Taxes like Donald Trump - Question

[Kevin Wasie]

According to a recent article published on NYT, over 90% of Americans strongly agree that it is a civic duty to pay your maximum taxes, and many find that trying to dcrease your taxes is unethical.

Personally, I want to decrease my tax burden, and pay the IRS what is legally required of me.

I am new to investing, and want to understand the taxes. I have a few questions for a deal that I am working on right now.

I have a property under contract, that Is going to be a BRRRR deal.

The attached picture shows the key values... I am buying it for $70,000 and putting $40,000 into repairs. For the purpose of this discussion, assume that I am paying cash for the property on January 1, and there are $0 closing/refinance costs. I will refinance to 30% LTV of th ARV which is $150k

My questions:

1) is the "with rental" scenario correct? ... is it right that I will decrease my tax burden by the $40,000 in repairs? 

2) it looks like, if my math is right, that I will owe about $8000 less in taxes this year, and will have everything but $5000 returned to me at the refinance time. So, I'll actually gain $3000 of net worth, plus the forced equity, and I'll have a great rental.

Does all this look right? 

[Chris Mason]

Hi @Kevin Wasie,

It depends on what you mean by "decrease your tax burden." Will you save $40k come tax time? No. Will $40k less of your income be taxed? Yes, more or less.

What trump is doing, from what I've gathered, is stacking net loss carryover on top of depreciation. I've seen plenty of blue collar self employed people do the same thing, so this isn't some evil tax scheme that only Mr. Trump can engage in.

Let's suppose he has a $10m building that he's depreciating over 27.5 years. $10m * 70% / 27.5 = $254k of income that he isn't taxed on each year (I'm not a CPA so that formula might be off and/or scenario dependent, but that's the idea). Never mind that he was never out $10m, because as a billionaire he can leverage better than the rest of us. Multiply this by however much he has in real estate holdings, and that's a lot of tax free income. 

So, if you own a $10m building and make $250k in a given year, it may be the case that you have a zero dollar tax bill. This is why I encounter $90k/yr spouses married to $10m/year executives that quit their $90k/yr day job and start gobbling up real estate -- that depreciation thing is a tax fiction. In reality, does real estate depreciate to being worth $0.00 after 27.5 years? Hell no, it typically actually appreciates in value. The goal of the spouse formerly earning $90k (maybe $25k after taxes and daycare) is to gobble up enough RE that there are over $25k in tax savings, meaning buying RE is more profitable to the household than going to a day-job earning $90k when your spouse is making $10m, and a parent gets quality time with the kids to boot.

Next is net loss carryover. The net loss carryover is related to his multitude of business failures. I don't necessarily work with a lot of business failures, so this isn't one that I've seen time and time again, but if you lose a bazillion dollars in a given year due to some business failing, you can use that to offset income in future years.

Interestingly enough, your taxable AGI can be $0.00 due to the two above combined, and you can still get a conventional residential mortgage. The financial services sector knows what games you are playing with the tax code, respects you for it, and doesn't hold it against you.