All Forum Posts by: Paul Allen

The seller will pay 25% on the amount depreciated. It is (charmingly) known as 'unrecaptured section 1250 gain', and it gets taxed at 25%.

Your description of the seller financing 90% of the deal sounds like an installment sale. This would spread the seller's gains out over the number of years of the agreement (and the tax bill), but it would not change the total tax paid by the seller. (Except that the seller would also be paying tax on the interest you are paying him/her.)

@Shaun R.

Another benefit of keeping the mortgage is that it provides opportunity to invest elsewhere at a potentially higher rate of return than what you're losing in mortgage interest.  In other words, instead of paying down a 4% mortgage you could use that money to invest at 8% and you would come out better financially over time. (Numbers for example purposes only.)

There's no guarantee your investments will outperform your mortgage, of course, but given the relatively long life of a mortgage the odds of coming out ahead are quite good.

Some people prefer the guaranteed 4% ROI by paying down the debt. Nothing wrong with that. Different strokes for different folks. But in your OP you wrote that the only reason you knew to keep a mortgage was for the tax break. I thought I would present another reason - the opportunity to use your money more profitably than paying down cheap, secured debt.

Best of Luck on Your Journey!

@Nicole A.

The only reason your LLC would increase the refund on your individual income tax return is because it is losing money. (Assuming you are not receiving the earned income tax credit.)

Otherwise, if your LLC is making money, it is adding to your tax bill.

Generally speaking, though, I wouldn't get too hung up on the amount of the refund. You can manipulate that number through withholding or quarterly payments. The 'real' number you should focus on is the total amount of tax you are paying.

Best of Luck!

@Mike Landry

Unlike SS, there is no maximum amount of Medicare tax. If your W2 income was $1,000,000 you'd pay Medicare tax on every bit of it. 

You don't pay SE (SS/Medicare) taxes on passive (rental) income or capital gains income. This is one of the reasons real estate has such an allure. :)

@Anthony Gayden

The phase out for allowing passive losses is from $100K to $150K Modified Adjusted Gross Income (MAGI). While charitable donations will reduce your TAXABLE income, they will not reduce your MAGI.

401K contributions will definitely reduce your MAGI.

Hey @Rudolph T. small correction.  Suspended losses are taken as ordinary losses when you sell the property. I wrote above that the suspended losses adjust the basis. While this is mathematically the same thing for 90%+ of my clients, there is a difference, and I thought it worth noting.

Hi Rudy. It's not that you can't take the passive losses against active income, its just that the losses are 'suspended'. That means you get to save them until:

a) you have passive income in a subsequent year. (hopefully your properties are not perpetually losing money)

b) you sell the property (they are added to your adjusted basis)

c) you die (at which time unused passive losses expire)

Forming a pass through entity will not help you deduct passive losses against active income.

Good luck on your first investment property!

Hi Thang. If you rented out 2 bedrooms and 2 bathrooms and allowed tenants equal use of the common areas of the house, then 50% of the property can be depreciated (based on your description above). If your refrigerator and stove are being used 50% for business and 50% for personal use, then you can depreciate 50% of those as well.

As a tax professional I just wanted to add my praise for the book. Aside from the obvious CPA worship (I am an Enrolled Agent, not a CPA) it was quite good. :-0

The authors should consider writing a book geared toward tax professionals. More meat not just on WHAT is possible, but WHICH forms you fill out and HOW would be useful. I pity the tax pro who has not read this book who has clients that have!