Investing 102

[SSLance]

Originally Posted by Vegas69

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...

[CJD Automotive]

Originally Posted by SSLance

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.

[SSLance]

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.

[Vegas69]

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?

[GregWeld]

Originally Posted by Vegas69

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.

[SSLance]

Originally Posted by GregWeld

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.

[Vegas69]

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.

[Flash68]

Originally Posted by Vegas69

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.

Love this strategy!

One I often used to read about was 1031 exchanging up and up over the years into more valuable properties and then at the very you trade a large apartment complex (likely holding) into your dream mansion SFR, then rent it out for a year before moving in to then recapture that 2 of out of last 5 primary residence designation. I think it still holds true as a viable option but that was awhile ago.

[Vegas69]

Yep, I had similar thoughts at one time as well. While I have utilized a 1031 before, I bought this one with Camaro money.

You know how those custom projects go. They always cost more than you thought they would up front. So I decided to utilize the primary strategy for 2 years while we build. It's worked out very well for our stage with Hugh and living simpler.

I have a very simple philosophy that has served me well so far. If a house doubles in value, I sell it. I'm glad I didn't utilize a 1031 on a number of them as I would of been forced to move up in value with poor markets on the horizon. It would've cost me far more than the 15% capital gains and I was only 2-5 years into the depreciation cycle. In fact, the 1031 I did utilize ended up costing me when I exited a market a bit late.

At this point my plan is to wait until the next recession and buy when the market is the most pessimistic. I don't mind moving in and out of markets as long term rentals mean bad tenants and major repairs at some point. Now, I only buy if the numbers make sense. I don't make the numbers work. If I get caught, I want the choice to hold long term. That's the real key to real estate investing. Can you wait until the timing is right worst case? If not, don't buy it. Unless you are a big risk taker and I'm not. I don't mind being the tortoise.