I have been investing in real estate rentals for almost 19 years and these income taxes are killing me. In short I am so “right side” up in my bank loans that it is costing me money. A lot of my loans are set to pay off in the next 4 to 6 years of a 15 year loan. Sounds great to me, however the tax law only allows a depreciation of 27.5 years. Now that i am at the end of my loans i am paying more principal than interest and with a small amount of depreciation I am actually spending more money in payments every month than the IRS is allowing me to write off. This is causing me to pay 15,000 to 20,000 dollars a year in income taxes on income that I really don’t have. My accountant suggested refinancing and stretching out the payments closer to the depreciation schedule. I was going to do that and borrow an extra 17,000 to pay my taxes and about 15,000 to pay off some credit cards that we used to do some past repairs. But the bank only wanted to do 7 years (just one year longer) and wanted to do some appraisals that are going to cost $7,000. This would only lower my current payments by $1,300 a month. This isn’t too bad, but I was thinking more like 10-15 years and lowering my payments by about $3000 a month so that I could actually have the money (that the IRS says I am making) to pay my future taxes. I don’t want to sell any properties because i am so close to paying out and realizing some serious cash flow. Do you have any suggestions as to what the correct solution is. I am sure that i am not the only person who has seen this problem.
property Investment.
you needn’t bother with a tremendous superannuation adjust nowadays to buy a property. You have the capacity now obtain cash in your property Investment.
sounds like a great problem to have
Like it or not, expenses like depreciation help offset some taxes because they are not paid out with cash. But interest never does. You pay a dollar in interest for a 10-30 cent tax reduction.
The depreciation should be about the same every year. When that stops you will pay more in taxes. 10-30% of the depreciation amount.
You are right in that the high principal payments uses up cash and spreading the loans out would help some.
I have a similar issue, I have been paying one loan about $45,000 per year(mostly principal). It pays off this year. My taxes wont change but it will be like getting a cash raise in 2015. Woohoo.
One of your(and mine) biggest problems is if you ever sell a rental that is fully depreciated. Good and bad. Good that you probably have an appreciated value, bad in that you have a zero book value and all the proceeds are taxable.