I agree completely, and we have done much the same. Some of the things that have been said to me by friends during this move process have been interesting. One friend in particular has to have a brand new high end 3/4 ton 4x4 truck every few years...but said to me disparagingly "it must be nice to be able to retire and move West so young". He has spent more out of pocket money on just trucks the last 15 years than we did on the new house. BTW, I daily drive a 15 year old truck with 220,000 miles on it.

It's the little tweaks that result in a major difference over time. Owning a car outright and investing the payment is a solid place to start for anyone.

I leased brand new BMW's and Audi's for nearly a decade at over $900 a month. That's over $100,000 in payments, not to mention the high insurance and registration costs. We woke up and smelled the coffee over 5 years ago and won't ever have a car payment again. I drive a 2007 Tundra with 117k on it. My wife has a 2015 Acura we bought certified.

But you can write off the car payment for business. Would you spend a dollar to get .25-.33 cents(tax bracket)? I used to be that bad at math too.

Same with rental homes... "you can write off the depreciation and save a ton on taxes..." What they neglect to tell you is if you EVER sell the property, you reclaim all of said depreciation as regular income at whatever tax bracket you happen to be in at the time, and any extra gain is taxed as Capital Gains.

Everyone I know that got into the rental home racket has either claimed bankruptcy and lost them all or is still holding onto them and dealing with tenants daily because they can't afford to sell them.

This is where all of the accounting classes I took in school helped me to avoid certain investments...

I have a few commercial and residential rentals/leases, and feel like they are solid investments. The trick is picking your target market. I will only buy 30-50K brick or block homes in "the not so good areas". Although I buy them outright, my strategy is they pay for themselves in 2.5-3 years. I invest very little in them for upkeep, pay little to nothing in taxes, and rent them through the section 8 program. I'm guaranteed my money, my tenants will never leave, and I get above average rent for the areas they are located.

That strategy is different than the "owning rentals for the tax break" strategy that was all the rage years ago. You are using the smallish investment to create monthly income and as long as you buy properly and keep expenses in check, it works fine.

If you were financing these homes and relying on the depreciation fa for to make them cash flow, the results are vastly different.

I've had really good luck with real estate in Las Vegas and Phoenix, but there have been lucrative opportunities twice in 15 years.

While I'm building my new house, I'm living in home we rented for a few years to convert it to a primary residence. I will still need to pay taxes on the forced depreciation while it was rented, but I'll escape capital gains. My accountant said they probably wouldn't catch it, but I don't play games with the IRS. I pay what I owe them.

I do agree though, the forced depreciation really hurts if you hold long term. You get in a place where you are almost forced to 1031 exchange to avoid taxes. I wonder if the taxes must be paid on the depreciation when it's passed on to your estate?

#1 -- the estate tax laws have changed dramatically in the last few years..... In MOST cases there are no estate taxes (they start at 5 million). If you set up a proper will - with trusts etc - then you can give your spouse 5MM - and your kids 5MM each etc - with no taxes. Of course there are complications to any and all tax planning strategies..... and only a professional in the field can guide you on that.


#2 -- Securities (stocks) assets are passed thru at the STEP UP value. I.e., the day they exchange hands (from dead guy to living guy) - the cost basis for the living guy is the value on that day (the day they pass hands).

However --- PROPERTY passed thru via an inheritance is taxed at the original cost basis. So if "Dad" paid $100,000 for the rental house in 1965 -- and you inherit it and then sell it asap.... you're paying taxes on the difference in value from $100K to what you sell it for. In other words -- there's no going back and having to recapture or pay taxes on Dad's deductions etc.

I'm not sure that is 100% correct...probably based on how the "PROPERTY" is defined or classed before death.

I've always been taught that Death always accelerates basis if the transfer of property is direct. For example, if my Father owns a personal residence house and I am listed on the deed as TOD (Transfer on Death), when he passes away the property automatically becomes mine at current market value as a basis the day he passes away.

This is assuming my fathers entire estate is under the 5 mil cap as far as inheritance tax is concerned. If over that cap, pretty much everything changes.

Rental property that has been depreciated might have to be treated differently though. I wouldn't be shocked if either Capital Gains tax on the gain or Deprecation recapture income tax would need to be paid by the heirs if they ever sell the property.

I do know this, income producing property that has not been depreciated (ie: farmland with no equip or structures) passes thru to heirs at an accelerated basis.

I do recall that if the beneficiary of the estate holds onto real estate for a certain amount of time, (Maybe a year?) the tax situation can change for the worse.

RE: Inheriting depreciated rental property




You will not need to worry about past depreciation on your inherited property. You will just use your stepped up basis (FMV of property on date of inheritance) and this new basis will be used for depreciation. You will be able to depreciation these inherited assets in full over the property's useful life. For example, use the full 27.5 year, S/L for the rental house (less land) and the start date will be the date when the rental property was transferred to you.

For any prior capital improvements, these will be included in the stepped up basis on the inherited property so do not depreciate them separately.

For any appliances, since they are considered "new" to you, you will just use the new FMV of these items and depreciate them over the new useful life at the date the asset were transferred to you.