3 ms·

Can someone clarify this piece for me? I don't understand how the author is able to completely avoid taxation on the rents. >My wife and I don’t need the mone

Can someone clarify this piece for me? I don't understand how the author is able to completely avoid taxation on the rents. >My wife and I don’t need the money we make from owning most of the business. We live off the salaries of our jobs, and reinvest virtually our entire share of the business. These reinvestments count as “losses,” and so officially we have never made any income or paid income taxes on our share of the business.

aerovistae 9y ago
If they took any sort of money from their business, it would be taxed as income. But if the money just stays inside the business and is used to buy more rental buildings-- what's there to tax? So the business keeps growing and growing. Case A: the owners take a paycheck of $100,000. It gets taxed at 30%, they get $70k. Case B: the owners take no paycheck but instead buy a $100,000 property through the business with the business's earnings. They pay no tax but now own a $100,000 property which will now augment the business's earnings further. Down the road years later, they finally take a paycheck at $300,000, which is taxed down to like $180,000 or something. Still more than 2.5x the Case A payout, and let's not forget they own that much more property now on top of everything else.
- erikcw 9y ago
  But in Case B, wouldn't they have to pay the corporate income tax on that $100,000 before they buy the next property (39.1% in 2017)? I thought each property is a capital expense which gets depreciated over time. So you can't buy a second property with your profits and deduct it as an expense in the current year. Am I missing something?
  - aerovistae 9y ago
    You're probably not missing something. I could be wrong.
- harryh 9y ago
  This isn't true in the United States if the business is organized as an LLC which is definitely the most common way of handling residential real estate. I, like bigtunacan, am very curious about this part of the story. It doesn't really add up. EDIT: thinking about this more I suppose that one possibility is that the operator brother is taking basically all of the rent as income and the financier brother, instead of making a return from rent, is hoping to make a return from appreciation (selling the houses later for a profit). TBH this doesn't seem super likely to me either, but it's possible. I really don't think that the author is correctly explaining his tax situation (which is fine. it wasn't the main thrust of the post).

aerovistae 9y ago

If they took any sort of money from their business, it would be taxed as income. But if the money just stays inside the business and is used to buy more rental buildings-- what's there to tax? So the business keeps growing and growing. Case A: the owners take a paycheck of $100,000. It gets taxed at 30%, they get $70k. Case B: the owners take no paycheck but instead buy a $100,000 property through the business with the business's earnings. They pay no tax but now own a $100,000 property which will now augment the business's earnings further. Down the road years later, they finally take a paycheck at $300,000, which is taxed down to like $180,000 or something. Still more than 2.5x the Case A payout, and let's not forget they own that much more property now on top of everything else.

erikcw 9y ago
But in Case B, wouldn't they have to pay the corporate income tax on that $100,000 before they buy the next property (39.1% in 2017)? I thought each property is a capital expense which gets depreciated over time. So you can't buy a second property with your profits and deduct it as an expense in the current year. Am I missing something?
- aerovistae 9y ago
  You're probably not missing something. I could be wrong.
harryh 9y ago
This isn't true in the United States if the business is organized as an LLC which is definitely the most common way of handling residential real estate. I, like bigtunacan, am very curious about this part of the story. It doesn't really add up. EDIT: thinking about this more I suppose that one possibility is that the operator brother is taking basically all of the rent as income and the financier brother, instead of making a return from rent, is hoping to make a return from appreciation (selling the houses later for a profit). TBH this doesn't seem super likely to me either, but it's possible. I really don't think that the author is correctly explaining his tax situation (which is fine. it wasn't the main thrust of the post).