Lowering the tax bill

11 Replies

Hello

Let me state upfront this may seem like a rather strange question.

I am looking to expand my portfolio but I currently don't a need for the rents income. If I use it exclusivly to pay the debt on the property will the rental income still be subject to tax?

I currently have a comfortable salary and have no need for the income. I would rather accelerate the payments of the debt so I can expand quicker and acquire more property

I don't want to begin to draw from the properties untill I can take enough to leave my job entirely

Any guidance or feedback would be greatly appreciated

V/r

The new guy

Originally posted by @Larry Moragne :

Hello

Let me state upfront this may seem like a rather strange question.

I am looking to expand my portfolio but I currently don't a need for the rents income. If I use it exclusivly to pay the debt on the property will the rental income still be subject to tax?

I currently have a comfortable salary and have no need for the income. I would rather accelerate the payments of the debt so I can expand quicker and acquire more property

I don't want to begin to draw from the properties untill I can take enough to leave my job entirely

Any guidance or feedback would be greatly appreciated

V/r

The new guy

 Paying down the debt with the rental income doesn’t lower your taxes. You have to report the income no matter how you use it. 

You might need to change your investing strategy so that you are investing in a appreciating property vs  cash flow properties. 

An appreciation is not taxed, but the net income is. Generally, property with the most appreciation potential will not generate much cashflow, at least in my market. 

@Ashish Acharya

Thank you

Yeah I like the idea of cash flowing properties but at this point I don't need the cash flow they would generate. I'll have to look into other strageties untill I have the money avaiable for a deal that I can use to transition from my day job into

Part of my portfolio of rentals is in CA East Bay. They have over most of their existence generated about 2/3 appreciation for which no current tax is due (and may never be due), and the other 1/3 is cash flow about 1/2 of which is tax sheltered by depreciation. 

So a very nice mix that tax optimizes my holdings in the context of my "day job" (which pushes me into fairly higher tax brackets on its own).

@Larry Moragne

IMHO, you're making a common mistake: narrowly focusing on taxes instead of focusing on your long-term investment strategy. How many words about taxes, and only in passing mentioning "expand quicker." The key is how to expand quicker and, before that, what exactly to expand

Your strategy, once you settle on it, might dictate some tax moves. But not the other way around.

Originally posted by @Carl Fischer :

@Larry Moragne

I started using my IRAs when I was in your position. No taxes. Works great. Invest the profits and increase wealth and cash flow 

Wealth - certainly. But how do you increase cash flow with an IRA? :)

 

Originally posted by @Carl Fischer :

@Michael Plaks easy if your 59.5 and/or you use 72t SEPP.

I know what you mean, but the IRA does not bring any advantage in this case, strictly from cash-flow angle.

 

@Michael Plaks

Thanks for the information using And IRA is a option I will have to explore

Follow up question

If the income is taxed at the entity level and I don’t take a distribution it wouldn’t not show on my personal tax return correct?

I am in a position where I don’t need the income right now but rather the properties are part of a long term plan for transitioning from employment to living off my property investments

Originally posted by @Larry Moragne :

If the income is taxed at the entity level and I don’t take a distribution it wouldn’t not show on my personal tax return correct?

I am in a position where I don’t need the income right now but rather the properties are part of a long term plan for transitioning from employment to living off my property investments

income is never taxed at the entity level - unless you use C-corporations which are not well suited for rentals. Income is reported at the entity level, but it is taxed to you personally. It is called pass-through taxation.

Your long-term plan should be discussed one-on-one with a tax strategist or two.

 

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