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The-Shoveler.
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February 17, 2014 at 8:55 AM #771060February 17, 2014 at 11:13 AM #771063
EconProf
Participant[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.February 17, 2014 at 11:51 AM #771064dumbrenter
Participant[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.February 17, 2014 at 12:30 PM #771065
CoronitaParticipant[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…
February 17, 2014 at 12:39 PM #771066CoronitaParticipantMorale 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…
February 17, 2014 at 2:05 PM #771067FlyerInHi
GuestNo 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.
February 17, 2014 at 5:53 PM #771068joec
ParticipantCorrect 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.
February 17, 2014 at 8:17 PM #771070GuestI’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-thompsonFred 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?
February 17, 2014 at 9:40 PM #771071CoronitaParticipant[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….
February 17, 2014 at 9:45 PM #771072SK in CV
ParticipantHere’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.
February 17, 2014 at 9:58 PM #771073CoronitaParticipant[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….
🙂
February 18, 2014 at 6:43 PM #771080ParticipantThanks 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. 🙂
February 18, 2014 at 11:07 PM #771088CoronitaParticipant[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…
February 18, 2014 at 11:09 PM #771090an
ParticipantI 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.
February 18, 2014 at 11:18 PM #771091CoronitaParticipant[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…
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