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Embarassment of income
Old 07-28-2014, 10:10 AM   #1
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Embarassment of income

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?
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Old 07-28-2014, 10:22 AM   #2
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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.
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Old 07-28-2014, 07:23 PM   #3
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Calmloki, better listen to the Senator. Sounds like he knows what he's talking about. Just sayin!
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Old 07-28-2014, 08:09 PM   #4
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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....
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Old 07-28-2014, 08:20 PM   #5
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I have a dumb question.... What does SWMOB stand for? (Sweet Wife, Mother of Babies is the only thing I could think of...)
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Old 07-28-2014, 08:25 PM   #6
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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.
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Old 07-28-2014, 08:32 PM   #7
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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?
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Old 07-28-2014, 09:18 PM   #8
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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
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Old 07-28-2014, 10:03 PM   #9
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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.
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Old 07-28-2014, 11:05 PM   #10
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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?
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Old 07-28-2014, 11:07 PM   #11
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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
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Old 07-29-2014, 08:59 AM   #12
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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?
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Old 07-29-2014, 09:15 AM   #13
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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.

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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?
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Old 07-29-2014, 11:49 AM   #14
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Originally Posted by calmloki View Post
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
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Old 07-29-2014, 12:11 PM   #15
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Originally Posted by Amethyst View Post
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
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Old 07-29-2014, 03:18 PM   #16
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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

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

thanks
mike
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Old 07-29-2014, 06:05 PM   #17
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just curious. Do you recall the % of the depreciation recapture you had to pay back?

thanks
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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.
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Old 07-29-2014, 06:08 PM   #18
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And she is right!

Ha
Thanks Ha. I'll be sure not to let her know. dammit.
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Old 07-29-2014, 06:14 PM   #19
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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

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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.
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Old 07-29-2014, 06:33 PM   #20
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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!
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