Portfolio Strategy Tax Question

11 Replies

Hey all, I have a very high level tax strategy question / hypothetical as a sole proprietor LLC. Let’s say I own a place worth $100k. After expenses, I net $15k in cash flow at the end of the year. I then take that $15k and buy another property, netting me back at $0 profit for the portfolio. Do I have to pay taxes on the $15k, or does it wash out due to the reinvestment back into another property? What if I earned the $15k through an investment in a syndication vs self managed property? Would that change anything? Thanks for the thought!
Originally posted by @David Mazza :
Hey all, I have a very high level tax strategy question / hypothetical as a sole proprietor LLC.

Let’s say I own a place worth $100k. After expenses, I net $15k in cash flow at the end of the year.

I then take that $15k and buy another property, netting me back at $0 profit for the portfolio.

Do I have to pay taxes on the $15k, or does it wash out due to the reinvestment back into another property?

What if I earned the $15k through an investment in a syndication vs self managed property? Would that change anything?

Thanks for the thought!

You have to pay taxes on the 15k no matter how you earn it.  

Reinvesting it has no effect on the tax.

Reinvestment within that activity, such as if you have a rental and if you spend that 15k to repair the house, which is expense, you wash out your income. 

But spending money just to not pay tax would be bad strategy. 

There are other strategy to minimize the tax, reinvesting is not one of them. 

Assuming you were reinvesting in another rental property, the $15K invested would be capitalized and you begin recovering the cost of the purchase through depreciation expenses once the new property is placed in service. 

So...(not to argue with @Ashish Acharya ), but technically you might be able to write off a very small portion of that $15K.

@Paul Allen , there are never arguments, just discussion :) 

I see your point. You mean that once the 15k in invested you would generate another source of expenses ( via depreciation). This expense, however, cannot offset the 15k income that was reinvested. 

That original 15k have to be taxed at the fullest. We do this all day so it is clear to us, but I have multiple people ask this exact questions. 

@David Mazza What's not clear from the information you provided is how long you own a place that's worth $100k? How old is the place? When did you purchase it? Is it still being depreciated? Have you taken a catch up depreciation (if eligible) against it? Bottom line, your actual income and your "paper" (tax return) income may differ. Consult with your CPA for further assistance. 

Cash flow =/= taxable income.  Cash flow doesn't include non-cash transactions such as depreciation and amortization.

Using $15k as a downpayment on a new property wouldn't be an expense for tax purposes.

Your closing statement could be scrubbed for more favorable tax treatments (than 27.5/39 year depreciation), but the bulk will be capitalized.

As Ashish mentioned, there are strategies to reduce taxable income, but what you're proposing won't.

@Ashish Acharya

If you believe there're no arguments on this forum, you clearly did not follow the recent, ahem, discussions about asset protection with certain highly opinionated attorneys involved. :) I was there, too. It got personal quickly.

@David Mazza

As my peers already said, reinvesting income from one property into another property does not eliminate taxes on that income. Any type of property, including syndications. (One exception: you can sometimes roll the proceeds from the sale of one property into another via a so-called 1031 exchange and delay paying taxes on the sale.)

I want to highlight another point made by my colleagues, to make sure it is not lost: $15k cash flow does not mean you pay taxes on $15k. We all wish it was that simple. Your taxable income may be more than $15k (from capitalization of improvements, for example) or less than $15k (from depreciation or cash-out refi). 

That's why we accountants have the most job security after nurses and drug dealers.

Originally posted by @Michael Plaks :

@Ashish Acharya

If you believe there're no arguments on this forum, you clearly did not follow the recent, ahem, discussions about asset protection with certain highly opinionated attorneys involved. :) I was there, too. It got personal quickly.

 Oh no!!

Let us be the professional one. 

@Michael Plaks I'm not an accountant anymore :) ...


Originally posted by @Michael Plaks:

@David Mazza

As my peers already said, reinvesting income from one property into another property does not eliminate taxes on that income. Any type of property, including syndications. (One exception: you can sometimes roll the proceeds from the sale of one property into another via a so-called 1031 exchange and delay paying taxes on the sale.)

I want to highlight another point made by my colleagues, to make sure it is not lost: $15k cash flow does not mean you pay taxes on $15k. We all wish it was that simple. Your taxable income may be more than $15k (from capitalization of improvements, for example) or less than $15k (from depreciation or cash-out refi). 

That's why we accountants have the most job security after nurses and drug dealers.