All Forum Posts by: Mark Stone

I believe there is a designation for "Highly Compensated Employees" (HCE) which allows my company to limit how much I can contribute in order for my company to meet certain rules set by the IRS that are necessary for the company to even offer a 401k. And apparently if those no-HCEs contribute more it allows the HCEs to do so then. Idk I read about it a while back and didn't seem fair at all.

Hey @John Woodrich and @Brandon Hall,

Thanks so much to both you for taking the time to answer my questions. You guys have definitely cleared up some of the issues I had, but have also given me a lot more to think about as well.

I was obv thinking of a 401(k) to lower apparently was is my MAGI, but apparently there are other options that may be better, so I will def take a look at the article you mentioned Brandon. My current employer does offer some matching though so thought it was always best to at least capture this, not to mention my employer only lets me contribute up to about $8k towards my 401k.

And yes John it seems kind of silly of me, but I work enough as it is at my current job, so when I pick up extra shifts I don't want to do so unless I am getting a decent amount more than base pay as opposed to my calculation of 1.1x base, otherwise I rather spend that time doing different stuff I enjoy like learning about real estate lol (which if it isn't apparent I have much to learn).

Thanks again!

Thought of one more question which could make a huge difference on my income for the passive loss rule. 

I am living in an owner occupied triplex, with rents of $800/month and other tenant pays $975/month.

Would this therefor add an additional $975 + $800 x 12 = $21,300 to my "income" for calculating this write off?

Thanks again!

Ok I have a few questions in regards to my taxes and am hoping someone could help answer them or point me in the right direction! Thanks in advance for any insight!

Due to my income falling between the $100-$150k, I am curious on how to increase the amount I can write off of the maximum $25k passive loss for active real estate investors (not sure if there is a term for this write off). 

Questions)

1.) If I contributed more money to my 401k would it lower my overall income that is viewed by this rule and therefore I could write more off?

2.) Currently if I work overtime I get paid 1.5x base pay, but I am wondering if someone can help me with the math of what I would roughly be making (1.4x, 1.3x etc.), since I would also be lowering how much I could write off the above rule (my OT wouldnt be extensive enough to have my income >$150k). This may not be feasible without more specifics on my taxes but perhaps a rough formula on how I could figure it out.

My basic thought process with the math would be the following:

For every extra $1.50 I make above $100k (but below $150k); I lose $0.75 I can write off.

So here is where my knowledge really breaks down (if it hasn't already unbeknownst to me).

So for every $0.75 I lose the ability to write off as a passive loss; will this cost me $0.75 or will it cost me $0.75 times my marginal tax bracket of 28%, which would be $0.75 x 0.28 = $0.21

And if it cost me $0.21 per $0.75 and therefore $0.41 per $1.5, that would basically bring my OT down from 1.5x base pay to roughly 1.1x base pay?

Thanks again for any insight!

Sincerely, 

Mark 

@Brent Coombs

Yeah I think I just laid things out so confusingly before, but I do appreciate all your help! The thing I love most about RE is there is always something new to learn!

And I definitely confused the term house hacking with BRRRR!

Bests!

@Brent Coombs (Sorry didn't link in my previous post!) Thanks!

Thanks everyone for the advice, definitely hs given me some things to think about, especially taking 7 years to recover the rehab cost.

One last thing I was trying to understand though was the 50% rule and the numbers I mentioned above. When I stated my gross rents being $2725/month with a mortgage payment of $1400/month thay mortgage payment included taxes, homeowners insurance, PMI and flood insurance. When looking at the 50% rule (which I know is only an estimate) would I do $2725 X 12 = $32,700 gross then subtract half for expenses which would bring me down to $16350. Then from thay subtract just my P & I (and in this case maybe PMI as well) but leave out all of the money going to escrow for homeowners, flood and taxes bc those are considered part of the expenses removed from my 50% gross profit?

So, therefore P + I + PMI = $1140

$1140 X 12 = $13680/year

Giving me a cash flow estimate based off the 50% rule of:

$16350 - $13680 = $2660

Or am I wrong again and taxes, flood and homeowners insurance is not part of expenses included in the 50% cut made from gross number?

Thanks!!

@brentcoombs

@Brent Coombs, @Brendan R., @Bob Smith

Thank you all for your, time, insight and advice! I definitely have a lot to think about, but taking it slower does seem wise.

If the property gets appraised for $275k would that $30k investment in rehab not be now considered equity in the property?

If I reappraise right now and it is worth $275k but bought for $235k and paid down ~$15k of principal via down payment and monthly payments, how does my equity only become $10k, or do you mean more like my profit from the rehab would only be $10k (which I still wouldn't necessarily follow).

And wow in regards to the 50% rule I believe I completed misunderstood it previously!! However, since I just redid 2 units my expenses will hopefully be low enough to give me positive cash flow!

Guess time will tell!

Thanks for your time and advice @Brent Coombs

Hey Brent! Thanks for the reply and the advice. I am definitelt very new to this and have quite a bit to learn. In all honesty I have no idea what it would appraise for at this point, and that is def a crucial component that I need to determine. I guess I should try and get some local realtors opinions bc I think $275k was a conservative reappraisal value. And yeah perhaps this property isn't the best for the BRRRR strategy, however I think it cashflows pretty well.

I have to admit I kind of got lost when you started talking about 1% gross returns a month. Also, if I don't do a cash out refinance and it even appraises for only $275k wouldn't I have about $50k in equity or ~20%? (between appreciation and the money I have paid through my down payment and monthly payments that went to the principal for the first year?) 

For a very quick analysis with some basic numbers, perhaps you could give me your opinion.

My PITI is roughly $1550/month right now, soon to drop down to about $1400/month after removing the PMI upon refinancing. With combined rents being now at a conservative market rate of $2725, that leaves me with a cashflow of $1325/month minus expenses (which should be reduced in the front 2 units do to being completely rehabbed). But even being conservative and using the 50% rule, that would cashflow $8k a year. I did minimal down payment at 3.5% with closing say $11k plus lets estimate rehab at roughly $30k, that would leave me with an $8k return on $41k or ~19% not counting appreciation, right?

Thanks so much for your time and input!