starting a business / investment property taxes

[Justin Littke]

Hello, I am 25 and just moved to VA Beach and started in REI. I just purchased my first primary home, single family, as a short sale, for 130k that is certainly worth 160k or more (170k or more after I do some simple labor and landscaping; if i invest 20k in additions can sell for possibly 220k however I dont see myself going this route as ill need the capital). 15 yr 3% interest mortgage. Nothing was wrong with the property; so I think i did very well on that buy. I only have 20k and will have only 20k in savings/capital after this as I have no extra $ each month after bills. My plan is in 2 years to buy another SFH as an investment property under a Sole-proprietorship business I'd form. This way I could set up a home office in my primary and deduct business expenses like home office and utilities involved in running it and travel expenses to and from investment property etc. and I assume after depreciation and other expense deductions I would show a loss on paper for the investment property and not pay tax on my rental income.

My goal is very modest, in 15 years to have 20k/year in cashflow coming in and a million dollars networth. This will enable me financial freedom.

My questions: How does this plan sound? Am I not accounting for anything (tax-wise on an investment prperty or business or otherwise?) Also, can I ultimately sell or gift properties to family member for less than the property is worth where they can then live in them for a year and turn arund and sell at profit to get around capital gains? Thanks! -Justin

[Paul B.]

Justin, I don't have any advice to give you, but I did want to say that you should be very proud of yourself for getting started in real estate at such an early age. If you are willing to reinvest cash flow now as opposed to squandering it on "stuff," you will be well positioned to retire at 45 or 50. I know that probably seems like forever into the future, but you'll still have plenty of living to do then (we're not ALL old farts), and being able to do that on YOUR terms will feel incredible.

I only wish that I had your foresight when I was 25, or that I had someone to teach me this stuff, but I didn't. As a result, I've spent the last 25 years getting my Ph.D. from Hard Knocks University (the alma mater for many here) -- and tuition ain't cheap.

Keep at it!