Reducing your tax bill…401k or Maximizing your primary mortgage interest deduction and buying rental properties.

[Coronita]

When I was a younger a friend of my parents once made the following comment….

“The only thing I do with my 401k is that I contribute to the amount that the company matches… Beyond which, I don’t bother to contribute anymore…Instead I cash-out refinance as much as possible on my primary home and use the cashed-out money to buy rental property in full. If I contribute to my 401k, although it lowers my taxable income, all I’m doing is deferring the taxes that I need to pay… If I take out as much equity as I can on my primary, and use it to buy a rental property, I can itemize the mortgage interest, which also lowers my taxable income. Furthermore, being rental property, there are more variables to play with in terms of rental “costs” to offset the rental income.

Comments?

[SK in CV]

How long ago? How’d it work out for him?

[Coronita]

[quote=SK in CV]How long ago? How’d it work out for him?[/quote]

I think the guy was in about mid 40ies back in 1990. Last I heard was he retired at 65 with about 15million from selling his real estate holdings. (Just a normal employee… No management title, no side business aside from is RE holdings.) My parents 401k/retirement was nowhere near that.

I guess the dude kept rolling and rolling the rental through exchanges. I suspect what he might have also done, is moved into each rental and lived for 2years to establish that home as a primary residence to take advantage of the $500k or so exemption. But he must have done that while he was still working

I didn’t want to poke and prod too much at the time, but was just curious for folks financially savy if this could have possibly been the case.

[SK in CV]

Sounds like his timing was right. Maybe even perfect. If he’d been doing that beginning in say….2002, and continued through 2007 or 2008, it wouldn’t have looked so pretty. Highly leveraged RE can be risky, with commensurate potential rewards. I don’t have to tell anyone here that. Glad his timing was right.

[Coronita]

[quote=SK in CV]Sounds like his timing was right. Maybe even perfect. If he’d been doing that beginning in say….2002, and continued through 2007 or 2008, it wouldn’t have looked so pretty. Highly leveraged RE can be risky, with commensurate potential rewards. I don’t have to tell anyone here that. Glad his timing was right.[/quote]

It begs the question though. If he did it at the time around the 90ies when RE was more or less trashed…Would a repeat encore right now yield similar results (unless we think a major correction is still enroute).

If he took out a bigger mortgage, I’m assuming he was also getting additional income from rent. So paying for his total mortgage on his primary was still coming from his regular job + now from rental income. And I assume that his rental income was at least break even with the additional amount he now needed to pay on his larger mortgage. Where I would could think he would have gotten burned if he couldn’t rent on the place or rented out the place for far less than his higher primary mortgage.

As far as if the rental property value fell..Well, it’s really not his problem either, because he’s not really paying for it…His renters were, right?

Also, back then…he did this when there still was mortgage interest rate deduction phaseout. So I’m just curious how the hell he did this.

I don’t think if it was him, he could have done this in 2002 throughout 2007/8. Because during this time he wouldn’t have been able to find decent property that he could have cash flowed…And I don;t think most people in this scenerio would rent out at a loss…

Sorry, my mind is totally fried right now. Maybe I’m just not thinking straight.

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