Help me convince Dear Ole Dad that making - Posted by Brent-AR

Posted by Ronald * Starr(in No CA) on March 10, 2003 at 23:40:37:


Good for your dad, he is doing the smart thing. Good for you getting the books, you are doing the smart thing. In my opinion, anyway.

As for your last question: “Would he be better to loan me/others the money, earn a good interest rate and just take the tax hits, but make more money?” Well, when we talk about the return from rental real estate, we think of CAT: C=cash flow, A=appreciation, and T=tax benefits.

In your initial post you talked only about T. I responded that your father could probably not get T from rental properties. If you analyse rental properties you have to add up all three economic benefits of owning them. Depending upon the income, expenses, and appreciation he might get a pretty good return on his money. I don’t know what it would be where you are. So, just because he does not get T does not mean he should forego rentals, as he still gets C and A.

Whether he would get a better return renting the money out–loaning it–is a matter of calculations.

There are a lot of people who prefer not to own real estate, but rather to loan money secured by real estate. This is discussed on the Cash Flow Forum here on the CREONLINE.COM website. This might be a good investment for him.

Good InvestingRon Starr***

Help me convince Dear Ole Dad that making - Posted by Brent-AR

Posted by Brent-AR on March 10, 2003 at 22:33:38:

a duplex purchase and letting a property management firm could save him 10-20k a year.

Here is his current situation.

His tax liability to the government was 38k last year. His gross was about 180k, but tons of business expenses. I still think his tax liability is high, and he could cut it by investing in some real estate.

Anyways, we have been toying with the notion of buying a property to use as rentals. Income isn’t really of importance.

He is willing to invest some of the money because all of his other investments have been taking losses as of late. He has one monthly obligation, a home equity line that he used to pay off his mortgage of about $400 a month. Perfect credit.

We have a group of five identical duplexes he is considering making an offer on. Each duplex rents for $350 a side, they are not in great condition but they are in good structual shape. Brick exterior, good roof, good construction. We think the rents could even be raised to $450 a month with a little money put back into them.

His offer, if I can convince him it is probably the right thing to do, is going to be 50k a piece, 250k for all of them. Put down about 15k, finance the rest. FMV value is about 60-65k. It is the only duplexes within a good half mile. It is on the end of a street in a lower-middle income neighborhood. Out of ten units, four are vacant right now.

Just buy taking off the interest deductions and accounting for depreciation, he can deduct any expenses he uses for these, correct?

What points should I make to him to make him see this could save him money, or am I wrong about all of this?

Opps, Sorry, you’re off the beam… - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on March 10, 2003 at 22:56:58:


You had better apologize to dear old dad and tell him that you don’t know enough yet to be advising him on buying rental properties. Then suggest that he talk to an accountant who is familiar with rental properties and their related taxes. And go with him so you can learn enough to no longer be dangerous.

The tax benefits of rental real estate are not for people with high incomes, according to Uncle Sam. At least the immediate benefits are not. Study up on the passive income loss limits of the federal income taxes. People with over $150K of adjusted gross income can take no rental property losses off of their other income. In other words, no immediate tax shelter.

What they can do is “suspend” their losses until the sell the properties, at which time their profits will be reduced by the amount of the “supended” losses, thus reducing their long-term capital gains tax.

Now, for many people, even this apparent tax benefit is meaningless. It is not a good idea to sell rental properties. It is a good idea instead to hold properties until you die and then will them to your fine son Brent, who will get them with a “stepped-up basis.” Which means that should Brent sell the properties shortly after inheriting them, Brent will probably not have to pay any capital gains tax on the sale.

Even if dear old dad does not will the properties to Fine, upstanding citizen Brent, if he wants to get rid of properties, he would probably be better off by not selling and instead exchanging into other rental properties. No sale means no reduction of gains and taxes from “suspended” losses.

So there is no tax benefit to the high-income person with rental properties.

You might want to read Jack Reed’s “Aggressive Tax Avoidance for Real Estate Investors” book. I recommend it. It is available at his website.

Good Investing and Good Studying*************Ron Starr*****************

Dad is headed to the CPA tomorrow - Posted by Brent-AR

Posted by Brent-AR on March 10, 2003 at 23:13:00:

I guess he will find out this information there.

He is also meeting with a real estate lawyer later this week, I guess they will tell him more pitfalls.

My father would never walk into a situation without consulting his CPA and attorney. I will tag along, because if I did have that much money, I probably would.

I have ordered the John T. Reed book, along with Brillant Deductions by Wade Cook. They should be here later this week.

Could it not even affect his adjusted gross income? I believe it was about 154k this past year.

Would he be better to loan me/others the money, earn a good interest rate and just take the tax hits, but make more money?