How to pay more in income tax

[Clint Pearcy]

I had lunch with a customer yesterday, who, with no prompt from myself, began telling me about all of the homes he had owned. The last one, he put up for rent the last year they owned it. His comment was "they really nailed me on the income tax return because of that"... I asked if he meant on the rental income and he said yes. This all followed by the ever common "I'll never do that again" that I hear from people who take a failure as a sign to quit completely.

I know there are many different reasons this could have happened, if it did, and not many details were provided. However, with so few details, what could have been a reason for his poor experience with owning a rental property? He did say he ran it by two different CPAs to make sure it was correct.

What are the ways you can make sure you pay too much in taxes on rental income? (So these mistakes aren't repeated)

[Tushar P.]

For a rental property, one way to pay more taxes is to not do 1031X upon sale. As depreciation recapture is taxed at a higher rate than long term capital gains, taxes owed via depreciation recapture would exceed the taxes saved over the years via depreciation loss.

I think this is the main reason people do 1031X. Their ego doesn’t allow them to say that Uncle Sam has them by their jugular, so upon doing 1031X they claim they didn’t have to pay (they don’t use the word defer) any taxes - which is better than saying that they will never realize the gains ever (until they die) and would have paid more taxes than saved if they wanted to realize the gains. Most of the time they have to overpay to defer the taxes as good time to sell is not a good time to buy. So the decision has to be whether they overpay for a new property to defer taxes, or realize the gains and pay more taxes than what was saved. Uncle Sam is always the winner.