. So, you cannot reduce your other current income with a net loss from passive real estate activities. This means that depeciation greater than your cash profit is pretty much pointless. You cannot use that excess depreciation until the real estate shows a net profit after depreciation (and then only to the extent of those profits). So the tax benefit will not be of use until those (distant?) future years. The accumulated tax loss carryforwards will then shelter the net income for a while. When you retire you might want to have such healthy profits.

So in the example I cited where you have 4 properties, 1 paid off, 3 breaking even, then wouldn't that be considered making a profit? So you'd be writing off that rent on the property you paid off. You can't do that with a bank savings account.

Burrito, In your example the depreciation deduction from the four properties would most likely exceed the cash profit. So you would have a net loss for taxes. If your income exceeds 150k you could not deduct that loss. You would carry it forward to offset future profits from your rentals.

It is better than a savings account. But with much more risk and work.

Not to anyone in particular, but a general observation:

In general, it seems that it is a popular scheme to postpone taxes as long as possible, all the while trying to vote in some crooks that will enact a loophole that will give you a free pass for a while until the people get mad and close the loophole again.

Apparently, this is the American Way (TM).

Jeez, Nomo. Don't be so literal. I was just being diplomatic.

I could have said "wait until the Republicans are in power again". And now you made me say it. See what happens?

Yeah, it's all the "Lits" fault :-).

You could try shoveling shit for awhile. It clears the sinuses. Elliemae respectfully invites all of you to come do it for her while she watches, as her sinuses are now spotless.

zephyr, if you are "active" on your real estate, it might make a difference. I'm not sure on this point, but if all of your money is at risk, and you make all day to day decisions, at least years ago that used to matter as to whether you could use the loss to offset other income.

Also, this thread is a bit misguided. One's goal shouldn't be to make "tax free income" , in fact to hell with tax free, I would like to pay about a million dollars in taxes next year... Ok, I might not really like to pay it, but I'd rather pay a million dollars in taxes than $30,000 in taxes...

azrob00

Being "active" does matter for tax purposes. If you are "active" you can deduct your losses against other income. But that is subject to a limit of 25k (if your income is 100k or less), and is not allowed at all if your Adjusted Gross Income is 150k or higher. At AGI of between 100k to 150k the 25k deduction is proportionally reduced (by 50% per dollar over 100k). That's all if you are active. If you are not active you cannot deduct any losses at any AGI level.

I agree that making tax free income is not a good goal.
Maximizing income is the better financial goal.
The more income you make, the more tax you pay.

Bap33 came on just to post in the third person, since this topic is well above his pay-grade. He did note that ellie keeps her sinus' clear through self-medicating with mathane based products, and that Doc Nomo is funny.

Bap33 says

Bap33 came on just to post in the third person, since this topic is well above his pay-grade. He did note that ellie keeps her sinus’ clear through self-medicating with mathane based products, and that Doc Nomo is funny.

Well, Ellie could pay someone $8 an hour (neighborhood kid) to shovel it - is that above Bap's pay grade? And, what's mathane? There was some comedian who had a routine about actually smoking shit, I think it was George Carlin. Having spent a few hours yesterday breathing it, I don't think I'd like to try it.

SFace,

>>@justme. There is nothing sinister about tax deferral planning.

Opportunistic is more the word I had in mind. The main problem with tax deferral is that it is for the most part only available to those that are already relatively wealthy. Not fair.

>>Do you turn down the stimulus check in 2008, or making work credit in 2009? that sounds like a bailout to me too.

I didn't turn it down, because I received none of it. I did not qualify.

This should be filed under How to invest in RE or How to Blow $87M in 3 easy steps.

"Mr. Coleman was focused on investing in various communities throughout the city of Detroit by developing real estate, creating jobs and revitalizing business opportunities," Berke said. "Due to the state of the economy, including the decline in the real estate market, Mr. Coleman's investments could not be sustained."

According to Basketball Reference, Coleman made more than $87 million during his 15 year career with the Nets, 76ers, Hornets, and Pistons. But now he has only about $1 million in assets, including a 1997 Bentley convertible, five fur coats, and $3,000 in jewelry. Not exactly appreciating assets.

Coleman's biggest debt comes from a $1.3 million lawsuit brought against him by Comerica Bank and a $1 million real estate loan from Thornburg Mortgage Home Loans. He also owes $50,000 to NBA Hall of Famer, and current Detroit mayor, Dave Bing.

Despite the filing, Coleman will be trying to keep both his Beverly Hills home, and the home that he bought for his mother, also located in Beverly Hills. Berke says that Coleman is "just hoping to get rid of that debt and make a fresh start."

They say that two is a coincidence, and three is a trend — someone needs to check on Billy Owens to make sure he's doing OK.

http://sports.yahoo.com/nba/blog/ball_dont_lie/post/Derrick-Coleman-is-almost-5-million-in-debt?urn=nba,233379

SF ace, "...the 25% tax bracket currently starts at 68Km by 2040, that bracket may start at 200K. In essense, time and control works in your favor."

Yes. But with inflation, by 2040 that 200k might be worth less than 68k is worth today. And with the prolific spending spree in DC our tax rates must go up (no free lunch). So you should not count on ever being in a lower tax bracket. However, the tax deferral is still very valuable because of the the time value of money, and inflation. You will pay that recapture tax with much cheaper dollars.

mathane is methane spelled wrong. lol

you do know Bap33's post was in jest I hope.

And Bap33 ment selfmedicading by inhalation of the methane fumes, not smoking the poop. Smoking poop is not as funny. Except on really cold mornings, then poop smokes.

Bap33 has left the building

Bap33 says

mathane is methane spelled wrong. lol
you do know Bap33’s post was in jest I hope.

I know Bap was a'kiddin' but, in my defense, I'm sore from head to toe after having a crappy time shoveling dung. And that's the poop.