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Housing in the US has gotten to where it is due to horrible laws effectively allowing total tax avoidance for landlords. Take some investment property. You buy

Housing in the US has gotten to where it is due to horrible laws effectively allowing total tax avoidance for landlords. Take some investment property. You buy it at some basis price, let's say 500k. You rent it out for 15k a year. Each year you can offset your rental income against deprecation of the property and property taxes - meaning, you pay no income tax on your rental income. ~30 years later, you've deprecated it down to an effective value of $0, so you hypothetically would have to start paying taxes on your rental income(of course, you can still deduct property taxes against that). What do you do? Well, there's something called a 1031 exchange - this lets you sell an investment property, and as long as the funds go directly into another investment property, you pay no capital gains taxes. So guess what? You can buy a brand new investment property with a new(albeit adjusted) cost basis, and you can start the entire cycle of depreciation and deduction all over again on your new, more expensive, property. So, you've now held this property your entire life, and you die and pass it to your kids - well, great news, unless your estate is over 12 million dollars(and double that for a married couple), you pay no estate taxes. And even more fun - when you inherit property, the cost basis is "reset" to the present day value of the property at time of inheritance - So your children can now rent the property out, deprecate it, and pay no income tax on the rental income either, and continue the cycle. The net result is that rental properties generate a ton of income for the owners, who pay almost nothing in taxes. Even if they do pay property tax, property tax rates are generally much lower than income tax rates.

jraby3 4y ago
It’s even worse. Take a look at the cost segregation rules.
sudosysgen 4y ago
That's horrific. From a quick back of the envelope calculation that's hundreds of billions of unrealized taxes.
refurb 4y ago
You’re ignoring depreciation recapture which can have significant tax implications even with a 1031 exchange. It basically claws back the depreciation you used to offset rental income.
adamsmith143 4y ago
Little wrinkle in your calculation is that 15000 in rental income doesn't even cover half of your Mortgage + Property Tax bill.
- Supermancho 4y ago
  > 15000 in rental income doesn't even cover half of your Mortgage That depends on how much you put as a down payment. Work backwards from the payment to make it sensible.
  - adamsmith143 4y ago
    Give me a break. You'd need a down payment of ~400K to have a mortgage low enough to barely break even at $15,000 in rent per year. None of his math makes sense. Of course you would really rent a 500k property at something more like 2500 a month but even then you'd need a down payment near 200k to start making a profit.
    - foobarian 4y ago
      You don't need to make a profit, there are ways to get loans against the property and continue acquiring more inventory.
      - adamsmith143 4y ago
        Well this ain't a startup with VC funding. How long can you reasonably have negative cashflow like this before you personally go bankrupt?
        Supermancho 4y ago
        Land is often leveraged by creation of negative (or net neutral) commercial enterprises to gamify population growth (and inflation). eg https://www.silverstarcarwashes.com/latest-news/silverstar-car-wash-breaks-ground-on-three-new-locations-in-fargo/ https://www.silverstarcarwashes.com/latest-news/silverstar-c... (this is of 6 planned) Because of the city tax conditions and depreciation schemes available, enough capital will turn a net negative run cost into a positive capital sale in less than 10 years. It's the same thing as flat asphalt parking lot developments that covered southern california commercial land until the 90s. It seems to be a gamification of city growth incentives.
sfe22 4y ago
It is easy to pick an example like this to show the “bad” sides. But what is the alternative? If people had to pay inheritance tax on their family home, how many could not afford such a tax bill and would have to get rid of their family home to please the tax man. Regarding the cost basis rest that is so people can upgrade their house without having to pay a tax bill. This is just deferring the tax not avoiding it. Without this it would be much harder to get a bigger house once you have kids. Most people would have a harder time moving and removing this would lower our quality of life.
- namdnay 4y ago
  > If people had to pay inheritance tax on their family home, how many could not afford such a tax bill and would have to get rid of their family home to please the tax man. so if they can't afford to pay tax on the windfall, they'd have to sell the house and buy a smaller one. is that the end of the world? > Regarding the cost basis rest that is so people can upgrade their house without having to pay a tax bill what they have in many european countries is that you can do this only on your primary residence. so you let people upgrade their homes, but not their rental properties
  - namelessoracle 4y ago
    So a family on hard times should be forced to leave their grandmothers home when she dies and hope they can find a new one? Gentrification can easily push a property in the place they've lived their whole lives out of their price range. And the family home might not have been super well kept up so the "windfall" isn't as big as the property values in the area may reflect. This happens now with gentrification in big cities, it would get worse with what you are saying. Being able to leave something to your descendants is a critical part of society. If people know they cant leave anything behind they start acting differently (and not in a good way). I understand a key part of communism is you and your family own nothing, but trust me you don't want people to have a use it or lose it attitude towards everything.
    - charlescearl 4y ago
mminer237 4y ago
You don't write off your rental income. You depreciate the rental property over 27½ years and write that off against your rental income. Few rental properties will have under a 3.7% ROI where depreciation would cover all the income. At best you might be paying half tax. In your example, you'd pay no tax, but you'd lose out on the potential income you could have had with better investments (and lose about 6 years' worth of depreciation by the depreciation then being too fast). And flipping to more and more expensive properties through 1031s requires more and more capital and only makes it cover less taxes. There's no tax benefits versus just keeping the first property and paying all the taxes and buying a separate property to depreciate. If you sell a $500k property earning $40k/year where the depreciation covered 45% of your income, and you buy a $1 million property earning $80k/year, you get a new $500k to depreciate $18k/year. Then the depreciation only covers 22% of your income. Depreciation is very fundamental to business tax law. I'm not sure how you'd "fix" that without penalizing non-rental companies for expanding.
- sbf501 4y ago
  We need a third party to validate both of your claims, because I don't know where to start to understand who is right. This is an example of someone (me) who wants to understand the issue, but would need to google for days to understand both arguments.
  - deleted 4y ago
    [deleted]
  - toss1 4y ago
    The rebuttal by mminer237 is much closer to right [0]. Also it isn't even as good as mminer237 mentions, as many states also have a much lower exemption, and there is work in congress to get rid of the step-up in basis (a bad thing, imo) and to reduce the $12MM lifetime gift & estate exemption (a very good thing). So yes, there are some advantages, but OP is vastly exaggerating as if it is some freebie to landlords when it is not. There were some freebies introduced in the bills in the Trump term for the type of LLCs that Trump runs, but IDK if they were fixed in legislation in this term. If you want a general complaint, perhaps the angle is that capital is taxed much less than labor, under some notion that lower taxation is necessary to get people with capitol to actually deploy it in investments. I think that is provably false, and certainly does not require the level of tax code favoritism it currently enjoys. [0] source: tax & estate attny at biglaw firm in the household, although this is just from info absorbed by osmosis over years and is NOT a detailed legal analysis.
throwaway908724 4y ago
Wow, I wish. I'm speaking as someone who put all his retirement savings into index funds year after year, but then married someone whose job is related to real estate. Real estate feels more concrete and understandable to her than finance, so that's where our money goes now. It's not easy free money, and I don't know why you would think that any high-profile, low-barrier-to-entry investment would be easy free money. Half of my friends have either bought property or are constantly talking about it. My friends are part of a horde of first-timers who believe, like you, that it's easy free money, and their belief inflates prices. And that's not just my amateur opinion: my wife and I sit in on a developer happy hour where experienced developers constantly bemoan that they haven't been able to work with certain types of property in years, because they get outbid by naive first-time buyers who don't have a plan for making money other than betting on the market going endlessly up. People who are looking for income rather than appreciation are not seeing opportunities at the current prices. Thanks to my wife managing our properties herself and having a lot of applicable skills from her profession, we manage to make some money, but every hour she spends managing property is an hour less (or two, really) that she can bill her clients. I doubt that if we adjusted for that it would work out to be a wise use of time. It's work she enjoys and finds satisfying, so we don't look that closely at whether her time (or our money) would be more profitably invested elsewhere, but I'm certainly not quitting my software development job to double our commitment to real estate. I'm in Austin, one of the hottest markets in the country, so in the end, it's possible that everyone regardless of how naive they are will be rewarded by continued appreciation. Income from real estate hasn't been a game-changing multiplier for us, but appreciation might be. Or not. That aspect of it is just a gamble.
- rhacker 4y ago
  It sounds like you're landlords, but you didn't explicitly state it. But isn't your tenant basically paying off each property, over the next 30 years. So right now your debt load may be high, but you're not experiencing that. You're just paying off the loans from rental income and handling the overage (prop tax and fixes) with the dev job. So in 30 years the two of you will have like 40M dollars paid over the backs of renters by selling all those properties.. I mean that's fine, it's legal. But if that's the goal of real-estate, then of course it will never be affordable to the next generations. Everyone wants to do what you are doing.
2OEH8eoCRo0 4y ago
> unless your estate is over 12 million dollars(and double that for a married couple), you pay no estate taxes. Why aren't estates just taxed as income to the entity who it goes to? If my father croaks and leaves me $1m it should count as an additional $1m of income to me that year.
- rhacker 4y ago
  how do you tax a house that isn't a dollar amount?
- ROTMetro 4y ago
  Fine, as long as you tax based on what was paid for the property. The father is giving his invested money, no one chose to 'realize' at the current valuation, it is happening because of a traumatic family event.
  - fwsgonzo 4y ago
    That sounds fair to me. I wonder if there any countries already doing it this way?
- 0x138d5 4y ago
  That would be awesome for gentrification. Jack up the property prices and when the owners pass, their heirs will be forced to sell.
- TrueSlacker0 4y ago
  "If my father croaks and leaves me $1m it should count as an additional $1m of income to me that year. " If it is $1m in property value, do you count that as still $1m of income? If so unless the child is in great financial situation with a lot of already liquid cash, they would be forced to sell part/all of the property to pay the taxes. If a parent croaks and has a small business, mom and pop style. How would that be handled? If they had a small corner store making 100k/profit but has no assets vs a shop that sells very expensive equipment making 100k/yr in profit. But has hundreds of thousand in assets that would pass down.
dkarl 4y ago
This is a really counterproductive take, not because of the ways it's wrong about how rental income works, but because it paints a completely wrong-headed picture of whose interests are opposed to progress. People who own property they don't live on stand to make a lot of money under policies that allow them to build more and build denser. It's homeowners who are opposed. EDIT: Lots of propaganda in these comments painting individual homeownership as the cure for our housing crisis. It's not. It's the cause.
0000011111 4y ago
Ya I think you are leaving out the concept of Deprecation Recapture. In short, if I buy the rental property for $10. Deprecate it to $0 over 27.5 years. Then Sell it for $20. I then haft to pay taxes on the sale of the profitable asset. ###### Depreciation recapture is a tax provision that allows the IRS to collect taxes on any profitable sale of an asset that the taxpayer had used to previously offset taxable income ###### https://www.investopedia.com/terms/d/depreciationrecapture.asp#:~:text=What%20Is%20Depreciation%20Recapture%3F,basis%20or%20adjusted%20cost%20basis https://www.investopedia.com/terms/d/depreciationrecapture.a....
tomrod 4y ago
I really don't understand what you're describing. Can you recommend a place where I could learn more about "deprecation of the property and property taxes"?
effingwewt 4y ago
And it gets better! They now have the added buffer of rental/leasing agencies! Many of these are fly-by-night and skirt or outright ignore inconvenient laws like renter's rights. Repairs? Cost sink, just don't renew complaintant's lease. Bonus you get to raise the rent again! Want to get in touch with the owner? Most times you'll have to look up tax records and hope it's actually in the owner's name. Makes rental properties probably 90/10 profit/cost. I know people on both sides of the equation and it's more than a little insane the entitlement some landlords feel.
- rootos 4y ago
  Rental/leasing agencies can ignore laws...but the courts don't. And the machinery of law enforcement, from bailiffs to cops to IRS revenue agents, keep both sides somewhat in line.
  - brnaftr361 4y ago
    That's cute, but 95% of people don't have the time or money for pursuing justice, myself included.
- supertrope 4y ago
  The heart of the problem is low vacancy giving landlords market power. The inherent scarcity of land in desirable locations is amplified by zoning laws keeping housing supply growing much slower than demand. When 90% of urban land is zoned for single family housing and it is literally illegal to build a duplex let alone an apartment building you will have a shortage. Eliminate parking minimums, setbacks, feature area ratio, height limitations, endless environment impact lawsuits, and build!
TrackerFF 4y ago
When purchasing real-estate in a hot area, the real money comes from increasing prices. Some cities have had something like 10% - 15% annual growth, for 10 years straight. Banks are also much more forgiving when it comes to down-payment, when they know it's going to be a rental, and you already have other rentals as collateral. In essence, purchasing a rental unit with only 1%-5% down payment up-front, is kind of like purchasing stocks with 20x - 100x leverage. As long as you meet your mortgage payments, get steady rent, and don't get any crazy expenses - you're sitting on a goldmine. Some of the guys I went to school with did just that. Bought a rental unit, while working. All their salary went toward down-payment of the next unit, and the banks were very forgiving when it came to new loans. After 10 years they had a nice portfolio of rentals, which they then sold to typical real-estate investment funds.
- mateo411 4y ago
  > Banks are also much more forgiving when it comes to down-payment, when they know it's going to be a rental, and you already have other rentals as collateral. I don't think that's true. The interest rate on your loan will be more expensive if it's an investment property and the LTV requirements are more strict.
- oogali 4y ago
  If the bank knows it's a rental, it's considered a commercial mortgage with a minimum of 25% down. And if you're lying to the bank by saying it's a residence when it's meant for rental -- you've just committed fraud (it's one of the clauses in your mortgage).
bsedlm 4y ago
I think taxes stopped making sense since 1971 when the USD became a fully fiat currency. if the government can print money, what's the point of collecting money through taxes?
- ralston3 4y ago
  Taxes creates demand for USD (an artificial way of giving fiat USD "value")
- JamesBarney 4y ago
  Countries that try to print money instead of collecting taxes usually end up with pretty bad inflation.
  - bsedlm 4y ago
    interesting... https://www.quora.com/Why-has-the-IRS-been-repeatedly-defunded-and-made-increasingly-inefficient-and-inconvenient-to-interact-with?share=1 https://www.quora.com/Why-has-the-IRS-been-repeatedly-defund...
- raindear 4y ago
  Progressive taxation.
- thehappypm 4y ago
  This is actually a really interesting question. There’s a really good argument to be made that taxes are actually a huge part of why dollars have a stable value. Let’s say you buy a house for $1 million. 1% interest rate means you have to pay $10,000 every year to your local tax board. That means that you need to acquire US$10,000 or you lose your home. That means you need to earn USD. If the USD hyperinflated, 1% of your house is now $100,000. Now you need to go earn $100,000 and pay that in taxes — which is actually making dollars more in demand, countering inflation.
  - bsedlm 4y ago
    very interesting... now add in asset forfeiture driven by legally mandated black markets and the picture is ever so slightly more complete.
ErikVandeWater 4y ago
The effects of lowering taxes on rental income is complicated. If you lower the taxes on rental income, more people will buy houses (and build new ones!) to take advantage of the reduction in taxes. However, they will still have to rent the apartments/houses out at market prices. The rental price will go down because now there is a greater supply of houses, and renting out an apartment at a lower rent is equally profitable as before (since you don't have to pay as much in taxes). The cost of purchasing a house, however will increase, because there are more landlords competing to purchase the house with you. Overall, the real problem is zoning single family homes everywhere, and rent control that disincentivizes building new housing.
sinecure 4y ago
I disagree that the 1031 exchange laws are detrimental to society. In fact, I would argue that their existence boosts the rate of development and increases housing supply in the US. Firstly, why does the government deserve to tax these transactions at all? These landlords are already taxed on their income from their jobs, pay property taxes, pay taxes on all the products they buy. The government is extracting plenty of wealth from its citizens, why on earth would we demand more of people just for being successful in real estate? Will the government put their money to better use than these people spending it themselves on products and services? I think anyone who engages with public sector projects and services knows that the government does not efficiently spend money. Let's imagine a world where 1031 exchanges are banned. What happens? Wealthy investors no longer sell properties at the same rate. What's the point? If my apartment building is cash flowing every year, and I'm stuck paying a huge capital gain tax on the sale, I'll just hold it for life and enjoy the cash flow. The rate of real estate transactions would collapse overnight, killing all of the jobs connected to it from appraisers, to brokers, to investment firms and wealth advisors. Now, not only does the government get less tax revenue because overall real estate transactions and taxable events are diminishing, but there is less incentive to build new projects. The appetite of 1031 exchange buyers is one of the driving factors in development of new commercial real estate projects in the market! The profit motive spurs growth. Look at the Opportunity Zone legislation of 2017, a once in a lifetime chance to defer and eliminate capital gains as long as you are investing those gain dollars into real estate development in blighted areas. This tax incentive alone has generated hundreds of thousands of new residential units on the market that would never have been built without the tax incentive. Taxing real estate more would only slow growth, if we want people to take the time, effort and risk to build more housing units in the US, we need to incentivize them with less taxes.. not more.
carom 4y ago
Taxes have nothing to do with insane rental prices. It is zoning that favors single family homes.
- namlem 4y ago
  Single family zoning, plus parking minimums, minimum floor-area-ratios, and minimum lot sizes.
  - carom 4y ago
    Preach. I have a property zoned for 14 units, the entire ground floor will be parking in order to build that many.
mdavis6890 4y ago
Really the only problem here is the step-up cost-basis at death that you mention. This is indeed a big problem, and the fix is simple: Your heirs inherit your cost-basis as well (likely $0), so that when/if they sell it they have to pay taxes on the whole capital gain. We could also force the payments over some years, by increasing the cost basis and taxing on that amount. e.g. I inherit a property worth $1M and zero cost basis. After one year, I have to pay capital gains taxes on $100k, but my cost basis also goes up by $100k. Repeat each year up to $1M. The other stuff (depreciation, 1031 exchange) are very sensible accounting. Depreciation applies only to the improvements (buildings) on the land, not the value of the land itself. This reflects genuine loss of value over time (buildings wear out). And in the event that you sell the property at a profit down the road, you have to pay back all that tax savings at higher regular income rates (not lower capital gains rates). This is called "depreciation recapture." So depreciation can defer taxes, but not eliminate them. Likewise, when you do a 1031 exchange, your new property ends up with a lower cost basis based on the previous property, so that when you later sell it you still have to pay all that capital gains tax and depreciation recapture. It defers but does not reduce or eliminate taxes. Of course - if you die while holding these properties, then your heirs get the cost basis reset ("stepped up"), which does indeed eliminate all these taxes. This is what we need to fix.
- deleted 4y ago
  [deleted]
- Enginerrrd 4y ago
  >Really the only problem here is the step-up cost-basis at death that you mention. This is indeed a big problem Why is that a problem?
  - mdavis6890 4y ago
    It provides a large artificial financial incentive to hold onto a property that you otherwise would sell. I also think it's not right to create this kind of arbitrary, large tax break that only applies in specific circumstances. I think if we're going to have a capital-gains tax (and maybe we shouldn't), then we should keep it simple and not have carve-outs. If I sell my house while I'm on my death bed, I pay all the taxes. If I wait a week to die first, and then my heirs sell, no tax. This is wrong and unnecessary.
dgs_sgd 4y ago
But this only works as long as the property's price is depreciating. Don't property prices generally trend up over time?
- ChrisLomont 4y ago
  As long as the owner puts significant money into the property over time to fight depreciation. Entropy applies to houses after all.
ChrisLomont 4y ago
>you pay no income tax on your rental income And are losing value on the property, which is the point of depreciation. >~30 years later, you've deprecated it down to an effective value of $0 An no one will now rent, since your building has an effective value of $0 since it has become crap. All throughout your list you ignore all the costs involved in being a landlord. Have any friends that have tried it? (I do). Did they become silly rich? Or did they quit because it is a major problem to actually make it very profitable versus other uses of capital and time? I'm a decently saavy investor (in many things), and have watched multiple friends start up rental properties, only to stop once it became clear that tenants destroy things, costs to maintain properties are volatile and astronomical, the work required is significant, and so on. I have done the math on real estate investing many times, and each time have decided the returns are not worth it. >The net result is that rental properties generate a ton of income for the owners If it were so profitable, then tons of capital currently being spent on other uses (tech, medical, finance) would instead go into buying up more housing. But the fact is that being a landlord is not very profitable, so capital doesn't flood into that market - it is still mostly elsewhere. Historically, housing has performed quite similar to the stock market for returns - as it should be. If housing were a better investment, money would flow in until they balanced. If housing is too poor an investment by screwing with taxes, then money will flow out into other more productive places. And if money flows out, people wanting housing will then have to pay even higher prices for less stock.
- wonnor 4y ago
  >>~30 years later, you've deprecated it down to an effective value of $0 >An no one will now rent, since your building has an effective value of $0 since it has become crap. Are you really in good faith trying to argue that nobody will rent a house that is 30+ years old?
  - bitexploder 4y ago
    Narrator: They were not arguing in good faith. I know we like to give the benefit of doubt here on HN, but that crosses a line. Landlords are known to perhaps not take the best care of their property, but in general, even if a tenant totally trashes the place it isn't too hard to strip down whatever got abused and rebuild it. Same thing happened to us when we rented a property. Tenant did as much damage as you can imagine with pets and abuse short of ripping wires and pipes out of the walls. It was really annoying to fix, but not hard. In the [late] 2020 real estate market it was easy to sell it and the house appreciated like 30-40K since we sold it easily.
cko 4y ago
As a former landlord for nine years, this is pretty correct. I did the tax deferred exchange thing once. Then I sold for cash (a pretty big no-no in terms of real estate investing) because I didn't enjoy such a concentrated risk. When I sold, there's something called depreciation recapture. If the 27.5 year depreciation thing was used to offset your income taxes, part of your gains gets taxed as ordinary income. The cost basis of property is also lowered so that the capital gains is higher. There's also tax trick called cost segregation that lets you depreciate certain parts of your property at an accelerated rate. Basically, as the OP says, keep doing the 1031 exchange until you're dead and your heirs don't have to worry about depreciation recapture.
Kalium 4y ago
If you're in California, your children also get to inherit your price-controlled tax assessment.
- jjav 4y ago
  Only if they live in it.
jklinger410 4y ago
This system is clearly designed to subsidize and create new landlords. Which is one of many desperate micro-economies that American capitalism has spun up in order to manufacture economic activity. We should be doing the opposite.
kelnos 4y ago
> Each year you can offset your rental income against [...] property taxes The ridiculous thing is that, since the SALT deduction cap went into effect (and so narrowly avoided the axe this past week, ugh), people who live in states with high property taxes end up being able to deduct only a small amount of their property taxes on their primary home, but if they own investment property, they can typically still deduct all of it -- and I believe they can deduct on their state taxes as well, whereas the SALT deduction is only available at the federal level.
throwoutway 4y ago
You’re confusing things. You do pay property tax regardless. You can deduct that from your income on federal (and probably state) tax return. But you definitely pay property tax. And some states have no income tax but very high property tax, and don’t get any sort of state deduction
xyzzyz 4y ago
All of what you describe above is good for the rental and housing market. It brings the rents down. Imagine the alternative, where all the depreciation rules you describe above don’t exist, and landlords have to pay a bunch more tax. In that world, the government has some extra money in the coffers, but how does anyone else benefit? Rents will not go down because landlords have to pay more tax, in fact quite the opposite will happen. Really, I get that you might have moral feelings of unfairness about it, but you are focusing on a minor aspect of the housing market that only has positive impact on rents by bringing them lower.
swiley-taway 4y ago

jraby3 4y ago

It’s even worse. Take a look at the cost segregation rules.

sudosysgen 4y ago

That's horrific. From a quick back of the envelope calculation that's hundreds of billions of unrealized taxes.

refurb 4y ago

You’re ignoring depreciation recapture which can have significant tax implications even with a 1031 exchange. It basically claws back the depreciation you used to offset rental income.

adamsmith143 4y ago

Little wrinkle in your calculation is that 15000 in rental income doesn't even cover half of your Mortgage + Property Tax bill.

Supermancho 4y ago
> 15000 in rental income doesn't even cover half of your Mortgage That depends on how much you put as a down payment. Work backwards from the payment to make it sensible.
- adamsmith143 4y ago
  Give me a break. You'd need a down payment of ~400K to have a mortgage low enough to barely break even at $15,000 in rent per year. None of his math makes sense. Of course you would really rent a 500k property at something more like 2500 a month but even then you'd need a down payment near 200k to start making a profit.
  - foobarian 4y ago
    You don't need to make a profit, there are ways to get loans against the property and continue acquiring more inventory.
    - adamsmith143 4y ago
      Well this ain't a startup with VC funding. How long can you reasonably have negative cashflow like this before you personally go bankrupt?
      - Supermancho 4y ago
        Land is often leveraged by creation of negative (or net neutral) commercial enterprises to gamify population growth (and inflation). eg https://www.silverstarcarwashes.com/latest-news/silverstar-car-wash-breaks-ground-on-three-new-locations-in-fargo/ https://www.silverstarcarwashes.com/latest-news/silverstar-c... (this is of 6 planned) Because of the city tax conditions and depreciation schemes available, enough capital will turn a net negative run cost into a positive capital sale in less than 10 years. It's the same thing as flat asphalt parking lot developments that covered southern california commercial land until the 90s. It seems to be a gamification of city growth incentives.

sfe22 4y ago

It is easy to pick an example like this to show the “bad” sides. But what is the alternative? If people had to pay inheritance tax on their family home, how many could not afford such a tax bill and would have to get rid of their family home to please the tax man. Regarding the cost basis rest that is so people can upgrade their house without having to pay a tax bill. This is just deferring the tax not avoiding it. Without this it would be much harder to get a bigger house once you have kids. Most people would have a harder time moving and removing this would lower our quality of life.

namdnay 4y ago
> If people had to pay inheritance tax on their family home, how many could not afford such a tax bill and would have to get rid of their family home to please the tax man. so if they can't afford to pay tax on the windfall, they'd have to sell the house and buy a smaller one. is that the end of the world? > Regarding the cost basis rest that is so people can upgrade their house without having to pay a tax bill what they have in many european countries is that you can do this only on your primary residence. so you let people upgrade their homes, but not their rental properties
- namelessoracle 4y ago
  So a family on hard times should be forced to leave their grandmothers home when she dies and hope they can find a new one? Gentrification can easily push a property in the place they've lived their whole lives out of their price range. And the family home might not have been super well kept up so the "windfall" isn't as big as the property values in the area may reflect. This happens now with gentrification in big cities, it would get worse with what you are saying. Being able to leave something to your descendants is a critical part of society. If people know they cant leave anything behind they start acting differently (and not in a good way). I understand a key part of communism is you and your family own nothing, but trust me you don't want people to have a use it or lose it attitude towards everything.
  - charlescearl 4y ago

mminer237 4y ago

You don't write off your rental income. You depreciate the rental property over 27½ years and write that off against your rental income. Few rental properties will have under a 3.7% ROI where depreciation would cover all the income. At best you might be paying half tax. In your example, you'd pay no tax, but you'd lose out on the potential income you could have had with better investments (and lose about 6 years' worth of depreciation by the depreciation then being too fast). And flipping to more and more expensive properties through 1031s requires more and more capital and only makes it cover less taxes. There's no tax benefits versus just keeping the first property and paying all the taxes and buying a separate property to depreciate. If you sell a $500k property earning $40k/year where the depreciation covered 45% of your income, and you buy a $1 million property earning $80k/year, you get a new $500k to depreciate $18k/year. Then the depreciation only covers 22% of your income. Depreciation is very fundamental to business tax law. I'm not sure how you'd "fix" that without penalizing non-rental companies for expanding.

sbf501 4y ago
We need a third party to validate both of your claims, because I don't know where to start to understand who is right. This is an example of someone (me) who wants to understand the issue, but would need to google for days to understand both arguments.
- deleted 4y ago
  [deleted]
- toss1 4y ago
  The rebuttal by mminer237 is much closer to right [0]. Also it isn't even as good as mminer237 mentions, as many states also have a much lower exemption, and there is work in congress to get rid of the step-up in basis (a bad thing, imo) and to reduce the $12MM lifetime gift & estate exemption (a very good thing). So yes, there are some advantages, but OP is vastly exaggerating as if it is some freebie to landlords when it is not. There were some freebies introduced in the bills in the Trump term for the type of LLCs that Trump runs, but IDK if they were fixed in legislation in this term. If you want a general complaint, perhaps the angle is that capital is taxed much less than labor, under some notion that lower taxation is necessary to get people with capitol to actually deploy it in investments. I think that is provably false, and certainly does not require the level of tax code favoritism it currently enjoys. [0] source: tax & estate attny at biglaw firm in the household, although this is just from info absorbed by osmosis over years and is NOT a detailed legal analysis.

throwaway908724 4y ago

Wow, I wish. I'm speaking as someone who put all his retirement savings into index funds year after year, but then married someone whose job is related to real estate. Real estate feels more concrete and understandable to her than finance, so that's where our money goes now. It's not easy free money, and I don't know why you would think that any high-profile, low-barrier-to-entry investment would be easy free money. Half of my friends have either bought property or are constantly talking about it. My friends are part of a horde of first-timers who believe, like you, that it's easy free money, and their belief inflates prices. And that's not just my amateur opinion: my wife and I sit in on a developer happy hour where experienced developers constantly bemoan that they haven't been able to work with certain types of property in years, because they get outbid by naive first-time buyers who don't have a plan for making money other than betting on the market going endlessly up. People who are looking for income rather than appreciation are not seeing opportunities at the current prices. Thanks to my wife managing our properties herself and having a lot of applicable skills from her profession, we manage to make some money, but every hour she spends managing property is an hour less (or two, really) that she can bill her clients. I doubt that if we adjusted for that it would work out to be a wise use of time. It's work she enjoys and finds satisfying, so we don't look that closely at whether her time (or our money) would be more profitably invested elsewhere, but I'm certainly not quitting my software development job to double our commitment to real estate. I'm in Austin, one of the hottest markets in the country, so in the end, it's possible that everyone regardless of how naive they are will be rewarded by continued appreciation. Income from real estate hasn't been a game-changing multiplier for us, but appreciation might be. Or not. That aspect of it is just a gamble.

rhacker 4y ago
It sounds like you're landlords, but you didn't explicitly state it. But isn't your tenant basically paying off each property, over the next 30 years. So right now your debt load may be high, but you're not experiencing that. You're just paying off the loans from rental income and handling the overage (prop tax and fixes) with the dev job. So in 30 years the two of you will have like 40M dollars paid over the backs of renters by selling all those properties.. I mean that's fine, it's legal. But if that's the goal of real-estate, then of course it will never be affordable to the next generations. Everyone wants to do what you are doing.

2OEH8eoCRo0 4y ago

> unless your estate is over 12 million dollars(and double that for a married couple), you pay no estate taxes. Why aren't estates just taxed as income to the entity who it goes to? If my father croaks and leaves me $1m it should count as an additional $1m of income to me that year.

rhacker 4y ago
how do you tax a house that isn't a dollar amount?
ROTMetro 4y ago
Fine, as long as you tax based on what was paid for the property. The father is giving his invested money, no one chose to 'realize' at the current valuation, it is happening because of a traumatic family event.
- fwsgonzo 4y ago
  That sounds fair to me. I wonder if there any countries already doing it this way?
0x138d5 4y ago
That would be awesome for gentrification. Jack up the property prices and when the owners pass, their heirs will be forced to sell.
TrueSlacker0 4y ago
"If my father croaks and leaves me $1m it should count as an additional $1m of income to me that year. " If it is $1m in property value, do you count that as still $1m of income? If so unless the child is in great financial situation with a lot of already liquid cash, they would be forced to sell part/all of the property to pay the taxes. If a parent croaks and has a small business, mom and pop style. How would that be handled? If they had a small corner store making 100k/profit but has no assets vs a shop that sells very expensive equipment making 100k/yr in profit. But has hundreds of thousand in assets that would pass down.

dkarl 4y ago

This is a really counterproductive take, not because of the ways it's wrong about how rental income works, but because it paints a completely wrong-headed picture of whose interests are opposed to progress. People who own property they don't live on stand to make a lot of money under policies that allow them to build more and build denser. It's homeowners who are opposed. EDIT: Lots of propaganda in these comments painting individual homeownership as the cure for our housing crisis. It's not. It's the cause.

0000011111 4y ago

Ya I think you are leaving out the concept of Deprecation Recapture. In short, if I buy the rental property for $10. Deprecate it to $0 over 27.5 years. Then Sell it for $20. I then haft to pay taxes on the sale of the profitable asset. ###### Depreciation recapture is a tax provision that allows the IRS to collect taxes on any profitable sale of an asset that the taxpayer had used to previously offset taxable income ###### https://www.investopedia.com/terms/d/depreciationrecapture.asp#:~:text=What%20Is%20Depreciation%20Recapture%3F,basis%20or%20adjusted%20cost%20basis https://www.investopedia.com/terms/d/depreciationrecapture.a....

tomrod 4y ago

I really don't understand what you're describing. Can you recommend a place where I could learn more about "deprecation of the property and property taxes"?

effingwewt 4y ago

And it gets better! They now have the added buffer of rental/leasing agencies! Many of these are fly-by-night and skirt or outright ignore inconvenient laws like renter's rights. Repairs? Cost sink, just don't renew complaintant's lease. Bonus you get to raise the rent again! Want to get in touch with the owner? Most times you'll have to look up tax records and hope it's actually in the owner's name. Makes rental properties probably 90/10 profit/cost. I know people on both sides of the equation and it's more than a little insane the entitlement some landlords feel.

rootos 4y ago
Rental/leasing agencies can ignore laws...but the courts don't. And the machinery of law enforcement, from bailiffs to cops to IRS revenue agents, keep both sides somewhat in line.
- brnaftr361 4y ago
  That's cute, but 95% of people don't have the time or money for pursuing justice, myself included.
supertrope 4y ago
The heart of the problem is low vacancy giving landlords market power. The inherent scarcity of land in desirable locations is amplified by zoning laws keeping housing supply growing much slower than demand. When 90% of urban land is zoned for single family housing and it is literally illegal to build a duplex let alone an apartment building you will have a shortage. Eliminate parking minimums, setbacks, feature area ratio, height limitations, endless environment impact lawsuits, and build!

TrackerFF 4y ago

When purchasing real-estate in a hot area, the real money comes from increasing prices. Some cities have had something like 10% - 15% annual growth, for 10 years straight. Banks are also much more forgiving when it comes to down-payment, when they know it's going to be a rental, and you already have other rentals as collateral. In essence, purchasing a rental unit with only 1%-5% down payment up-front, is kind of like purchasing stocks with 20x - 100x leverage. As long as you meet your mortgage payments, get steady rent, and don't get any crazy expenses - you're sitting on a goldmine. Some of the guys I went to school with did just that. Bought a rental unit, while working. All their salary went toward down-payment of the next unit, and the banks were very forgiving when it came to new loans. After 10 years they had a nice portfolio of rentals, which they then sold to typical real-estate investment funds.

mateo411 4y ago
> Banks are also much more forgiving when it comes to down-payment, when they know it's going to be a rental, and you already have other rentals as collateral. I don't think that's true. The interest rate on your loan will be more expensive if it's an investment property and the LTV requirements are more strict.
oogali 4y ago
If the bank knows it's a rental, it's considered a commercial mortgage with a minimum of 25% down. And if you're lying to the bank by saying it's a residence when it's meant for rental -- you've just committed fraud (it's one of the clauses in your mortgage).

bsedlm 4y ago

I think taxes stopped making sense since 1971 when the USD became a fully fiat currency. if the government can print money, what's the point of collecting money through taxes?

ralston3 4y ago
Taxes creates demand for USD (an artificial way of giving fiat USD "value")
JamesBarney 4y ago
Countries that try to print money instead of collecting taxes usually end up with pretty bad inflation.
- bsedlm 4y ago
  interesting... https://www.quora.com/Why-has-the-IRS-been-repeatedly-defunded-and-made-increasingly-inefficient-and-inconvenient-to-interact-with?share=1 https://www.quora.com/Why-has-the-IRS-been-repeatedly-defund...
raindear 4y ago
Progressive taxation.
thehappypm 4y ago
This is actually a really interesting question. There’s a really good argument to be made that taxes are actually a huge part of why dollars have a stable value. Let’s say you buy a house for $1 million. 1% interest rate means you have to pay $10,000 every year to your local tax board. That means that you need to acquire US$10,000 or you lose your home. That means you need to earn USD. If the USD hyperinflated, 1% of your house is now $100,000. Now you need to go earn $100,000 and pay that in taxes — which is actually making dollars more in demand, countering inflation.
- bsedlm 4y ago
  very interesting... now add in asset forfeiture driven by legally mandated black markets and the picture is ever so slightly more complete.

ErikVandeWater 4y ago

The effects of lowering taxes on rental income is complicated. If you lower the taxes on rental income, more people will buy houses (and build new ones!) to take advantage of the reduction in taxes. However, they will still have to rent the apartments/houses out at market prices. The rental price will go down because now there is a greater supply of houses, and renting out an apartment at a lower rent is equally profitable as before (since you don't have to pay as much in taxes). The cost of purchasing a house, however will increase, because there are more landlords competing to purchase the house with you. Overall, the real problem is zoning single family homes everywhere, and rent control that disincentivizes building new housing.

sinecure 4y ago

I disagree that the 1031 exchange laws are detrimental to society. In fact, I would argue that their existence boosts the rate of development and increases housing supply in the US. Firstly, why does the government deserve to tax these transactions at all? These landlords are already taxed on their income from their jobs, pay property taxes, pay taxes on all the products they buy. The government is extracting plenty of wealth from its citizens, why on earth would we demand more of people just for being successful in real estate? Will the government put their money to better use than these people spending it themselves on products and services? I think anyone who engages with public sector projects and services knows that the government does not efficiently spend money. Let's imagine a world where 1031 exchanges are banned. What happens? Wealthy investors no longer sell properties at the same rate. What's the point? If my apartment building is cash flowing every year, and I'm stuck paying a huge capital gain tax on the sale, I'll just hold it for life and enjoy the cash flow. The rate of real estate transactions would collapse overnight, killing all of the jobs connected to it from appraisers, to brokers, to investment firms and wealth advisors. Now, not only does the government get less tax revenue because overall real estate transactions and taxable events are diminishing, but there is less incentive to build new projects. The appetite of 1031 exchange buyers is one of the driving factors in development of new commercial real estate projects in the market! The profit motive spurs growth. Look at the Opportunity Zone legislation of 2017, a once in a lifetime chance to defer and eliminate capital gains as long as you are investing those gain dollars into real estate development in blighted areas. This tax incentive alone has generated hundreds of thousands of new residential units on the market that would never have been built without the tax incentive. Taxing real estate more would only slow growth, if we want people to take the time, effort and risk to build more housing units in the US, we need to incentivize them with less taxes.. not more.

carom 4y ago

Taxes have nothing to do with insane rental prices. It is zoning that favors single family homes.

namlem 4y ago
Single family zoning, plus parking minimums, minimum floor-area-ratios, and minimum lot sizes.
- carom 4y ago
  Preach. I have a property zoned for 14 units, the entire ground floor will be parking in order to build that many.

mdavis6890 4y ago

Really the only problem here is the step-up cost-basis at death that you mention. This is indeed a big problem, and the fix is simple: Your heirs inherit your cost-basis as well (likely $0), so that when/if they sell it they have to pay taxes on the whole capital gain. We could also force the payments over some years, by increasing the cost basis and taxing on that amount. e.g. I inherit a property worth $1M and zero cost basis. After one year, I have to pay capital gains taxes on $100k, but my cost basis also goes up by $100k. Repeat each year up to $1M. The other stuff (depreciation, 1031 exchange) are very sensible accounting. Depreciation applies only to the improvements (buildings) on the land, not the value of the land itself. This reflects genuine loss of value over time (buildings wear out). And in the event that you sell the property at a profit down the road, you have to pay back all that tax savings at higher regular income rates (not lower capital gains rates). This is called "depreciation recapture." So depreciation can defer taxes, but not eliminate them. Likewise, when you do a 1031 exchange, your new property ends up with a lower cost basis based on the previous property, so that when you later sell it you still have to pay all that capital gains tax and depreciation recapture. It defers but does not reduce or eliminate taxes. Of course - if you die while holding these properties, then your heirs get the cost basis reset ("stepped up"), which does indeed eliminate all these taxes. This is what we need to fix.

deleted 4y ago
[deleted]
Enginerrrd 4y ago
>Really the only problem here is the step-up cost-basis at death that you mention. This is indeed a big problem Why is that a problem?
- mdavis6890 4y ago
  It provides a large artificial financial incentive to hold onto a property that you otherwise would sell. I also think it's not right to create this kind of arbitrary, large tax break that only applies in specific circumstances. I think if we're going to have a capital-gains tax (and maybe we shouldn't), then we should keep it simple and not have carve-outs. If I sell my house while I'm on my death bed, I pay all the taxes. If I wait a week to die first, and then my heirs sell, no tax. This is wrong and unnecessary.

dgs_sgd 4y ago

But this only works as long as the property's price is depreciating. Don't property prices generally trend up over time?

ChrisLomont 4y ago
As long as the owner puts significant money into the property over time to fight depreciation. Entropy applies to houses after all.

ChrisLomont 4y ago

>you pay no income tax on your rental income And are losing value on the property, which is the point of depreciation. >~30 years later, you've deprecated it down to an effective value of $0 An no one will now rent, since your building has an effective value of $0 since it has become crap. All throughout your list you ignore all the costs involved in being a landlord. Have any friends that have tried it? (I do). Did they become silly rich? Or did they quit because it is a major problem to actually make it very profitable versus other uses of capital and time? I'm a decently saavy investor (in many things), and have watched multiple friends start up rental properties, only to stop once it became clear that tenants destroy things, costs to maintain properties are volatile and astronomical, the work required is significant, and so on. I have done the math on real estate investing many times, and each time have decided the returns are not worth it. >The net result is that rental properties generate a ton of income for the owners If it were so profitable, then tons of capital currently being spent on other uses (tech, medical, finance) would instead go into buying up more housing. But the fact is that being a landlord is not very profitable, so capital doesn't flood into that market - it is still mostly elsewhere. Historically, housing has performed quite similar to the stock market for returns - as it should be. If housing were a better investment, money would flow in until they balanced. If housing is too poor an investment by screwing with taxes, then money will flow out into other more productive places. And if money flows out, people wanting housing will then have to pay even higher prices for less stock.

wonnor 4y ago
>>~30 years later, you've deprecated it down to an effective value of $0 >An no one will now rent, since your building has an effective value of $0 since it has become crap. Are you really in good faith trying to argue that nobody will rent a house that is 30+ years old?
- bitexploder 4y ago
  Narrator: They were not arguing in good faith. I know we like to give the benefit of doubt here on HN, but that crosses a line. Landlords are known to perhaps not take the best care of their property, but in general, even if a tenant totally trashes the place it isn't too hard to strip down whatever got abused and rebuild it. Same thing happened to us when we rented a property. Tenant did as much damage as you can imagine with pets and abuse short of ripping wires and pipes out of the walls. It was really annoying to fix, but not hard. In the [late] 2020 real estate market it was easy to sell it and the house appreciated like 30-40K since we sold it easily.

cko 4y ago

As a former landlord for nine years, this is pretty correct. I did the tax deferred exchange thing once. Then I sold for cash (a pretty big no-no in terms of real estate investing) because I didn't enjoy such a concentrated risk. When I sold, there's something called depreciation recapture. If the 27.5 year depreciation thing was used to offset your income taxes, part of your gains gets taxed as ordinary income. The cost basis of property is also lowered so that the capital gains is higher. There's also tax trick called cost segregation that lets you depreciate certain parts of your property at an accelerated rate. Basically, as the OP says, keep doing the 1031 exchange until you're dead and your heirs don't have to worry about depreciation recapture.

Kalium 4y ago

If you're in California, your children also get to inherit your price-controlled tax assessment.

jjav 4y ago
Only if they live in it.

jklinger410 4y ago

This system is clearly designed to subsidize and create new landlords. Which is one of many desperate micro-economies that American capitalism has spun up in order to manufacture economic activity. We should be doing the opposite.

kelnos 4y ago

> Each year you can offset your rental income against [...] property taxes The ridiculous thing is that, since the SALT deduction cap went into effect (and so narrowly avoided the axe this past week, ugh), people who live in states with high property taxes end up being able to deduct only a small amount of their property taxes on their primary home, but if they own investment property, they can typically still deduct all of it -- and I believe they can deduct on their state taxes as well, whereas the SALT deduction is only available at the federal level.

throwoutway 4y ago

You’re confusing things. You do pay property tax regardless. You can deduct that from your income on federal (and probably state) tax return. But you definitely pay property tax. And some states have no income tax but very high property tax, and don’t get any sort of state deduction

xyzzyz 4y ago

All of what you describe above is good for the rental and housing market. It brings the rents down. Imagine the alternative, where all the depreciation rules you describe above don’t exist, and landlords have to pay a bunch more tax. In that world, the government has some extra money in the coffers, but how does anyone else benefit? Rents will not go down because landlords have to pay more tax, in fact quite the opposite will happen. Really, I get that you might have moral feelings of unfairness about it, but you are focusing on a minor aspect of the housing market that only has positive impact on rents by bringing them lower.

swiley-taway 4y ago