All Forum Posts by: Paul B.

 I was about to post that I think it's illegal to collect that much upfront in Massachusetts. Sure, it's a notoriously tenant-friendly state, and I doubt many other states are like that, but the OP definitely needs to check the local laws just in case.

Great info, everyone. Thanks.

I know that the best approach is to get a CPA to look at your personal tax situation and help you make the best decisions, and I will do that, but a little education on my own is worthwhile and will reduce the amount of billable hours I need from the CPA. So here is my question....

I wish there were some sort of table or guide that told you all the relevant things one should be aware of for their income level. For example, I already know that if I make around $100,000 as a single filer:

-The ability to deduct rental losses (for a non-RE professional) phases out as MAGI exceeds $100,000

-I enter the the 28% tax bracket as taxable income exceeds $91,900 (after standard deduction and personal exemption)

-The ability to contribute to a Roth IRA phases out as MAGI exceeds $118,000

I have no concern about the capital gains tax rate increasing to 20%, or the Obamacare tax, because my income is nowhere near the level where it comes into play. 

So does anyone know a good way to look up other things I should know about for my income level (without reading the entire tax code start to finish)? The reason I want to be wary of these things is that between contributions to a 401(k) and some securities that I would like to start selling piecemeal, I have the ability to swing my income at least $20,000-$30,000 up or down each year, but I don't want to shoot myself in the foot. 

Or is this simply too open-ended of a question?

Recessionary cushion. I like that. There is a frequent poster on this site who says you have to calculate 10% annual opportunity cost on any equity you have in a property. In other words, he would say that the OP here is "losing" between 36-44K a year because he is not even making 10% on his equity. While he does have a point, I just think that's far too aggressive.

@Brandon H.

Interesting comments. It's well known that inflation is good for owners of real estate and all debtors. And I agree that governments always want inflation, because it lessens the impact of their endless borrowing. But I am not sure that the Fed should be targeting 3-5% inflation....the problem is that we weren't getting that with near-zero interest rates. So making that the goal might even encourage negative interest rates. I have concerns about an "inflation at all costs" policy. Low interest rates encourage speculation in a desperate attempt to get yield. I'd rather see reasonable rates so savers don't get punished. And you say yourself that near-zero rates are dangerous. 

It's true that the US dollar is used worldwide, but there are attempts to change that. The Chinese want to become less dependent on it. All oil is traded in dollars thanks to a deal made with Saudi Arabia in the 70s. That could change too. What do you think the impact would be? Of course, if the dollar is used less, the demand would go down, and so would the value. Inflation!

Also, my understanding is that you usually need "post-closing liquidity" of something like 10% of the loan amount, or maybe nine months debt service. That means you can't put your entire savings into the deal. You've got to have something left over. 

Disclaimer: I don't have first-hand experience with commercial loans. I only know anything because I have invested with people who do.

Thank you. I began passively investing in multi-family syndications only last year, so I am still getting smarter about how to do due diligence on a deal. There are standard questions anyone considering such an investment should ask, such as "What are the loan terms?" and "Who is your property manager?" I now have another question to add to my list: "Who is your SEC attorney?" If someone can't be bothered to do things the right way, then what other corners are they cutting? 

The difference is that car loans are not large enough to bring down the economy the way that home loans were. I imagine it's the same case with credit cards. However, student loans are the size of a mortgage for some borrowers. Hmmmm.

Here is a pretty in-depth article on how to fill out IRS Schedule E:

https://www.therealestatecpa.com/2016/05/22/ultima...

Hold on folks, my understanding is that you can always deduct depreciation (as long as you have depreciation to deduct). In fact, you really want to deduct it, because when you sell your property, the IRS is going to assume you took the deductions all this time, and your cost basis is going to be reduced by the amount that it assumes you depreciated. 

However, if you are showing a net loss, you can't deduct that loss against regular income unless your MAGI is under $100,000, and the loss you can deduct is capped at $25K. If your MAGI is $125K, you can deduct up to $12,500 in losses. If your MAGI is $150K and above, you can't deduct any of it. Also, you can only deduct losses against regular income if you are actively managing your property (no concrete definition, but you have to be the decision maker, not necessarily swinging a hammer) or you are a real estate professional (working over 750 hours a year in RE).

Example:

W-2 income $95,000

Rental property 

Rental income $13,000

Taxes $3,000

Maintenance $2,000

Mortgage interest $5,000

Depreciation $7,000

Rental loss that I report to the IRS on Schedule E: $-4,000 ($13,000-$3,000-$2,000-$5,000-$7,000)

So when I do my taxes, I get to tell the IRS I made $91,000 instead of $95,000. At a 25% tax bracket, that's an extra $1,000 in my pocket.

If I get a big raise and my W-2 income is now $120,000, I can still deduct those rental losses, but the cap of $25K gets reduced to $15,000 (it goes down by $1 for every $2 over $100K I make). I can still fully deduct my $4,000 loss, because it's under the $15,000 cap. If I had four of these properties, then I'm more likely to be up against the cap. 

As for depreciation, let's say I bought the property in 2007 for $200,000, and sold it in 2017 for $300,000. That's $100K in appreciation on which I will have to pay capital gains tax. But the IRS also assumes I took the $7,000 depreciation every year for the 10 years that I owned it. So I have to pay 25% income tax on that $70,000. It's known as depreciation recapture. 

I only got a grasp on this recently, so please point out my mistakes if there are any.