All Forum Posts by: Paul Allen

@Max Briggs your wife will get OPERS instead of SS, though, right? (I am originally from Ohio and my mother is a retired school administrator.)

Your point is taken, though. Real estate investors need to make arrangements to replace SS in their retirement strategy if they don't have enough 'day job' credits to qualify for SS benefits. I suspect most of the BP crowd has that covered. They take rugged DIY individualism to new heights around here. 

Go Buckeyes!

Dave is single and has a home business building furniture. After taking all his expenses and exemptions into consideration, Dave has $50,000 of taxable income. Using 2016 rates, Dave will owe the IRS $15,731 in taxes for that $50,000 of taxable income.

Debbie is single and owns residential rental properties. After taking all her expenses and exemptions into consideration, Debbie also has $50,000 of taxable income. Using 2016 rates, Debbie will owe the IRS $8,271 in taxes for her $50,000 of taxable income.

As for depreciation recapture, if you die owning the property, you never have to repay it. My father-in-law- is 80 and owns 12 properties. He has depreciated them for about $1.5 million. That equates to $1.5 million of tax free income to him over his lifetime. His heirs will sell the properties for about $4 million and pay no income taxes on that money.

These meet most people's threshold for a "big" tax benefit. Your personal threshold might be higher.

@John Richards you're asking your questions on last January's sale about 10 months too late. I'd recommend getting to a real estate savvy tax professional and getting an estimate on what to expect for a tax bill this coming year. That tends to be the kind of news that doesn't get better by waiting.

S/he can also help you out with a tax strategy for your upcoming sale. 

Best of Luck with your real estate investing!

I believe you are. It's called self-employment tax. You don't pay it on rental income, but you pay it on income generated from active trades or businesses. That's another ~15% landlords get to keep that other businesses don't.

Also, there are ways to avoid paying taxes on the depreciation recapture. Much has been written on that so it shouldn't be too hard to find something to read and ponder.

Best of Luck with your real estate investments! And, Go Browns!

Unrecaptured section 1250 gains (sometimes known as 'recaptured depreciation') are not excluded from income under the section 121 provision allowing exclusion of capital gains on the sale of a primary residence.

For Dan - the taxes on the depreciation recapture are UP TO 25%. People in a low income tax bracket can have a 0% tax rate on the depreciation recapture. (We rarely talk about this because most real estate investors end up paying 25%.) You should get with a tax pro and run the actual numbers to see what your tax implications are on the sale.

Or, if you really want your brain to hurt, you can use this handy worksheet to figure it out. (You have to carry the result forward to line 33 of the next worksheet, as well.)

Best of luck with your real estate investing!

Hi @Robert Wong - welcome to Bigger Pockets

I am assuming that none of the $100,000 in capital gains in your scenario are due to a depreciation adjustment to basis.

In the scenario you outline, under Section 121b5 you had 4 years of qualified use (when you lived in the house) and 5 years of non-qualified use (when you rented it). Therefore, 4/9 of your $100,000 gain qualifies for the section 121 exclusion ($44,444). (And you actually use months or days, not years, when performing the caluclation.)

Note that the non-qualified use is created when you convert from business property to primary residence. If you were to buy a house, use it as a primary residence for 2 years then use it as a rental for 2 years, then sell it you could get the full section 121 exclusion for capital gains. In this scenario you never went from a business back to primary residence, so no period of non-qualifying use was created.

Best of luck with your real estate investments!

Things are better than you realize. 

You are looking at your situation in a logical manner: I collect X for rent. I pay Y on my mortgage. My income is X-Y.

The IRS does not look at your situation in a manner that is as easy to understand. It's not difficult to understand the IRS way, but it takes a little bit of study. The IRS sees you as having a business. You have revenue from that business - rent. You also have expenses for that business - taxes, insurance, interest, maintenance, repairs, advertising, travel, depreciation, etc.

Your taxable income from your business will be the revenue (rent) minus all your expenses.

It is common for new landlords to have no taxable income their first few years in their new business. You may find yourself in that category. Find a tax pro that can set you up correctly in your first year. Calculating depreciation expense is an unnatural act. It's worth it to have a pro do it for you.

Best of Luck on your real estate investing!

You separate out the cost of the land. Only the building is depreciated.

Additionally, if the FMV of the property is less than what you paid for it, then the depreciable basis is based on the FMV at the time it is placed in service as a rental property. There is a little latitude at this point. If you have both an appraisal and a tax assessment of value, use the one that you prefer. The IRS will accept either as a reasonable method for establishing basis.

I 'office hack' (if there is such a thing). I lease an office suite, use one of the offices for my business, and sub-lease the other three. My current tenants are all personal coaches/counselors; solo practitioners with businesses unrelated to one another. They all pay the rent on time and take a turn vacuuming the common areas, so I am happy with them.  I hope they all renew their leases when it is time. 

The walls between the offices within the suite only go to the top of the suspended ceiling. Above that is about 30 inches of space for pipes, wires, ducting, etc. When the counselor in the office next to mine is with a client I can hear them talking. I usually can't make out what is said, but it's a problem. The tenant has told me when I am on the phone or with a client it can be disruptive when she is with a client.

I am sure the sound is going through the suspended ceiling space. How can I (cheaply) soundproof between offices? I am handy, but it isn't practical to extend the walls to the hard ceiling (my first thought). There's just too much 'stuff' up there in the way. A local contractor wants $3,500 to just do my office. I'd prefer something that costs less and makes things better for everyone.

Ideas?

Ha! @Dillon Lieder

I'd post a picture of my card, but I think that is probably a violation of forum rules.  :-)