Baby Boomers and their assets

[sdgrrl]

Hello,

Long time in posting and hope all are well. Curious what the piggies think of what is going to occur as the Baby Boomers begin to retire and start unloading assets.

Will they have a great retirement due to their home value? Will the market be inundated with a flood of homes? Did our Baby Boomers en masse not prepare accordingly for their future and we will possibly see foreclosures for the elderly increase?

Thoughts?

[flyer]

Baby Boomer here.

I know much of the research shows many BB’s are no more prepared for retirement than any other age group, but the retirement stats in every age group across the board are far from impressive, especially when you realize only 5% of the entire population in the US have a million or more in assets.

I can’t speak for all BB’s but, personally, we’re well positioned for retirement, and most people we know in our age group are as well. We don’t plan to unload our assets, but plan to pass everything along to our kids–rental properties, etc.

IMO, it will affect various geographical areas of the country in different ways, but, again from the people we know, I don’t see anything on the radar that would indicate Baby Boomer retirements will result in mass foreclosures, or other dire circumstances in the San Diego area, but only time will tell.

[The-Shoveler]

All of the above, some of the above and none of the above.

I am probably the exception
Most of the boomers I grew up with have stayed in very stable relationships (one marriage)
Most own their own homes in Socal outright and they are planning to age in place, but that is most likely very unusual.
I know some exceptions to the above though (maybe 10% or so of the boomers I know) who are not doing so well.

[The-Shoveler]

One other thing I hear from my colleagues in the bay/silicon valley area is one of the biggest complains is people don’t move out of the bay area once they retire.
You would think they would want to cash out and move someplace (like say SD).
But they just stay where they are. Weird.

[flyer]

I can understand that, TS. Most, probably have the funds to stay, and their kids, grandchildren, and extended family are there, so they have no reason to relocate. Like us, they’re probably planning to pass their assets along to the next generation, rather than cash out.

[sdgrrl]

I know many Boomers who plan to stay in their homes until they die or are forced to move. The whole generation is interesting to me as they had a lot going for them and against them.

They had low home prices in their younger years, education was cheaper and some are part of a pension system.

On the flip side, they went through the 90s recession, the dot com burst and then the 2008 crash.

The Great Generation endured the Depression, but those who made it through witnessed the post War boom and could prosper with hard work.

The Boomers…not sure what to think.

X, Y and Millennials…we will see as well.

[flyer]

Personally, we love what life has brought us as BB’s. No complaints here. Since we’re still in our 50’s, our kids (who are doing well on their own) might have to wait awhile before cashing in on our assets:)

[(former)FormerSanDiegan]

The first boomers (born in 1946) turned 65 in ~2011.

We should be seeing a start of some sort of trend if these folks are unloading their assets.

BTW, my father-in-law is one of those leading edge boomers. He retired in place at 65 in a house he bought 10-12 years before retiring. He’s living off social security and a part-time gig. He’s not pulling from his retirement account, not moving, so I have seen no immediate unloading of assets.

Plus, if they were unloading assets, it might even be stimulative to the economy, as they would be unloading for the purpose of consuming. Rather than saving for retirement.

My gut says that the impact of boomers unloading assets is greatly overexaggerated.

[livinincali]

Boomers are in their peak asset accumulation years still. They are near the top of the wage scale and all looking for assets to fund their retirement years. Assets are purchased with discretionary income, while mortgage debt is debatable stocks and bonds are not. The problem is that not only will some boomers look to cash in their assets, the demand for assets from the boomer generation will shrink as well. We all know the next generations for the most part as broke as hell and up to their eye balls in debt. Always ask yourself who are you going to sell to. Could your kids or your neighbor kids afford to buy your house at it’s current price. You have to sell to somebody’s kids.

I just don’t see how this ends well. At a macro level I expect most assets prices to crash as the supply/demand curve switches. That said there are probably various pockets of assets that will always remain valuable, it’s just incredibly difficult to guess right. The bottom line is comfortable retirement for the masses is a new concept in society and we likely don’t have the economy or resources to support it.

[Jazzman]

You need a pension and/or assets that provide income to retire. The challenge for the latter has been so much volatility in stocks and bonds of recent, it has forced many into RE, or to hold onto rentals for the yield. That trend might reverse if the economy improves and baby boomers feel better about financial products, especially bonds. Income and capital preservation becomes more important in your later years. When asset prices get artificially inflated, it doesn’t necessarily inspire confidence. If you don’t have ties to a particular place, downsizing and moving is an option to release capital, but the problem of where to invest for income doesn’t disappear. I would imagine many boomers are also cash hording at the moment.

[livinincali]

[quote=Jazzman]I would imagine many boomers are also cash hording at the moment.[/quote]

Some might be but with many not having enough saved for retirement, they are probably more likely invested in riskier assets looking for the 8-10% that always gets touted.

The reality is that many boomer retirees are significantly exposed to the stock market. Many have pensions or 401K plans with few options. The big problem with asset being sold isn’t that some boomers will hang on to assets because they aren’t giving them away. The problem is pension funds don’t have that option. If they are on the hook for pension payments that exceed new money coming in they are forced sellers.

[CA renter]

[quote=livinincali]Boomers are in their peak asset accumulation years still. They are near the top of the wage scale and all looking for assets to fund their retirement years. Assets are purchased with discretionary income, while mortgage debt is debatable stocks and bonds are not. The problem is that not only will some boomers look to cash in their assets, the demand for assets from the boomer generation will shrink as well. We all know the next generations for the most part as broke as hell and up to their eye balls in debt. Always ask yourself who are you going to sell to. Could your kids or your neighbor kids afford to buy your house at it’s current price. You have to sell to somebody’s kids.

I just don’t see how this ends well. At a macro level I expect most assets prices to crash as the supply/demand curve switches. That said there are probably various pockets of assets that will always remain valuable, it’s just incredibly difficult to guess right. The bottom line is comfortable retirement for the masses is a new concept in society and we likely don’t have the economy or resources to support it.[/quote]

In total agreement with this. The combination of Boomers reducing their spending/accumulation, along with the reduced relative purchasing power of their kids (the incredible debt loads and lack of good jobs) is the greatest threat to asset prices, IMHO.

I don’t think that Boomers will necessarily sell their homes as they age, but the kids who inherit these homes likely will, especially if there is more than one heir. The Boomers’ kids are broke, and selling Mom & Dad’s house (and stocks, bonds, etc.) after they pass is the only thing that will allow many of them to climb out of their financial holes.

[flyer]

There will always be some winners and some losers in every generation, so, even though we can all generalize about the fate of a particular generation, there are always exceptions.

Some of us BB’s will have extraordinary, financially rewarding lives–some won’t. Some Gen Xer’s will have extraordinary, financially rewarding
lives–some won’t, and on and on. That’s the way life is.

[FlyerInHi]

[quote=flyer]There will always be some winners and some losers in every generation, so, even though we can all generalize about the fate of a particular generation, there are always exceptions.

Some of us BB’s will have extraordinary, financially rewarding lives–some won’t. Some Gen Xer’s will have extraordinary, financially rewarding
lives–some won’t, and on and on. That’s the way life is.[/quote]

We are talking about the general demographic trends, not individual cases.

It’s not looking good. Japan will be interesting to watch. The boomers did incredibly well. They saved and own houses free and clear. What about the younger generations?

I believe life can take a different path for the worse because of demographic, economic and political cycles. Of course, there will always be exceptions.

[flyer]

Understand, FlyerIH, and, I agree it will be interesting, and, perhaps, devastating to some, to experience the way in which the future unfolds.

However, since none of us can turn back time to change whatever damage has or has not been done by or to my generation or future generations, IMO, the most any of us can hope for, is to use our individual resources to take care of ourselves and our families at the highest level possible for as long as possible. That was my point in mentioning the advantage of being the exception.

[FlyerInHi]

[quote=flyer]

However, since none of us can turn back time to change whatever damage has or has not been done by or to my generation or future generations, IMO, the most any of us can hope for, is to use our individual resources to take care of ourselves and our families at the highest level possible for as long as possible. That was my point in mentioning the advantage of being the exception.[/quote]

I think you have quite accurately observed before that many families are having to move out of San Diego because it’s too expensive

I’m seeing a lot of boomers helping their kids and grand kids with downpayments, etc..

Of course boomers who have good savings and self sufficient offsprings will be fine.

[sdgrrl]

[quote=FlyerInHi][quote=flyer]There will always be some winners and some losers in every generation, so, even though we can all generalize about the fate of a particular generation, there are always exceptions.

Some of us BB’s will have extraordinary, financially rewarding lives–some won’t. Some Gen Xer’s will have extraordinary, financially rewarding
lives–some won’t, and on and on. That’s the way life is.[/quote]

We are talking about the general demographic trends, not individual cases.

It’s not looking good. Japan will be interesting to watch. The boomers did incredibly well. They saved and own houses free and clear. What about the younger generations?

I believe life can take a different path for the worse because of demographic, economic and political cycles. Of course, there will always be exceptions.[/quote]

Japan is an experiment in motion and the cultural impact between the Boomers and Xers are alarming. I’m sure many of you read about the large percentage of Japanese who have no interest in sex or romantic relationships- the figure was something like 40%. The government is worried as their is a huge elderly generation being supported by a younger workforce who feel little security and aren’t really reproducing.

The X and latter generations saw their parents work the same job for 30 years, slowly earn respect as they aged in the workforce and have a decent life.

Today’s Japanese by and large feel I think more insecure than we do. Their culture puts such emphasis on success that I’m not surprised many become video game obsessed hikikomoris.

It will be interesting watching it unfold.

[FlyerInHi]

[quote=sdgrrl]
Japan is an experiment in motion and the cultural impact between the Boomers and Xers are alarming. I’m sure many of you read about the large percentage of Japanese who have no interest in sex or romantic relationships- the figure was something like 40%. The government is worried as their is a huge elderly generation being supported by a younger workforce who feel little security and aren’t really reproducing.

The X and latter generations saw their parents work the same job for 30 years, slowly earn respect as they aged in the workforce and have a decent life.

Today’s Japanese by and large feel I think more insecure than we do. Their culture puts such emphasis on success that I’m not surprised many become video game obsessed hikikomoris.

It will be interesting watching it unfold.[/quote]

Add to that a shrinking population, a political system that is dysfunctional (worse than us), the rise of korea and China.

The people are turning inward, standards of living are declining…. Not a good future.

[The-Shoveler]

One Thing I think I must say, coming from L.A. homes were “NEVER CHEAP”
It was always a big event if you bought your first home and it was all you could do to make the payments.
(the possible exception was mid-90’s crash which I only know one boomer who bought then) and the 2008-2011 crash.

They only look like they were cheap when you see today’s prices (and most have grown used to almost no inflation so it distorts their view of things).

Trust me it was a Struggle.

[sdgrrl]

I am way to used to FB. I was looking for the “like” option. Haha

[Coronita]

[quote=sdgrrl]I am way to used to FB. I was looking for the “like” option. Haha[/quote]

people like you are the reason why FB stock is $65/share instead of $18/share.

(serious remorse of not buying any shares back when things were $18… Thanks for nothing…)

🙂

[sdgrrl]

[quote=flu][quote=sdgrrl]I am way to used to FB. I was looking for the “like” option. Haha[/quote]

people like you are the reason why FB stock is $65/share instead of $18/share.

(serious remorse of not buying any shares back when things were $18… Thanks for nothing…)

:)[/quote]

You aren’t alone in that 😉

[Coronita]

[quote=sdgrrl][quote=flu][quote=sdgrrl]I am way to used to FB. I was looking for the “like” option. Haha[/quote]

people like you are the reason why FB stock is $65/share instead of $18/share.

(serious remorse of not buying any shares back when things were $18… Thanks for nothing…)

:)[/quote]

You aren’t alone in that ;)[/quote]

I’m trying to work on not being in the loser category in generation X….

….However, the punchline someone should say is “so how’s that workin out for you, FLU? Try harder…loser….”

[sdgrrl]

[quote=flu][quote=sdgrrl][quote=flu][quote=sdgrrl]I am way to used to FB. I was looking for the “like” option. Haha[/quote]

people like you are the reason why FB stock is $65/share instead of $18/share.

(serious remorse of not buying any shares back when things were $18… Thanks for nothing…)

:)[/quote]

You aren’t alone in that ;)[/quote]

I’m trying to work on not being in the loser category in generation X….

….However, the punchline someone should say is “so how’s that workin out for you? Try harder…loser….”[/quote]

I’m dyin’ over here!

Again, from one X to another- you are not alone

[Coronita]

[quote]
Long time in posting and hope all are well. Curious what the piggies think of what is going to occur as the Baby Boomers begin to retire and start unloading assets.
Will they have a great retirement due to their home value? Will the market be inundated with a flood of homes? Did our Baby Boomers en masse not prepare accordingly for their future and we will possibly see foreclosures for the elderly increase?
[/quote]

The ones that managed their money well will live a wonderful life..And afterwards figure out a way to pass on their assets to their heirs..

The ones that didn’t well, they are screwed…

Just like in every part of life.. there will be winners and there will be people who lose.

[edna_mode]

Comic on Gen X and real estate. Not sure I agree!
http://2.bp.blogspot.com/-AT9fFMD5bms/TuhTshwhG8I/AAAAAAAACh0/aV_Xppuqo48/s400/genxx.jpg

[sdgrrl]

[quote=edna_mode]Comic on Gen X and real estate. Not sure I agree!
http://2.bp.blogspot.com/-AT9fFMD5bms/TuhTshwhG8I/AAAAAAAACh0/aV_Xppuqo48/s400/genxx.jpg%5B/quote%5D

That is great. Hmmm…in SD I would agree. In other areas I find you can have your cake and eat it too.

Thank you for sharing.

[The-Shoveler]

I think also boomers have been colored a bit by having lived (and worked) through some very high inflationary periods.
It was buy big now you will be able to afford it later. (when you have been living through 10-14% wage inflation). — that counts promotions etc…. as well.
Not so much in later generations I think but X should have seen the tail end of that.

the 60’s had some high inflation also the weird low-inflation period starting mid 90’s I think (well weird from a boomers Perspective).

What X views as cheap homes was just the work of inflation (well for the most part).

[flyer]

.

[flyer]

[quote=edna_mode]Comic on Gen X and real estate. Not sure I agree!
http://2.bp.blogspot.com/-AT9fFMD5bms/TuhTshwhG8I/AAAAAAAACh0/aV_Xppuqo48/s400/genxx.jpg%5B/quote%5D

Per the above post, it’s interesting how younger generations might think BB’s have had to choose between having a house or having a life, when we, and most people we know–other airline pilots, real estate investors, film executives–all of whom happen to be BB’s–have found it is definitely possible to have it all. Apparently misperceptions abound.

[joec]

[quote=flyer][quote=edna_mode]Comic on Gen X and real estate. Not sure I agree!
http://2.bp.blogspot.com/-AT9fFMD5bms/TuhTshwhG8I/AAAAAAAACh0/aV_Xppuqo48/s400/genxx.jpg%5B/quote%5D

Per the above post, it’s interesting how younger generations might think BB’s have had to choose between having a house or having a life, when we, and most people we know–other airline pilots, real estate investors, film executives–all of whom happen to be BB’s–have found it is definitely possible to have it all. Apparently misperceptions abound.[/quote]

This is probably because the cost of required spending like transportation, healthcare, education, food, are all up a ton from before…

When we were young, college and housing in “decent”, non exclusive areas was pretty affordable relative to most incomes I think and college and healthcare was DEFINITELY more affordable compared to now. Even state tuition is very expensive now and we used to pay well over 1k / month for healthcare when 20-30 years ago, it was free for the worker and the family at many jobs.

I don’t think there will be a huge crash though since the whole world is more global now so even if many long time people can’t buy homes here, you have pretty much everyone capable from buying from Asia, Europe, India, Mexico, you name it wanting to diversify their assets out of their own countries and put it in US real estate. In a lot of these other countries, housing is even worst for what you get so there is very limited shortage of buyers compared to supply IMO. It’s a global world/economy now and the US is still one of the safest places to “park” assets from probably China, Brazil, Russia, etc…

Families who own a lot of properties are also probably wealthy so there is limited/no need, rush to sell anything. I know my parents and in-laws all have a fair amount of real estate so there isn’t a cash crunch…

For the “general/typical” American, yeah, it looks bad. But they never had the assets or homes to begin with as mentioned in many retirement/assets owned surveys.

Since these people who own the assets aren’t financially strapped, they will just sell when it comes back. Sorta like if you look at high end collectibles/art, etc…the prices seems to never drop or go down. Those buyers can just wait it out (not counting the crazed 2005 housing bubble of course since that was more of the general no-cash down flipper).

[The-Shoveler]

I think “Owner Equivalent Rent” caught Gen-X off guard (some Boomers as well)
They were always used to inflation following home prices (SURPRISE!!!).

Yea that did not happen (the bust of the 90’s should have been a shot across the bow).

Now you got the Fed trying to figure out how to do this without it looking obvious IMO.

[The-Shoveler]

I think the percentage of boomers who hold rentals is fairly small.

The issue in SoCal I think as well for retiring boomers is (where is it better ?)
If they don’t need to sell their primary this is.

Sure some will be forced by health to downsize etc… but it is not going to be all at once.

It’s going to be a slow onzy_twozy process.

[FlyerInHi]

Michael Fink of black rock says there is cause for worry.

Can people living to their 90s expect to retire in their 60s?

[sdgrrl]

Gen X and latter for the most part will not have any type of pension. My hubbie’s two grandfathers both worked for Ford. One was white collar and the other blue collar. The blue collar one retired in his mid 60’s and lived till he was 97. The man had a great, albeit simple life.

My father in law receives his military pension, a pension from American Airlines, one from a co called Cobra and then SSI. The man is making more now then when he worked. He worked hard and I’m happy he gets to travel non stop and just enjoy life.

Flash forward to my hubbie- he invest in his 401k to the max, but the numbers still don’t make us feel comfortable. My income goes to savings as well, but it will take a great great deal of work to have the retirement my GF and FIL have had.

[Coronita]

[quote=sdgrrl]Gen X and latter for the most part will not have any type of pension. My hubbie’s two grandfathers both worked for Ford. One was white collar and the other blue collar. The blue collar one retired in his mid 60’s and lived till he was 97. The man had a great, albeit simple life.

My father in law receives his military pension, a pension from American Airlines, one from a co called Cobra and then SSI. The man is making more now then when he worked. He worked hard and I’m happy he gets to travel non stop and just enjoy life.

Flash forward to my hubbie- he invest in his 401k to the max, but the numbers still don’t make us feel comfortable. My income goes to savings as well, but it will take a great great deal of work to have the retirement my GF and FIL have had.[/quote]

Worrying about it is half the battle. Most people don’t know or don’t care… The fact that you and your hubby do already says something….

(At least that’s what I keep telling myself…)…

W2 salaries are the worst way to accumulate wealth BTW…

[sdgrrl]

W2 salaries are the worst way to accumulate wealth BTW…[/quote]

Would you expand on that?

Sincerely,

S

[Coronita]

[quote=sdgrrl]W2 salaries are the worst way to accumulate wealth BTW…[/quote]

[quote]
Would you expand on that?

Sincerely,

[/quote]

Sure. If I was to do it over again, I would have invested much much earlier in things like real estate where it could produce income without actually slaving away at a job…

Also, if I were to do it again, I would probably have focused more time on running my own company longer instead of converting over to a w2 when I got older….

W2 is taxed to the max….

[joec]

Yeah, W2 earned income for very high income people is taxed massively so high income jobs get killed with taxes upwards of 60+% (near 40% federal, 13%+ state (CA special), 6.2% social security/medicaid)…

When you start making more money, you’ll see very little of it when you get raises/etc that it’s almost discouraging.

Now, add in another 10% for sales tax and pretty much 70% of your earned income is gone when you buy anything.

If you study the tax code, it’s totally against the average income worker.

My suggestion is to start a business. Not only can profits (unlike income) be taxed AFTER all your business expenses (valid of course), but you can also do things like setup defined benefit plans like those fancy pensions, put a ton more in retirement accounts, etc…

Of course, starting and running a company is very hard generally and not for everyone. If you look at the ultra wealthy, nearly everyone was a business entrepreneur though so it’s one of the few ways to get extreme wealth.

Biz people make magnitudes more than entertainers, sports athletes, etc…

[flyer]

As a BB, one thing I would encourage all younger people to do is enjoy life along the way, as you acquire wealth–rather than waiting until you retire. I know that’s easier said than done, but it’s always been our philosophy, and we have no regrets.

Many people run out of time (or health, or?) before they run out of money. Some might say that’s good, but, IMO, it’s sad–especially if you didn’t have a chance to live the life of your dreams.

[Jazzman]

^^^Yep, it doesn’t do to get overly obsessed with retirement planning. Making do with less is good for the soul. As long as you have a roof over your head and remain healthy, you can still live the dream.

[FlyerInHi]

ah, dreams… easier said than done.

I’v been fairly lucky compared to most people. So I’m thankful. But lots of people more talented than me don’t have what I have.

Sometimes dreams should stay dreams — something unattainable. It’s not really helpful to tell people to live their dreams. It’s oftentimes destructive.

Look at the people in LA trying to become actors, screenwriters, etc… most of them will end up, old, poor, and rejected, perhaps addicts who will die early in bad health. I know such a person.

It’s easy for the few who make it to say they lived the lives of their dreams.

People should understand their own limitations and live within their means. Or at least, through family or personal perseverance, to setup a nest egg to guarantee a baseline standard of living before, or while pursuing their dreams.

Telling people to live their dreams, no matter what, is a recipe for disappointment.

[sdgrrl]

[quote=FlyerInHi]ah, dreams… easier said than done.

I’v been fairly lucky compared to most people. So I’m thankful. But lots of people more talented than me don’t have what I have.

Sometimes dreams should stay dreams — something unattainable. It’s not really helpful to tell people to live their dreams. It’s oftentimes destructive.

Look at the people in LA trying to become actors, screenwriters, etc… most of them will end up, old, poor, and rejected, perhaps addicts who will die early in bad health. I know such a person.

It’s easy for the few who make it to say they lived the lives of their dreams.

People should understand their own limitations and live within their means. Or at least, through family or personal perseverance, to setup a nest egg to guarantee a baseline standard of living before, or while pursuing their dreams.

Telling people to live their dreams, no matter what, is a recipe for disappointment.[/quote]

I think much of this depends on the person. Some people for good or bad- just are not phased by…what is the word? Upward mobility, security, leaving a legacy.

Some would rather be a waiter at 45 and acting the occasional extra role than be tied to a desk.

For the dreamers, those that think they will make it. Have the Oscar speech all ready- yes, at some point if it doesn’t happen it’s time to move on. Those are the people who crack, burn and fade.

I blame Disney.

[flyer]

I completely understand everyone’s concerns about the concept of living your dreams, but, I still think it is possible to have security, wealth AND to live your dreams.

We have, and I personally know many others who have in many different fields of endeavor–even some who have risen to great heights from ground zero (one of my wife’s best friends was a stay-at-home wife and mother, who became a world famous author after writing some books, then movies, about vampires a few years ago–and that’s how we started investing in films)–so I know it’s possible.

However, as was mentioned, embarking upon a quest to live your dreams should not be taken lightly. I agree that the realities of one’s abilities and individual circumstances should be evaluated, and realistic decisions should be made accordingly.

[EconProf]

Here is a shameless plug for owning real estate as a means of planning for retirement. Whether a SFR or two, condos, or, for ease of management, commercial properties, the multitude of advantages are just about unbeatable.
We all know about the tax advantages: depreciation allowances permit you to lower your tax bracket from your regular income. Inflation allows you to use the lower capital gains tax rate when you decide to sell, which you can conveniently time to happen in your retirement years.
Your equity buildup over the years of ownership can be profound–both from paying down the loan and the (presumed) appreciation in property values. Together they may enable you to sell a free and clear property upon retiring or during retirement.
Yes, there are hassles to being a landlord. In the early years there is little cash flow and it is sometimes negative. There is a learning curve to both maintenance headaches and minimizing tenant hassles. But as you learn more the cash flow gets better. Most of all, beneath the surface, forced saving is occurring on your personal balance sheet. You learn to be frugal because your job income and property income demand it. Meanwhile you are quietly getting rich.

[joec]

[quote=EconProf]Here is a shameless plug for owning real estate as a means of planning for retirement. Whether a SFR or two, condos, or, for ease of management, commercial properties, the multitude of advantages are just about unbeatable.
We all know about the tax advantages: depreciation allowances permit you to lower your tax bracket from your regular income. Inflation allows you to use the lower capital gains tax rate when you decide to sell, which you can conveniently time to happen in your retirement years.
Your equity buildup over the years of ownership can be profound–both from paying down the loan and the (presumed) appreciation in property values. Together they may enable you to sell a free and clear property upon retiring or during retirement.
Yes, there are hassles to being a landlord. In the early years there is little cash flow and it is sometimes negative. There is a learning curve to both maintenance headaches and minimizing tenant hassles. But as you learn more the cash flow gets better. Most of all, beneath the surface, forced saving is occurring on your personal balance sheet. You learn to be frugal because your job income and property income demand it. Meanwhile you are quietly getting rich.[/quote]

+1 agreed…

I think the income equation for a rental isn’t that good, but if you factor in the depreciation, that tends to make it better since any higher wage taxable income is at your marginal (highest) rate and anything to lower that helps a ton.

Not for everyone, but I think the tax benefits could be pretty huge…All expenses are also business expenses. I know a lot of family friends moving into all their rentals for 2 years and selling them for the tax free profit.

In our tax code, there’s very little “tax free” options.

[EconProf]

Right, Joec. I believe the (legal) tax dodge you describe involves buying a house needing serious rehab, living in it while fixing it up, then selling it for a big tax-free gain (since you lived in it for the necessary period of time). Rinse, repeat. This lets you avoid any tax on the “profit” ordinary house flippers have to pay.

[FlyerInHi]

I agree.

Real estate takes more work and more planning than just saving money and investing it in financial markets. Timing makes a big difference because real estate goes in cycles.

You need cash at the ready. During this last bottom, to get the good deals in the depressed markets (which btw recovered fastest) you needed cash.

In about a decade or two, there will be another good buying opportunity. Be prepared with good credit and cash for the best deals.

Learn about putting properties in trust, as well as ways to maximize the number of mortgages you can take out. But that’s not saving money, that’s getting into debt, hahaha. But leverage can maximize returns and, of course, loses too! (The self made multi-millionaires would not have made it without leverage. But then again if their loans were called at the inopportune time, they would have gone bankrupt)

[skerzz]

The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.

[EconProf]

[quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.

[flyer]

[quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]

Again, +1 EP.

[an]

[quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]skerzz is partially correct. You can benefit from depreciation deduction, just like everyone else, but the amount you can deduct decreases when you make >$150k. After $150k AGI, you can no longer apply passive loss from rental property toward your active W-2 income. So, if you make $145k and have $50k “loss” in investment property, your new AGI would be $95k. However, if you make $155k, you cannot apply the $50k “loss” toward your active W-2 income. Unless you’re a real estate professional.

This is another prime example of social engineering. If you’re a couple and one of you make close to $150k, there’s very little reason for the other person to go back to work, especially if you have a few investment properties that net a huge “loss”. It would only make sense for the other spouse to go back to work if the other spouse becomes a real estate agent/broker.

[EconProf]

[quote=AN][quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]skerzz is partially correct. You can benefit from depreciation deduction, just like everyone else, but the amount you can deduct decreases when you make >$150k. After $150k AGI, you can no longer apply passive loss from rental property toward your active W-2 income. So, if you make $145k and have $50k “loss” in investment property, your new AGI would be $95k. However, if you make $155k, you cannot apply the $50k “loss” toward your active W-2 income. Unless you’re a real estate professional.

This is another prime example of social engineering. If you’re a couple and one of you make close to $150k, there’s very little reason for the other person to go back to work, especially if you have a few investment properties that net a huge “loss”. It would only make sense for the other spouse to go back to work if the other spouse becomes a real estate agent/broker.[/quote]
Good clarification AN. For the really higher income taxpayer, a whole lot of benefits and deductions start to be phased out as one’s income rises. My post above applies more to middle and upper middle income class taxpayers.

[dumbrenter]

[quote=EconProf][quote=AN][quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]skerzz is partially correct. You can benefit from depreciation deduction, just like everyone else, but the amount you can deduct decreases when you make >$150k. After $150k AGI, you can no longer apply passive loss from rental property toward your active W-2 income. So, if you make $145k and have $50k “loss” in investment property, your new AGI would be $95k. However, if you make $155k, you cannot apply the $50k “loss” toward your active W-2 income. Unless you’re a real estate professional.

This is another prime example of social engineering. If you’re a couple and one of you make close to $150k, there’s very little reason for the other person to go back to work, especially if you have a few investment properties that net a huge “loss”. It would only make sense for the other spouse to go back to work if the other spouse becomes a real estate agent/broker.[/quote]
Good clarification AN. For the really higher income taxpayer, a whole lot of benefits and deductions start to be phased out as one’s income rises. My post above applies more to middle and upper middle income class taxpayers.[/quote]

Isn’t that exactly what skerzz wrote? Also don’t forget the part where you need to be a full time real estate professional….

[EconProf]

[quote=dumbrenter][quote=EconProf][quote=AN][quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]skerzz is partially correct. You can benefit from depreciation deduction, just like everyone else, but the amount you can deduct decreases when you make >$150k. After $150k AGI, you can no longer apply passive loss from rental property toward your active W-2 income. So, if you make $145k and have $50k “loss” in investment property, your new AGI would be $95k. However, if you make $155k, you cannot apply the $50k “loss” toward your active W-2 income. Unless you’re a real estate professional.

This is another prime example of social engineering. If you’re a couple and one of you make close to $150k, there’s very little reason for the other person to go back to work, especially if you have a few investment properties that net a huge “loss”. It would only make sense for the other spouse to go back to work if the other spouse becomes a real estate agent/broker.[/quote]
Good clarification AN. For the really higher income taxpayer, a whole lot of benefits and deductions start to be phased out as one’s income rises. My post above applies more to middle and upper middle income class taxpayers.[/quote]

Isn’t that exactly what skerzz wrote? Also don’t forget the part where you need to be a full time real estate professional….[/quote]
Actually, no. I just agreed with him that for really higher income folks–above $250k or so–some tax benefits start to phase out. Also, some additional taxes start to apply…part of Obamacare, I believe. In recent years at the CA and Fed level, higher effective marginal tax rates for the rich have been going into effect via slight-of-hand. Some of these new rules will apply to rental property owners, but only very high income taxpayers.
But for the vast majority of Piggs reading this, rental “losses” are used to offset W-2 income, thus lessening the tax liability.

[dumbrenter]

[quote=EconProf]
Actually, no. I just agreed with him that for really higher income folks–above $250k or so–some tax benefits start to phase out. Also, some additional taxes start to apply…part of Obamacare, I believe. In recent years at the CA and Fed level, higher effective marginal tax rates for the rich have been going into effect via slight-of-hand. Some of these new rules will apply to rental property owners, but only very high income taxpayers.
But for the vast majority of Piggs reading this, rental “losses” are used to offset W-2 income, thus lessening the tax liability.[/quote]

Are you sure that folks with > 150K AGI can still get the benefit of offsetting the rental “losses”? And they don’t have to be a full-time real estate professional to get the depreciation losses?
I hope you are right, but this is a good time for me to go check on the IRS site.

[Coronita]

[quote=dumbrenter][quote=EconProf]
Actually, no. I just agreed with him that for really higher income folks–above $250k or so–some tax benefits start to phase out. Also, some additional taxes start to apply…part of Obamacare, I believe. In recent years at the CA and Fed level, higher effective marginal tax rates for the rich have been going into effect via slight-of-hand. Some of these new rules will apply to rental property owners, but only very high income taxpayers.
But for the vast majority of Piggs reading this, rental “losses” are used to offset W-2 income, thus lessening the tax liability.[/quote]

Are you sure that folks with > 150K AGI can still get the benefit of offsetting the rental “losses”? And they don’t have to be a full-time real estate professional to get the depreciation losses?
I hope you are right, but this is a good time for me to go check on the IRS site.[/quote]

If your AGI is >$150k, you cannot offset use your rental losses to offset your W2 income if you are not considered a real estate professional…The only benefit is you can zero out your rental incomes if you have more than one property.

For folks above $250k, you get hit with other things both at the federal and state levels (not related to rental income alone) but with taxes related to income in general… (The state threshold is $340k if your are claiming head of household)…
Namely,

1) Medicare tax surcharge on unearned investment income (3.8%) for AGI’s above $200k(single/HOH) and $250k(joint). This applies to stock, index, real estate,etc… The exception is the first $250k/500k capital gains exemption from the sales of a primary home is not subject to this surcharge…

2)Capital gains taxes of 20% on AGI above $400k/$450k…

3)The expiration of the holiday tax credit (which applies to everyone) (insignificant for upper income people)

4)California tax increases for folks above $250k single ($340k HOH) $500k for joint -> 10.3% effective tax rate, and 11.3% and 12.3% brackets thereafter…

[quote]
But for the vast majority of Piggs reading this, rental “losses” are used to offset W-2 income, thus lessening the tax liability.[/quote]

I think EP was referring to the majority of piggs don’t reach the $150k AGI threshold… Whether this is true or not is a separate topic of discussion.

These are the general rules for most common people. I’m sure there’s probably other exceptions, if you have more variables to work with (retirement etc). But it probably applies to most people working and earning a W2 or 1099….

What I do think is the case is all else being equal, earned income for amount up to a threshold Y is taxed at a significantly higher rate than if the same income Y is earned from dividends and/or long term capital gains… What threshold Y is is left as an exercise for the reader…

And one more reason why my original statement that W2 is the worst way to accumulate wealth, all else being equal…

[Coronita]

.

[Coronita]

[quote=AN][quote=EconProf][quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]
Please explain yourself here. A W-2 worker is exactly the taxpayer who can most use the depreciation “expense” that goes with owning rental real estate. While he may have a positive cash flow from rents minus cash expenses, he also gets to deduct depreciation “expense” every year. This lowers the property’s taxable income, maybe even making it negative for tax purposes. The result is lower total taxable income. In fact, the higher his W-2 taxable income, the greater the tax benefit from owning rental properties.[/quote]skerzz is partially correct. You can benefit from depreciation deduction, just like everyone else, but the amount you can deduct decreases when you make >$150k. After $150k AGI, you can no longer apply passive loss from rental property toward your active W-2 income. So, if you make $145k and have $50k “loss” in investment property, your new AGI would be $95k. However, if you make $155k, you cannot apply the $50k “loss” toward your active W-2 income. Unless you’re a real estate professional.

This is another prime example of social engineering. If you’re a couple and one of you make close to $150k, there’s very little reason for the other person to go back to work, especially if you have a few investment properties that net a huge “loss”. It would only make sense for the other spouse to go back to work if the other spouse becomes a real estate agent/broker.[/quote]

Bingo..

[flyer]

Since we’re talking tax deductions here, it seems our film investment deductions have always trumped our rental deductions by a long shot.

One such film investment deduction that we’ve used for several years expired at the end of 2013, but we’ve been able to use a “grandfather clause” (lasting 44 years) to protect this deduction on future projects, as long as we made sure certain requirements had been met by the end of 2013.

[Coronita]

[quote=skerzz]The majority of W-2 workers that own rental property in California generally will not benefit from depreciation deductions (losses on rental properties). I won’t go into all the specifics, but unless you are a full time real estate professional you won’t be able to offset ordinary income with passive rental losses. There is an exception to this rule based on income limitations — however, those that own rentals in SoCal or the Bay Area are likely making too much money to realize the benefit.[/quote]

Ding ding ding…..

BUT, I think it does mean you can almost get into a situation in which your effective rental income is $0/year at least on paper in the short/mid term until you actually need to deal with it… It does end up coming back and biting your eventually.. but hopefully by that time, you have little/no W2 income so you’re in a lower bracket at that point and/or you’re dead by then. Or you keep rolling and rolling it over…

At least that’s my plan (hopefully not the dead part)…

[flyer]

[quote=EconProf]Here is a shameless plug for owning real estate as a means of planning for retirement. Whether a SFR or two, condos, or, for ease of management, commercial properties, the multitude of advantages are just about unbeatable.
We all know about the tax advantages: depreciation allowances permit you to lower your tax bracket from your regular income. Inflation allows you to use the lower capital gains tax rate when you decide to sell, which you can conveniently time to happen in your retirement years.
Your equity buildup over the years of ownership can be profound–both from paying down the loan and the (presumed) appreciation in property values. Together they may enable you to sell a free and clear property upon retiring or during retirement.
Yes, there are hassles to being a landlord. In the early years there is little cash flow and it is sometimes negative. There is a learning curve to both maintenance headaches and minimizing tenant hassles. But as you learn more the cash flow gets better. Most of all, beneath the surface, forced saving is occurring on your personal balance sheet. You learn to be frugal because your job income and property income demand it. Meanwhile you are quietly getting rich.[/quote]

+2 EP. Have been “quietly” doing this for years, as has most of our family. Of course, we’re all benefiting from this in our lifetimes, but we’re also glad to know our rentals, (unless we decide to sell them) are something we can leave our kids, which will enhance their lives as well.

[UCGal]

[quote=sdgrrl]

Flash forward to my hubbie- he invest in his 401k to the max, but the numbers still don’t make us feel comfortable. My income goes to savings as well, but it will take a great great deal of work to have the retirement my GF and FIL have had.[/quote]

As someone who’s a boomer by the definition above, but not by other definitions… (I’m 52 – my parents were born AFTER the greatest generation, dad served in the Korean conflict, not WWII, etc… )
I can offer this hindsight on retirement savings.

Saving early and maximizing doesn’t make big impacts in the early years… but once you reach a certain point, the compounding really kicks into gear. It took a REALLY long time to save my first $100k in my 401k. It was quicker to double it to 200k. Then it doubled again… etc. At some point the gains are bigger than the contributions, and your money is making money for you, not just increasing by the savings.

All that is a way of saying, don’t give up on maxing out the retirement savings. You’ll get there. I’m so glad I didn’t give up… I’m hoping to retire no later than 55…

[sdgrrl]

[quote=UCGal][quote=sdgrrl]

Flash forward to my hubbie- he invest in his 401k to the max, but the numbers still don’t make us feel comfortable. My income goes to savings as well, but it will take a great great deal of work to have the retirement my GF and FIL have had.[/quote]

As someone who’s a boomer by the definition above, but not by other definitions… (I’m 52 – my parents were born AFTER the greatest generation, dad served in the Korean conflict, not WWII, etc… )
I can offer this hindsight on retirement savings.

Saving early and maximizing doesn’t make big impacts in the early years… but once you reach a certain point, the compounding really kicks into gear. It took a REALLY long time to save my first $100k in my 401k. It was quicker to double it to 200k. Then it doubled again… etc. At some point the gains are bigger than the contributions, and your money is making money for you, not just increasing by the savings.

All that is a way of saying, don’t give up on maxing out the retirement savings. You’ll get there. I’m so glad I didn’t give up… I’m hoping to retire no later than 55…[/quote]

Glad to see you are still on here. Thank you for the advice. My generation- myself personally can be impatient. Thanks for the words to relax, keep contributing and watch it grow.

[Coronita]

Morale of the story. The tax loopholes and tax benefits for most common people are closing much faster than say for all the complex loopholes of I’d say corporations and and insanely rich…. Why? Because these things for more common people are lower hanging fruit…

Great if you’re older and was able to accumulate wealth when these benefits were more readily available. Sucks if you’re much younger just starting out… Those won’t be available for you anymore…

[FlyerInHi]

No big secret. It’s always easier to build wealth the closer you are to the top.

Generally, at the bottom of the pyramid you have the vast majority of workers.

Then you have the high paid professionals and managers.

Next comes business owners. Not tiny business but businesses employing hundreds.

Finally you have CEOs of large corporations and celebrities.

[joec]

Correct me if I am wrong, so if say my earned income (w-2) in my job is say 155k, however I have a paid and clear rental home I inherited from my parents that is paid off that generates say 30k in income a year (passive).

I also have another rental I own that I do depreciate against and currently, to simplify, say I’m running even to cash flowing. Assuming I depreciate 30k a year for that one, would I be able to pretty much eliminate my passive rental income from the other property?

I haven’t looked at this aspect of the tax code at all since I don’t have any rentals, but my guess is you could since they are the same class (both passive).

It just seems to me that no matter the tax laws, wealthy people will find ways around it to make it more beneficial for them which is now leading me to sorta favor having no corporate tax at all in America to allow re-patrioting of profits from foreign countries to at least put the money back in the US. US companies won’t pay taxes anyways and this actually helps the small business (me) that can’t afford to do these kinds of things.

Just pass the income straight through…

For the guy with the 155k income, maybe it makes sense to do a multi purchase (assuming you have the savings) to generate income in 1 property and another to write off depreciation from both. Not too certain, but maybe some of the slum lords here 🙂 can share what they do.

[Coronita]

[quote=joec]Correct me if I am wrong, so if say my earned income (w-2) in my job is say 155k, however I have a paid and clear rental home I inherited from my parents that is paid off that generates say 30k in income a year (passive).

I also have another rental I own that I do depreciate against and currently, to simplify, say I’m running even to cash flowing. Assuming I depreciate 30k a year for that one, would I be able to pretty much eliminate my passive rental income from the other property?

I haven’t looked at this aspect of the tax code at all since I don’t have any rentals, but my guess is you could since they are the same class (both passive).

It just seems to me that no matter the tax laws, wealthy people will find ways around it to make it more beneficial for them which is now leading me to sorta favor having no corporate tax at all in America to allow re-patrioting of profits from foreign countries to at least put the money back in the US. US companies won’t pay taxes anyways and this actually helps the small business (me) that can’t afford to do these kinds of things.

Just pass the income straight through…

For the guy with the 155k income, maybe it makes sense to do a multi purchase (assuming you have the savings) to generate income in 1 property and another to write off depreciation from both. Not too certain, but maybe some of the slum lords here 🙂 can share what they do.[/quote]

My understanding is that passive losses on one rental can be used to offset only gains on other passive gains, IE gains on other estate.

It’s considered “passive” if you didn’t “materially participate” in in rental activity… (IE you or your spouse aren’t a real estate professional that actively participate”…

In your scenario (again take what I say with a grain of salt since it’s a enginerd talking, not a finance/accountant talking)… Your $30k passive loss incurred on your second property would offset the $30k gain on your first property… But keep in mind if your $30k “loss” was from depreciation, when you sell the property, it is going to bite to in the arse by lowering the cost basis of that property when you sell…

That depreciation loss you claimed is “recaptured” at the time of sales of your property… And I believe the part of the gain from depreciation is subject to what’s called a 25% “recapture” tax if I’m not mistaken…

Also, you might have thought, “what if just avoid claiming depreciation on my property” so I can avoid the eventual 25% recapture tax… But ah yes, that’s the rub in the fine print from the IRS… The rub is the tax law requires depreciation recapture to be calculated on depreciation that was “allowed” OR “allowable”… (section 1250(b)(3))…
In other words, even if you don’t claim depreciation, you’re going to have to pay for the recapture tax when you sell the property anyway whether you claimed depreciation or not. So you might as well claim it…..

You can 1031 exchange it to defer that onto your next property, and keeping 1031 exchanging it indefinitely… but it goes on and on and on, and your next property has a lower cost basis from the depreciation of the previous one you rolled it from,etc,etc,etc…

Where you sort of escape from the depreciation recapture hit..is when you die, and your heirs inherit the property… In simple terms (roughly), when your heirs inherit the property, they get what’s called a “step-up” basis… The cost basis for your heirs of that inherited property ends up being the fair market value of that property at the time of your death… Basically, when a real estate is inherited, it starts with a new basis and new depreciation (more or less)…at least for now, until they change that tax rule too……Of course, there’s the other issue of inheritance tax, but that’s a separate discussion…

Again, consult a CPA if that applies to you.. I’m not an accountant, and if I butchered that in anyway, I stand corrected….

[SK in CV]

Here’s the deal on rental losses. If you’re not a real estate professional, real estate rental income is always passive. If the owner actively participates in management, net losses from all rental property of up to $25,000 per year can be used to offset other income, unless modified AGI is over $100K. If modified AGI is over $100K, then the loss limitation is reduced by $1 for every $2 of income, with the deductible losses completely phased out at income of $150K. (those numbers are cut in 1/2 for married taxpayers filing separately.) Unallowable losses are carried over until they can be fully used, or until the properties are disposed of, at which time all previously un-allowed losses can be deducted.

None of this means that the “tax shelter” aspect of real estate is lost, even for higher income taxpayers. If there is positive cash flow, but non-deductible losses for tax purposes, that cash flow is still tax-free (for the time being). Given all the talk I’ve read here over the last few months, about 7% plus cash on cash returns, this really shouldn’t cause much of a problem for recent investors. Even with 20% down payments, if cash flow is really 7% plus, tax losses should be pretty small. With 30% or more down and that kind of return, there won’t be any losses at all in most cases. But there will still be tax sheltered income.

[Coronita]

[quote=SK in CV]Here’s the deal on rental losses. If you’re not a real estate professional, real estate rental income is always passive. If the owner actively participates in management, net losses from all rental property of up to $25,000 per year can be used to offset other income, unless modified AGI is over $100K. If modified AGI is over $100K, then the loss limitation is reduced by $1 for every $2 of income, with the deductible losses completely phased out at income of $150K. (those numbers are cut in 1/2 for married taxpayers filing separately.) Unallowable losses are carried over until they can be fully used, or until the properties are disposed of, at which time all previously un-allowed losses can be deducted.

None of this means that the “tax shelter” aspect of real estate is lost, even for higher income taxpayers. If there is positive cash flow, but non-deductible losses for tax purposes, that cash flow is still tax-free (for the time being). Given all the talk I’ve read here over the last few months, about 7% plus cash on cash returns, this really shouldn’t cause much of a problem for recent investors. Even with 20% down payments, if cash flow is really 7% plus, tax losses should be pretty small. With 30% or more down and that kind of return, there won’t be any losses at all in most cases. But there will still be tax sheltered income.[/quote]

Carryover losses are kinda like dirt cheap loans to uncle sam, depending on the duration of the carryover…

$3000 loss incurred today that you need to carry over on your taxes is probably worth a heck of a lot less 10-15 years from now when you add it back to your taxes….

🙂

[joec]

Thanks for all the explanations. I was familiar with the depreciation recapture and all that, but from these scenarios, I don’t think it’ll be that bad since a lot of the tax situations could be controlled. If you are ultra wealthy, you can pass it on tax free, for less so, can’t you also just move into said property for 2 years and sell for the 500k tax free benefit as well?

I know a lot of other friends’ parents doing that over the past few years.

With tax code constantly changing, I think it’s just wise to keep deferring till you are in a situation where you can take the tax hit, and not be hurt too bad.

Sorta like now, if you are off work or between jobs, start converting your regular IRA to the Roth if it won’t cause much tax.

Get a mortgage just before you retire so you have a large tax deduction for any large IRA withdrawals required…

I suppose easier said than done for some folks since they never stop working. 🙂

[Coronita]

[quote=joec]Thanks for all the explanations. I was familiar with the depreciation recapture and all that, but from these scenarios, I don’t think it’ll be that bad since a lot of the tax situations could be controlled. If you are ultra wealthy, you can pass it on tax free, for less so, can’t you also just move into said property for 2 years and sell for the 500k tax free benefit as well?
[/quote]

Short answer. No…

Longer answer..

1) The move back in for 2 years and sell for $500k “tax free (joint)” is on capital gains only…. it wouldn’t be on the depreciation recapture portion…
So for example, if you bought a home for $300k, sold it for $500k and had $50k in depreciation while it was a rental, that $50k depreciation recapture would still be taxed….

That $200k capital gains is the portion that would be exempt from capital gains in full or in part..But keep in mind also that……

2) Even the rules of the $250k/$500k capital gains “tax free” has changed…. It’s not as simple as living there two years as your primary residence anymore and getting the entire $250k/$500k capital gains tax free (like it was under the old law)….. Specifically,

“A special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.” ”

Probably, from a “fairness” point of view, yes this is more of a fair rule…From a practical point of view…just as I stated early, one less tax benefit that older people were able to take advantage when they could versus younger people who haven’t taken advantage of this..

Don’t get my wrong, I’m not complaining (no, really… ok, maybe a little bit..) I’m just telling it how it is (I think)…Clocking is ticking my friends. Those older tax benefits sure seem to be closing fast…

[an]

I wonder what would happen to the early depreciated taxes if the property is foreclosed. Would you still be taxed if you refi to the hilt, then the next time the market crash, you just mail back the key. In essence, you’ve already gotten your tax free gain out.

[Coronita]

[quote=AN]I wonder what would happen to the early depreciated taxes if the property is foreclosed. Would you still be taxed if you refi to the hilt, then the next time the market crash, you just mail back the key. In essence, you’ve already gotten your tax free gain out.[/quote]

Not sure, never went through that scenario because never considered getting foreclosed on…….But….If I were to guess, I’d think from a tax perspective, foreclosure would be considered a “sale”…. You would recognize capital loss from the sale itself, and you would have gain from the depreciation….Whether you owe taxes would depend on how you net…

Personally, after my kid grows up to a point, I think I would want to try doing is selling my primary home every 2-4 years if I have any reasonable capital gains…. And buy another one…. Assuming that tax benefit still exists…

[FlyerInHi]

I’m seeing more ads for reverse mortgages. That’s indication of a growing sector of finance. Maybe it’s time to buy shares. Remember how? countrywide was a small outfit that grew to become the biggest mortgage lender.

This ad was in prime time national nbc news with Brian Williams today.
http://www.ispot.tv/ad/7qHN/aag-reverse-mortgage-too-good-featuring-fred-thompson

Fred Thompson said it was Ronald Reagan’s way of helping seniors access the cash they need to enjoy retirement.

Anyone with AARP getting reverse mortgage mailers?

[Coronita]

Since we’re on the topic of taxes… I got a new scenario for folks to figure out… (I don’t know the answer)…

1. Suppose you borrowed $50k from your traditional 401k…
2. Suppose you also have a Roth 401k….

Now you decided you want to pay back your 401k because you don’t want an outstanding loan… BUT, you really don’t want your total 401k (both traditional and roth account) value to really increase by $50k… (for sake of argument, you feel you don’t want to put $50k back into the stock/bond markets)…

Can you withdraw from your Roth 401k $50k, ALL from CONTRIBUTION portion without incurring a tax (since it was money you contributed after taxes)… and use that money to payback off the outstanding loan on your traditional 401k….

[an]

[quote=flu]Since we’re on the topic of taxes… I got a new scenario for folks to figure out… (I don’t know the answer)…

1. Suppose you borrowed $50k from your traditional 401k…
2. Suppose you also have a Roth 401k….

Now you decided you want to pay back your 401k because you don’t want an outstanding loan… BUT, you really don’t want your total 401k (both traditional and roth account) value to really increase by $50k… (for sake of argument, you feel you don’t want to put $50k back into the stock/bond markets)…

Can you withdraw from your Roth 401k $50k, ALL from CONTRIBUTION portion without incurring a tax (since it was money you contributed after taxes)… and use that money to payback off the outstanding loan on your traditional 401k….[/quote]
It all depends on your 401k. I’m not sure if you can withdraw from ROTH 401k (even if it’s just the contribution part). Maybe your 401k allow it, but mine only allow a hardship withdrawal while I’m still working for the company. However, my 401k rock in a sense that it allow me to be in cash. You might see if that option is for you and you can put in $50k and just leave it in cash if you don’t want to be in the market.

[FlyerInHi]

I think that reverse mortgage have a future.
It might be wise to invest now.

older people on this board might be financially secure but that doesn’t speak for the rest of the nation.

[The-Shoveler]

I definitely think reverse mortgage will be big for boomers.

If they can get about 50% equity in a house, it will allow them to live payment free.

This is the only way I would use it, If it was owned outright I would not do this IMO.

Just make sure everyone who needs to be on the mortgage is on it. That seems to be the biggest issue that comes up.

[SK in CV]

[quote=The-Shoveler]
Just make sure everyone who needs to be on the mortgage is on it. That seems to be the biggest issue that comes up.[/quote]

What do you mean by this?

[FlyerInHi]

we need to find a way to live another 100 years to see population declines worldwide. I wonder what that will do to real estate.

In the mean time, richer populations in emerging markets are increasing the demand for real estate in big metros around the globe.

[The-Shoveler]

I saw an article that LA/OC/SD were going to become one big mega City over the next 50 or so years.
Kind of like driving on the 5 from Anaheim until you get to Castaic LOL.
I hope they have automated flying cars.

[The-Shoveler]

I guess we should be hoping Texas steals more of Ca population.
At this point I honestly don’t think it will make a dent.

[The-Shoveler]

Very Simple,
Lets say you have a husband & wife, If the Husband only puts the reverse mortgage in his name.
And the husband kicks the bucket; usually the surviving wife gets booted from the home.
Everyone in the home who expects to be in the house till they “kick it” needs to be on the mortgage.

At least that is the way I understand it.

[Author]

Posts