Embarassment of income

[calmloki]

We have been building our rental real estate portfolio for 30 years or so, living well below our means, and the chickens have come home to roost. We are quite happy with our spending habits, which means a surplus is generated each year, which we've used to make property loans, which have added to the stash... Horrible first world problem, and I'm sure your hearts bleed for us, but here's the thing:

We pay buckets of taxes each year. I'd really like to move our income into "drooling idiot makes money anyway" status in preparation for the lack of mental acuity I feel creeping up. Looking for tax deferred or free. SWMOB is very security oriented - her Dad used to bury cans with money in the back yard; we keep a fair bit of cash and gold ready to hand in case we have to (?) buy off a DA(?) pay for surgery up front (?).

I am Roth free, she has a tiny Roth from her past employ. All the rental and interest income is taxed right and proper at 28% marginal. Would like to, and am, moving into the stock market (50% Vanguard total stock market, 50% V midcap), but that is with fairly modest weekly amounts and a bunch of spousal resistance. Put a dab into V California tax-free bond fund. Do have a chunk of PenFed certificates which will mature 1/2015. Thanks to a three loan payoffs we have a major amount earning a big 0.85%.

Anyone have suggestions for investments that might pass the spousal security sense + tax deferred/free test?

 

[Senator]

Much of your income is already sheltered by depreciation. Rentals have a ton of write-offs and no self-employment taxes on the earnings. You are doing the right things. You could pay a small salary to someone, enough to get the maximum 90% social security limit, and put the net earnings into a Roth.

I think $816 per month is the 90% cutoff limit. That's $9,792 annually. Pay 15.5% Social security taxes, or $1,498. At some point, that $816 equates to $734 per month in Social Security, with COLA, somehow…

So, you pay $1,498 to maximize your Roth, and shelter $9,792 worth of income. Of course, there are state taxes (maybe), Unemployment taxes, Workers Comp (maybe), etc. that might add to the cost. Most of the $9,792 would be tax free due to the personal exemptions.

You also get to add some to the Social Security kitty at minimal cost. It could wipe out any zero years that are used in the 35 year average.

I have a bunch of rentals too, and that is what I am considering for the SO. She doesn't have 35 years of earnings.

You can also do a 1031 exchange to another property, rent it for two years, and then move in yourself. Even if you lost money on the rental, it may be less than any tax hit.

 

[JOHNNIE36]

Calmloki, better listen to the Senator. Sounds like he knows what he's talking about. Just sayin!

 

[Texas Proud]

I would think that after 30 years a lot of the properties are fully depreciated... so not as much sheltering going on... that is why taxes are being paid...


I would run a few of your options through the tax program... you probably have recapture issues if you start to sell property...

You can buy munis, but I do not like them myself....


Sometimes you just have to suck it up and pay taxes... sometimes that is the smartest move....

 

[rodi]

I have a dumb question.... What does SWMOB stand for? (Sweet Wife, Mother of Babies is the only thing I could think of...)

 

[Gumby]

I have a dumb question.... What does SWMOB stand for? (Sweet Wife, Mother of Babies is the only thing I could think of...)

Could be a typo. I've always heard it as SWMBO - She Who Must be Obeyed.

 

[LOL!]

So you have full-time jobs as landlords? Is that what you want as you get older? Or do you intend to unwind or pass the job on to the children?

 

[haha]

I have a dumb question.... What does SWMOB stand for? (Sweet Wife, Mother of Babies is the only thing I could think of...)

I like this interpretation!

Ha

 

[FUEGO]

1031 exchange to consolidate into something simpler was the first thing that came to mind. Big apartment building? Office/medical building? Shopping center/highway commercial? Something big but in one place, with the plan to hire a manger eventually (or from day 1).

I'm not sure it would reduce your taxes though. One thing to keep in mind is that paying for management (for your current rentals or something you exchange into) and hiring out maintenance would only cost you 72% of what you spend on them (factoring in taxes). Might be time to hand the reins over to someone else?

I'd also like to say congrats on having so much income that you have to pay 28% marginal taxes. I hope to be there some day (instead of the 0% bracket). RMDs in 37 more years might do it.

 

[calmloki]

I'm familiar with rental depreciation - problem is, when you have owned the places for 25 years there isn't much depreciation left. That means if you sell you pay tax on darn near the whole sale price. Have done a 1031 before, and all that does is move an asset into another, higher priced asset without paying tax on the first asset's sale - until you sell the second asset. Not really looking to keep growing the rental herd, in fact the idea is to shrink it and the day to day problems.

If we exchanged one of our multi units into a rental house and then rented it out for two years, followed by living in it till sale time, we would take a substantial rental income loss for two years, have to prorate the home sale capital gains tax exclusion between rental and private use, and move several times - not convinced the effort is worth the possible tax savings.

The idea of hiring someone (presumably either me or SO, no kids here) at "maximum social security limit" I'm not familiar with. Unfortunately SO and I both file as single and are both at a point that earned income would be taxed at 28% + 15% social security + 9% state tax. Don't think that hiring one or the other of us will shelter anything worthwhile and would instead result in great complexity for little if any return. But again, not familiar with the 90% SS limit Senator speaks of, so probably talking through my hat.

I had thought of taking out a loan against some of the rentals and plugging the money into the market - result would be an interest expense to reduce annual rental profit while the borrowed money could quietly grow free from tax until we cashed it out. Hopefully the market would return as much or more than the loan interest, thus shifting the increase from the rentals to stock growth. Be a way of allowing us to control how much taxable income we make in a year. Unfortunately, that cunning plan did not pass the SO's high security gate.

Any other good ideas?

 

[calmloki]

I have a dumb question.... What does SWMOB stand for? (Sweet Wife, Mother of Babies is the only thing I could think of...)

Sloppy of me - Gumby is correct - She Who Must Be Obeyed

 

[coldnose]

Quick Question on selling rental properties and closing costs:

Can you deduct closing costs from any profit you make on the house, or is that not generally capitalized?

 

[Amethyst]

We just sold a rental house and, per our CPA's advice, deducted everything associated with the sale: Fix-up costs, closing costs, broker's fee, etc.

Caution: We ended up losing money, due to "depreciation recapture" pushing us into a higher tax bracket.

Amethyst

Quick Question on selling rental properties and closing costs:

Can you deduct closing costs from any profit you make on the house, or is that not generally capitalized?

 

[haha]

I had thought of taking out a loan against some of the rentals and plugging the money into the market - result would be an interest expense to reduce annual rental profit while the borrowed money could quietly grow free from tax until we cashed it out. Hopefully the market would return as much or more than the loan interest, thus shifting the increase from the rentals to stock growth. Be a way of allowing us to control how much taxable income we make in a year. Unfortunately, that cunning plan did not pass the SO's high security gate.

And she is right!

Ha

 

[wrigley]

We just sold a rental house and, per our CPA's advice, deducted everything associated with the sale: Fix-up costs, closing costs, broker's fee, etc.

Caution: We ended up losing money, due to "depreciation recapture" pushing us into a higher tax bracket.

Amethyst

just curious. Do you recall the % of the depreciation recapture you had to pay back?

thanks
mike

 

[Amethyst]

Not sure. We consulted the planner to find out how how much tax we'll owe for 2014 overall, not specifically for each type of income or income-like thing. We are having tax withheld from our pensions and my part-time pay at Single, Zero Exemptions, and we'll still owe some tax next April.

Amethyst

just curious. Do you recall the % of the depreciation recapture you had to pay back?

thanks
mike

 

[calmloki]

just curious. Do you recall the % of the depreciation recapture you had to pay back?

thanks
mike

Not Amethyst.

But.

On our property sales purchases we had a certain amount for the land, say $20 of our $100 purchase price, and the $80 worth of building was depreciated at $80/27.5. If we sold after 27.5 years for $200 we paid capital gains on the $100 profit + $80 in depreciation recapture. So if I understand you, we paid tax on 100% of the depreciation recapture. I think - we have our taxes done.

 

[calmloki]

And she is right!

Ha

Thanks Ha. I'll be sure not to let her know. dammit.

 

[Amethyst]

Yes, that's how it is for us too. I thought the question had to do with the %age of the depreciation recapture (25%? 28%?) that we are having to pay the Feds and MD. Which, I don't exactly know. I only know the total tax amount and %age which our CPA estimates we will owe on our projected, total 2014 income. This estimate is, in turn, driving the amount to have withheld in 2014.

Amethyst

Not Amethyst.

But.

On our property sales purchases we had a certain amount for the land, say $20 of our $100 purchase price, and the $80 worth of building was depreciated at $80/27.5. If we sold after 27.5 years for $200 we paid capital gains on the $100 profit + $80 in depreciation recapture. So if I understand you, we paid tax on 100% of the depreciation recapture. I think - we have our taxes done.

 

[calmloki]

Yes, that's how it is for us too. I thought the question had to do with the %age of the depreciation recapture (25%? 28%?) that we are having to pay the Feds and MD. Which, I don't exactly know. I only know the total tax amount and %age which our CPA estimates we will owe on our projected, total 2014 income. This estimate is, in turn, driving the amount to have withheld in 2014.

Amethyst

We sold a little old 5-plex right at the end of 2013. Not only did we pay a major chunk of tax to fed and state (we had 1031-ed into it), but our quarterlies this year are robust. The big bounce up in income will also affect the amount we each pay for Part B Medicare in 2015, as Medicare cost is based on your income two years prior. Doggone it - can't hardly afford to make this kind of money!

 

[calmloki]

So you have full-time jobs as landlords? Is that what you want as you get older? Or do you intend to unwind or pass the job on to the children?

The first plan involved our selling everything right about 2008 and retiring to a life of bonbons. Then we decided to sell a place per year. I spent about 16 months selling one little house while watching the prices drop, and the next years listing other places, worst first, and chasing prices down. Really got to the point it didn't make sense to sell, as the rental profit exceeded any reasonable return on about 70% of our sale price (about what we would have left to invest after paying fees and taxes).

We are landlords part time - like when we gotta be. We have one loyal and trustworthy person who stands in our stead most of the time. We are about to give him one of the multi units, doing an IRS form 709, as he would be in our wills anyway and we would rather he have the benefit now. That will reduce our income and reduce our rental headaches.

We do like places and buildings - rentals and property loans have allowed us to look at and participate in a bunch of places and actually make a living doing so. I'm just not as eager to make silk purses as I once was.

Edit: While inheriting our places at a stepped up basis is a great deal for our heirs I would rather not saddle them with running rentals - nor would I feel right about sticking our tenants with clueless landlords.

 

[pb4uski]

I wonder if you could form a C corporation and contribute some of the properties to the corporation in exchange for stock. The the corp owns and operates the properties and pays you for running it in effect shifting rental income to wage income and you can use that structure to take advantage of tax deferred savings opportunities. You could manage it so the corp net profit is mininal so no corp taxes would apply and the wage earnings would also get you SS credits.

 

[jerome len]

I'd look at Vanguard's tax exempt balanced fund.....pays out about 2%, low taxes because over half of the payout is muni bond interest, overall safer than 100% stocks, increases each year because of the increasing dividends on the half that is in large cap stocks.....don't really have to worry much, lower taxes and easy to maintain. I sold a bunch of commercial RE and invested there....don't make as much.....don't worry as much!

 

[LOL!]

Thanks for the explanation of how you all are going to unwind all this.

 

[jimnjana]

What about 1031 into a REIT?