What Would Ben Carson's 15% Flat Tax Mean for Landlords?

Question

Hey all, bit of a hypothetical question here, but would you be worried if Carson's 15% flat tax would be adopted at some point? He said there would be no deductions...which would obviously have a huge negative impact on your cash flow if you couldn't deduct depreciation, mortgage interest, insurance, operating expenses, repairs, amortize capex costs, etc.

Am I missing something, or would a 15% flat tax with no deductions be as bad for landlords as I think it would?

Chris Soignier · Answer

No point worrying about a proposal that's beyond your control and that has a remote at best chance of being implemented.    I'll adjust how I run and structure my business if/when changes take place.

Logan Allec · Answer

Michael Seeker is correct.  When the Republican candidates talk about eliminating "deductions", they're referring to itemized (personal) deductions like contributions to charities, medical expenses, mortgage interest on a personal residence, etc.  They are not referring to business deductions like salaries paid to employees, repair expenses, or mortgage interest on a rental property.Most if not all of the Republican candidates have proposed eliminating all of the itemized deductions except for charitable contributions and mortgage interest on a personal residence.  Carson is unique in that he is proposing an elimination of all itemized deductions.

Michael Seeker · Answer

I think what you're describing is a gross receipts tax, not a flat tax.  When talking about no deductions I think that refers to the typical homeowner that gets to deduct mortgage interest, not a business that deducts expenses associated with doing business before paying taxes on net income.

I don't know the specific details of Carson's tax plan (or any of the others for that matter) but it seems very unlikely that any plan could eliminate deduction of legitimate business expenses before paying tax on net income.

Dave Toelkes · Answer

Business expense.  Depreciation is not a Schedule A deduction.

Tim Porsche · Answer

@Dave Toelkes - So would depreciation be considered a business expense then or is that something a flat tax would eliminate as a deduction in your opinion?

Dave Toelkes · Answer

@Tim Porsche,

I think you are misinterpreting how the flat tax would be applied.  All the rental property "deductions" you mentioned are not deductions, but rather business expenses.  Deductions are those things you claim on Schedule A.

If a 15% flat tax plan plan were enacted, then one of the loopholes that might be closed is the net passive loss allowance.  Your rental income property might still generate a tax loss on paper, but you would probably lose the ability to offset that tax loss against your other ordinary income.

Losing most of the personal deductions allowed on Schedule A will only affect those who itemize deductions.  Whatever amount of itemized deductions that is no longer deductible increases taxable income. Those taxpayers with taxable incomes less than $42060 will see their tax bills go up on the 15% flat rate plan.  Those taxpayers with taxable incomes greater than $42060 will see their tax liability go down on the 15% flat rate plan.

If my assumptions are correct, then the poor will get poorer after taxes and the rich will get richer after taxes.

Frank B. · Answer

Taxes apply to income, which is revenues minus expenses. So the expenses would still be included to calculate income, and the income would just be taxed at a different rate.

Donald M. · Answer

I do not care whether it has a real chance of happening or not because we create the chances. If a flat tax is favorable for us (real estate investors) and a great majority of Americans, it will end up passing. And you give a germane example which shows that we need to be cognizant of the possible repercussions. I will be paying attention to this issue as it plays out.

Chad Carson · Answer

Flat tax plans are interesting to talk about, but no real chance of happening anytime soon - even if Carson does become president (again doubtful).

But this question isn't without merit.  The 1986 Tax act had a big affect on investment real estate values (negative) and it led to the Savings and Loan Crisis. They took the ability for passive investors to shelter a lot of their income with depreciation. Many of the buyers in the market bought for tax benefit reasons, so values dropped as they offloaded properties and as many lenders suffered.

What did Reagan and the other politicians want to accomplish at that time?

"simplify the income tax code, broaden the tax base, and eliminate many tax shelters."

Sounds familiar. So, some kind of tax changes like that COULD happen in the future.

The lesson I take from history is don't buy investments counting on tax benefits. Buy based upon solid economics (cash flow, loan amortization) period.

Jeff B. · Answer

Why neither a flat tax nor gross receipts taxes  would never pass?  Elimination  of the IRS would depress the economy :sigh:

Both  are transaction oriented and until there is a transaction, there is no tax; simple, understandable and accountable.

Imagine: no 1040, Sch E, W2 or 1099's

What Would Ben Carson's 15% Flat Tax Mean for Landlords?

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