All Forum Posts by: David M.

@Brian Hunsaker sure a paid off property netting you ~$10k annually, or ~$15k before depreciation, sounds fine.

The potentially "silly" way to reduce your taxes is to leverage out your properties.  The interest payments will be additional deductions/expenses.  But, I assume you paid in cash for a reason.

Good luck.

@John Brown Entities can actual elect different tax statuses. For example, S-Corp isn't an entity but a tax status. So, generally LLC's would elect to be taxed as a S Corp. Partnerships, for example can elect to be taxed as C Corps... Taxation and legal entity status are two different things.

If they are truly duplexes, then each has their own Title.  How many you purchase doesn't matter.  Its almost like saying if i purchased say qty of 5 regular passenger cars, I should be able to go to the DMV and register them as a single bus or something...

@John Brown first partnerships are pass through entities. Taxation is at the individual level.  If you elected a different tax status, of course that would be … different 

The refi itself has nothing to do with taxation.  “You paid him out.”  So… al of his earnings, ie payment, is reported as .. earnings.. so he pays tax on all of it.  If he had outright sold the properties as least his PROFIT would be the sales price minus his cost basis.  For completeness there would be the depreciation unrecapture and PAL offsets and I’m generalizing the profit calc

Starting to make sense?  You need to follow the accounting, for lack of better term 

@John Brown

Each to their own.. personally I’ve been liquidating my properties to reinvest in more passive, higher yielding investments.  Actually have paid very little tax so far, even after 20years!!

Your idea is basically doing a 721 exchange. It requires having and upREIT.  Properties are exchanged into the reit, the sell gets unit shares (partnerships don’t technically have shares).  Then you sell your units and the tax liability is left behind with the reit, as I understand.  Another person posted a nice article/ flyer detailing this transaction.

However I doubt any upREIT would take something this small.  But I never tried

I believe your way won’t work because he is capitalizing a partnership, not his own entity.  So it’s still a transaction.  Or, it’s still a huge gain/profit to him when you pay him out — so tax liability still there

@Theresa Harris I'd have to find a way to double check, but I thought the credit card debt statistic was the balanced carried/financed.  Its not what's being paid off within the grace period.

@Michael Ashe I'll just add that "...property taxes increase when the home is converted to a rental..." is a very location specific event.  Anything specific in your plan or locality that would force this?

Are you moving out of your primary and renting it out?  Basically a regular rental?

Or, are you staying and renting out a room or something?  i.e. house hacking?

As far as "cash flow," one MIGHT consider that just your income (i.e. the rent) minus the fixed expenses.  Yes, it would be good to figure out what those expenses will be.  Shouldn't be too bad since you are already living there.  Some will be passed on to the tenant.

You can include non-recurring expenses such as capital expenses, repairs, etc.  In my opinion, how you handle your reserves is up to your financial preference.  Setting aside a percentage of the rent for capex and repairs sounds like a good idea, and for some it is a good idea.  I personally wouldn't know what do to with a small pot of money just sitting there.  That's why you need reserves (don't care if you call it the rainy day fund, the oh crap fund, the long term savings, whatever).  The extra cash would go into that reserve..

Good luck.

@Chris Seveney yeah probably.  It may be sampling error or just our skewed news, but aren't they saying the younger generation has given up on saving for a house and retirement?

More telling is the rise in credit card debt.  They've kept saying all last year there is "too much money out there..."  Not with the huge rise in credit debt.  The rich got richer, so the economists / indicators makes it look like there is extra cash out there.  However, the poor got poorer so they have to rely on credit card debt.  However, the 'richer rich' of course are just sitting on more cash so it skews the numbers.

The economy is much bigger and different than it was in 2006.  I have little idea of what will happen.  I don't think most due, especially since it doesn't fit in a 5-15 min discussion, much less a 30sec blurb.

@John Brown has he actually ran the numbers?  over 5 years, I am GUESSING there hasn't been that much depreciation.  How much Passive Activity Loss (PAL) does he have built up?  Most people don't look at it, but that will help offset.

Installment sale may be a way to distribute the tax liability.  Its not really seller financing.  he just gets his money over a period of time, so the funds (a massive amount) would be held in escrow.  I haven't done it, so not sure of all the details.  

Otherwise, you might just buy from him in stages over time...

Does he have any other capital investments that he can tax loss harvest?

I assume he doesn't want to move into any of the properties for at least a couple of years to use the sec121 exclusion?  You'd have to wait, and it better actually if he 1031'ed into a new property and then lived in it...

Otherwise, just another investor who didn't think through his exit strategy and unwilling or unable to pay the tax for his gains...

Good luck.

@Brian Hunsaker

No, legal entities won't help.  Actually, making an S Corp will only make it worse since you change some passive into active income.

If anything, your rentals seem to be doing well.  You are making $9k per property on average after your expenses and depreciation.  You are making money, so you pay tax.

I guess the only other thing to check is if you are putting in all your expenses and getting your depreciation correctly.  Imagine how much tax you'd have to pay if you couldn't claim those deductions (right?  that's the sale pitch about the "tax efficiency" of equity investing in real estate).

Note: don't forget / freak out about when you have to sell and pay back that depreciation.

Good luck.

@Stephen Bass

First, you really shouldn't be giving taxation advice to --- whomever they are... sellers?

What does bonus depreciation do that 1031 won't?  The former creates more tax deferred liability.  You are just having them spend money in an attempt to trade realized tax deferred liability into tax deferred liability.

It depends on what they need/want.  I guess they haven't figured out their exit strategy?  Unfortunately, too many investors don't bother to figure that out when they start.

If you are going to get into this, See how much Passive Allowed Losses (PAL) they have banked.  People seem to keep skipping over that when being spiteful about paying taxes.

Are they mobile?  1031 into a property, rent it for a year or so, then move in.  After 2 years sell to use the sec121 exclusion for capital gains (doesn't help with depreciation unrecapture).

Yes, DST and syndications have a long running thread right now about their risks. For better or worse, 1031 seriously constrains their investing options, even for real estate. Doesn't let them even do debt investing for the cash income for their retirement.

But, still it depends if they need the cash.  What are they doing next in their retirement.  I've shown before in another real life post, it was cheaper for them to sell and pay the tax, than most any other option, even if they were still going to invest in real estate.

Good luck.