Tax reform Q&A Thread 4 - New creative tax strategies

[Michael Plaks]

Colleagues and friends,

The original GOP reform thread started by @Brandon Hall is well over 200 posts by now. This is one of the follow-up threads specifically for discussion of new creative tax planning strategies, in view of the reform. 

PLEASE POST QUESTIONS IN THE OTHER TAX REFORM THREADS. THIS ONE IS FOR THE DEBATE OF NEW IDEAS.

Specifically, Brandon suggested 2 ideas already:

#1: Allocate more basis to land, to increase room for the 20% deduction and decrease depreciation recapture at sale.

#2: Switch from W2 to 1099, to benefit from the 20% deduction.

Both are subject to debate, and feel free to add your ideas. I will add mine for sure. 

Together, we will conquer this monster legislation and figure out how to benefit from it.

[Michael Plaks]

And now, my reservations about the "allocate more to land" strategy suggested originally by @Brandon Hall and replicated in my post right above.

Say, my property rents at $10,000 annually, and my holding/operational costs are $7,000. My depreciation is $3,000, for $0 net income. Since there is no net income, there is no 20% deduction. 

If I understand what Brandon suggested, we re-allocate the property basis more to the land (using one of the alternative valuation methods, legally). Now, depreciation is only $1,000 instead of $3,000. So we have $2,000 net income. Great! We created a "freebie" 20% deduction of $400. But - we now have $1,600 taxable net profit!

We cannot squash this net profit with more deductions. More deductions would mean that we have to collapse the remaining income and, with it, the 20% deduction - defeating the purpose!

In other words, the only way to create room for 20% deduction is to create taxable income - where there was none previously! So we will be increasing our taxes just to make room for the 20% deduction. You lost me here, Brandon. Please tell me what am I missing. (Yes, I sometimes can't see the obvious, sorry.)

Now, you mentioned that by taking less depreciation we will reduce depreciation recapture at sale. Sure, I get it. But it seems that the price for this eventual "break" at sale is paying more taxes every year that we own the property. That is a bad trade-off, even considering the 20% discount. We are essentially PRE-paying the future capital gain! The capital gain that could be deferred into 1031 or stepped-up at death. Something does not add up for me.

Apology in advance if my analysis is missing your point. Thanks, Brandon!