Do you pay taxes on your Buy & Hold Property?

[Chris Heeren]

I'm curious to see how many people actually have enough deductions to not pay any income tax on their cashflow at the end of the year? If you own buy and hold properties, do you pay tax at the end of the year, or not? I've heard enough podcasts say that if you are investing correctly, you should NEVER pay taxes on your cashflow in real estate.

I'm so far away from seeing a zero balance that I'm starting to try and look into other strategies to help reduce my remaining taxable amount. What have others done if you do show a large gain?

[Jim Kennedy]

Chris,

I am a CPA who prepares hundreds of investor returns annually. Also, I won an operate a series of residential and commercial properties. I am a financial statement auditor, and was a tax examiner for the IRS and also worked in their Criminal Investigation Division. Finaicial analysis is a large chunk of my expertise and your fact presentation actually provides the answers to your question about why your profits are so good (high)

First, thanks for sharing your data with us. I have clients who own a dozen properties each in low income cities and towns and the low cost is the key as to why you are paying taxes. Check this out:

1.  I noticed your depreciation was $2K or less. That tells me your houses cost you under $100K. Depreciation on a $100K house is about $3,000 a year so you are losing a writeoff there
2. Since you're buying for a lower price, that means you have less interest expense than somebody who buys a duplex for, say, $140K and pays $3500 each in interest.
3. I noticed the real estate taxes are $2K and less. Thats tied to the lower assessed value of your house, so you lose some there too.
4. Your insurance rates are also a little lower there too - a $140K house could go $1100, you;re at 750-800

So you are getting serious rents with lower income area reduced expenses, resulting in taxable cash flow even though it appears you are writing off everything you could and should.Other write-offs I could suggest are not material here so I wont waste my time there and I saw previously somebody accurately stated you cannot fund a retirement plan with passive income. As such I cant understand why nobody suggested looking into becoming a real estate professional under IRC 469 et seq because then its possible that because of your material participation, passive limitations no longer apply and its a business. Structured properly, and reported properly on business tax returns, it could work nicely!!

Jim Kennedy, CPA