4 ms·
One thing a middle class friend of mine does is the following: 1. Buy house 2. Rent out rooms 3. Deduct all expenses that you'd have to pay anyway, utilities
by tabeth 9y ago
One thing a middle class friend of mine does is the following:
1. Buy house
2. Rent out rooms
3. Deduct all expenses that you'd have to pay anyway, utilities, internet, etc. as "business expenses".
4. Depreciate house
5. Renovate the house and depreciate the new fixtures/additions/etc.
6. Reappraise the house after a certain time and refinance.
7. Take money out after refinancing and buy more property.
Go back to (1).
It's pretty much foolproof. The tough part is being an owner-occupied landlord for a bit to get to the point where (6) is worth while. You also have to be in a hot market.
- vasilipupkin 9y agowhen you sell those properties, you still have to pay all the taxes. Depreciating doesn't save you from having to pay tax, it just defers the tax liability to the future.
- tabeth 9y agoYou have to pay depreciation recapture tax whether or not you actually depreciate your house[1]. Not depreciating a rental property is just stupid. [0] https://www.thebalance.com/depreciation-recapture-3192979 https://www.thebalance.com/depreciation-recapture-3192979 [1] Internal Revenue Code section 1250(b)(3)
- vasilipupkin 9y agoI agree, I am just saying, depreciation is not a free pass, since when you sell, you have to pay the tax.
- tabeth 9y agoTrue, but you'd have to pay tax either way (e.g. don't have a rental and pay capital gains, though this is minimized if you're a first time homeowner), is what I'm saying. Though, the cool thing is that if your house is a rental (as opposed to residential) you can actually offset depreciation recapture by passive loss throughout the time the property was a rental. Often this completely negates the tax. Man... too many benefits are given to those who own property.
- vasilipupkin 9y agodoesn't passive loss lower your tax basis? so, no, I don't think it negates the tax.
- tabeth 9y agoYou're right, however in the original scenario proposed you'd sell your property and buy another one, enacting like kind exchange. So then you don't have to pay any taxes.
- abhinavkulkarni 9y agoNot if you do a 1031 exchange. In that case, you never pay taxes on the depreciation. It just basically becomes a snowball, you keep on upgrading properties.