I admit it, I do not see the purpose in FIREcalc

[Another Reader]

I don't agree with the OP that he did well. In my view, he did things that caused his problems.

1. Concentrated his risk in one property.
2. Used the property/properties as an ATM without a plan to pay it/them off.
3. Failed to recognize the market was turning and did not bail out when he could.
4. Dumped everything into a failing property.
5. Did not have the resources left to hire an attorney when it was necessary to settle the default case.

Really, the OP just did what millions of homeowners did during the housing market crash. Lots of people pulled out equity from their houses in 2002 to 2007 and faced disaster when they lost their jobs and could not sell their houses. Bankruptcy attorneys were booked solid from 2009 through 2012.

Astute investors find ways to insure themselves against this type of loss. The OP did not. He also did not take advantage of the TSP when he was in the military. Had he done that along with investing in the real estate, and left it alone, he would be much better off today. Diversification is a form of insurance that would have helped him.

The OP now plans to buy rentals for cash in Maine. He is 59 and wants to start a new business that requires a lot of work and is risky. He has not presented a financial case for why this is a good idea. I kind of think he hasn't learned anything except leverage can burn you.

 

[Gumby]

Thanks for the info.... wonder if OP filed Ch 11.....

Do you know when this became law? I do not remember these exceptions when I was doing taxes, but that was decades ago...

Keep in mind that Title 11 of the US Code (referred to in the tax bulletin) is broader than just Chapter 11. It also encompasses Chapters 7, 12 and 13.

I don't know how long this has been part of 26 U.S.C. 108. I think at least as long as I've been a lawyer (since 1992)

 

[Milton]

"I have no student loans, therefore I can't see the purpose in student loan calculators."

"I don't need a mortgage, therefore I can't see the purpose in mortgage calculators.''

"I'm not building anything, therefore I can't see the purpose in having a hammer."

I feel like Mr. Orange in Reservoir Dogs: "He's convinced me. Give me my dollar back".

 

[Milton]

I wouldn't say "you screwed the bank". The bank got exactly what it bargained for in the event of default - foreclosure of the property and a deficiency judgment, which could be discharged in bankruptcy. Presumably, the bank takes into account that eventuality when it extends the loan and prices accordingly.

And presumably stores take the possibility of shoplifting into account when opening their doors to customers, and price accordingly. So retail thefts are no big deal.

 

[Milton]

We hate paying income taxes.

That's ironic, considering that such taxes are responsible for the salary you earned during your naval career, and your pension income thereafter.

 

[Letj]

Spending to maintain the building is current expense and does not increase the basis... seems that whoever did you taxes were not doing them correctly or not explaining them...

Not true. Spending does increase your basis if it’s capital spend. You’ll be surprised how much the IRS classifies as capital spend. How I wish my spending for new cabinets that tenants destroyed, HVAC that they fail to use properly resulting in lower useful life, etc was current expenses.

 

[Another Reader]

And presumably stores take the possibility of shoplifting into account when opening their doors to customers, and price accordingly. So retail thefts are no big deal.

There is a difference between theft and business mistakes. The OP did not set out to steal from anyone. The lenders know that no matter how carefully they vet their loans, market conditions and lives change, and there will be foreclosures. They reserve for this type of loss. The tax code by design forgives debt discharged in bankruptcy. That's what bankruptcy is for - we don't send people to debtors' prison in this country, we give them a fresh start.

 

[Another Reader]

That's ironic, considering that such taxes are responsible for the salary you earned during your naval career, and your pension income thereafter.

I don't think anyone likes paying taxes. Tax avoidance is not un-American. It's a prudent business decision to minimize taxes to the extent allowed by law.

 

[ERD50]

And presumably stores take the possibility of shoplifting into account when opening their doors to customers, and price accordingly. So retail thefts are no big deal.

The obvious difference is that you and the bank sign the mortgage contract that outlines what happens in case of a default (they get to keep your property).

You don't sign a contract with a store that says you can steal, as long as they account for it in their prices. Double .

Those mortgage contracts also stipulate that the property is to be maintained. The people who let it deteriorate and/or rip out the copper pipes and fixtures before leaving are breaking the law, and subject to prosecution.

-ERD50

 

[ERD50]

That's ironic, considering that such taxes are responsible for the salary you earned during your naval career, and your pension income thereafter.

I don't think anyone likes paying taxes. Tax avoidance is not un-American. It's a prudent business decision to minimize taxes to the extent allowed by law.

Yes, but it still is ironic, IMO.


-ERD50

 

[Gumby]

And presumably stores take the possibility of shoplifting into account when opening their doors to customers, and price accordingly. So retail thefts are no big deal.

Defaulting on a loan is not a crime. Shoplifting is a crime. The law and most people recognize the difference. And, yes, the price of goods needs to account for amounts lost to theft.

 

[Texas Proud]

Keep in mind that Title 11 of the US Code (referred to in the tax bulletin) is broader than just Chapter 11. It also encompasses Chapters 7, 12 and 13.

I don't know how long this has been part of 26 U.S.C. 108. I think at least as long as I've been a lawyer (since 1992)

Thanks... I read it wrong

 

[Texas Proud]

Not true. Spending does increase your basis if it’s capital spend. You’ll be surprised how much the IRS classifies as capital spend. How I wish my spending for new cabinets that tenants destroyed, HVAC that they fail to use properly resulting in lower useful life, etc was current expenses.

He was specific and so was I... spending to maintain a bldg is current expense...

If I were you, I would get a new accountant... if someone destroyed cabinets and I had to put new ones in I would expense that as repairs, not a capital improvement.... not sure about HVAC... that would probably be capital if you put in a new one... but repairing the old one is current expense....

BTW, if you have those assets separate from the bldg then you get to expense the remaining balance when they were retired or destroyed....

 

[Texas Proud]

I don't think anyone likes paying taxes. Tax avoidance is not un-American. It's a prudent business decision to minimize taxes to the extent allowed by law.

I still have a suspicion that OP is not following the law as he does not seem to have paid any cap gains taxes on his properties and I am not sure if he put something down on the tax return he calculated the basis correctly....

However, he did say he was audited and was fine, but not sure when that was and did it that took into account the last 'sale' or foreclosure...

 

[samclem]

He also did not take advantage of the TSP when he was in the military.

FWIW, military members became eligible to contribute to the TSP in Oct, 2001. Based on OOF's sig line, he either retired from the Navy before this time or might have had only a short window of eligibility.

On the morality of walking away from a mortgage debt--I'll admit my feelings on this have changed and now I see things as Gumby has outlined them. A mortgage is a contract, and that's all. No one is obligated to go beyond what the contract (and associated laws) stipulate. It's just a business arrangement. Rather, if we agree that a person has a higher moral obligation to his family than to a bank, a good case could be made that it is morally questionable to bring increased hardship on one's family in order to go beyond the strict terms of the mortgage contract to make a bank happy.

 

[Chuckanut]

If you purchased a property for $100k, you are not likely going to sell it for $200k.

If you bought property for $100k and paid off the mortgage, then you could borrow $100k against it, and then sell the property for $100k. The IRS would see that you sold it for the same price you had paid to buy it, and there would be no taxes.

Ummm.... money is fungible.

 

[Another Reader]

I still have a suspicion that OP is not following the law as he does not seem to have paid any cap gains taxes on his properties and I am not sure if he put something down on the tax return he calculated the basis correctly....

However, he did say he was audited and was fine, but not sure when that was and did it that took into account the last 'sale' or foreclosure...

The OP appears to have rolled all his gains into this property, presumably through a series of 1031 exchanges. The value of the property dropped and all the gains evaporated. He avoided tax on the debt "forgiveness" via bankruptcy. I suspect any depreciation recapture was offset as well.

 

[Letj]

He was specific and so was I... spending to maintain a bldg is current expense...

If I were you, I would get a new accountant... if someone destroyed cabinets and I had to put new ones in I would expense that as repairs, not a capital improvement.... not sure about HVAC... that would probably be capital if you put in a new one... but repairing the old one is current expense....

BTW, if you have those assets separate from the bldg then you get to expense the remaining balance when they were retired or destroyed....

The IRS rules are certainly open to interpretation. I do my own taxes. I have read the rules over and over for capital versus expenses and I have to admit I tend to take the conservative approach. Repairs for sure such as HVAC repairs are certainly expense but here’s the scenario with the cabinets. The tenants were section 8 and one of the worst we’ve seen. In a year they allowed the house the be overrun with lots and lots of roaches. I’ve never seen so many roaches in my life. The roaches infested the walls, carpets, cabinets including the base cabinets, etc and we had no choice but to throw everything out and start again. Some maintenance expense are considered capital. For example if you are doing a partial roof repair on a big apartment building, I cannot see how that would be not capital.

 

[HFWR]

Don’t have a dog in this hunt, but stashing a few dollars away tax-deferred for thirty years in low-cost index funds sure sounds easier than dealing with tenants, the IRS, bankruptcy court, etc.

Given my stash is primarily/mostly in stock/bond funds, FIREcalc was a useful input in my analysis of when I had “enough”.

 

[razztazz]

Don’t have a dog in this hunt, but stashing a few dollars away tax-deferred for thirty years in low-cost index funds sure sounds easier than dealing with tenants, the IRS, bankruptcy court, etc.

Given my stash is primarily/mostly in stock/bond funds, FIREcalc was a useful input in my analysis of when I had “enough”.

In an interview Warren Buffet once related that in his early days, after having much success as an investor, everyone he knew kept telling him "Warren you should put that money into real estate." He said, "Why would I want to go into real estate when this stock market thing is so easy?"

 

[Offgrid Organic Farmer]

There was never an 'open enrollment' season for TSP during my Active Duty career.

 

[Another Reader]

There was never an 'open enrollment' season for TSP during my Active Duty career.

Did you max out your IRA's?

Spreading your money among multiple classes of assets would have probably yielded a better result overall, as long as you did not drain your IRA's to keep the apartment building.

 

[Offgrid Organic Farmer]

Did you max out your IRA's?

Spreading your money among multiple classes of assets would have probably yielded a better result overall, as long as you did not drain your IRA's to keep the apartment building.

No. I remained focused on the highest net gain investment I could find, to establish our farm. It worked.

 

[Another Reader]

No. I remained focused on the highest net gain investment I could find, to establish our farm. It worked.

You got the farm but lost everything else. I don't think you pulled all your real estate equity out to buy the farm, just some of it. If some of the equity or the money that created the equity had gone into protected retirement accounts instead of the apartment black hole, you would have ended up with more. Without the specific numbers to consider, I can't do any math to illustrate this, but I'm pretty sure this is the case, based on what you have said.

What I'm saying is your investment prejudices and what turned out to be destructive assumptions about your investment real estate left you a lot poorer than you might have have been had you been more open to other investments. I'm a numbers person. I like to see operating statements and the data to back up the assumptions underlying the operating statements. You haven't provided any numbers that support buying multi tenant properties in your area of Maine. Maybe it's a good time now to examine your prejudices and assumptions, before you again buy real estate that may not perform as you would like or need it to perform.

 

[Offgrid Organic Farmer]

Money is not all there is. Money will come and it will go. I achieved the goal that I wanted.

Now I have another apartment building, much larger than the last.