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Old 04-16-2018, 10:07 PM   #121
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Gumby covered the tax implications in post #110. Yep, we are now up to over 110 thoughts on this subject.

Some of us are bipartisan. We cross the aisle and invest in both real estate and stocks... Now if we could only get certain people in Washington to be bipartisan and cross the aisle...
Gumby was talking about the bank and foreclosure, not taxes. I also own (and am happy with) both rentals and equities, so I am neutral in the investment aspect. I was just concerned that the OP was setting himself up for a significant problem since I couldn't understand his explanation of the tax situation. But, for the most part, I don't care. So
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Old 04-16-2018, 10:58 PM   #122
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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.

Also, debt discharged in bankruptcy is not taxable income. https://www.irs.gov/taxtopics/tc431

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...
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Old 04-16-2018, 11:05 PM   #123
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You need to spend some every year to maintain the building, which adjusts the cost-basis back up. In theory you should be doing this roughly equal to how much you depreciate each year, roughly 1/27.5th of the cost-basis.

You are thinking of depreciation as being much faster than what it is in reality. It takes a long time.

Rent income: Regardless of how much money you put in your pocket each month, the depreciation and mortgage payments greatly reduce any taxable income.

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 to you correctly.....


As to the value.... if you tried to sell and no offers came, then the value was down.... the whole point of value is a willing buyer and a willing seller.... when there are no willing buyers the value is reduced... IOW, you would have to reduce the price down to the level of a willing buyer and you would then know the value of the property.... it is not what you paid for it....

As an example.... when I sold my last house during the crisis I thought it was worth $135K.... but got no offers at that price.... I did get a low ball at $85K, but I was not a willing seller.... finally got an offer at $115K and sold... so the value was $20K less than I thought...
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Old 04-16-2018, 11:10 PM   #124
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Keep in mind that it is perfectly legal and ethical to keep multiple sets of books for the same business. Looking at transactions from different viewpoints.

My wife does this, as it was part of her college education to do so.

Different sets of books can describe the same period of time, just as how the four books of the Gospels describe the ministry of Jesus, from different viewpoints. The accounts sound entirely different, they require hundreds of manhours of study to mesh together to see a singular timeline of the events.

I lived through the timeline of my life. You guys are all asking for explanations, here and there. I am doing my best to be patient and truthful. I can not give to you a full accounting in one post. I just do not have the energy nor desire.

We did the best that we knew to do. I think that we have done pretty well.

It is.... but you are also required to have one method for taxes that is told to you by the tax laws and regulations..... not some wat that you choose to do it...

For your own purposes you can do whatever.... for taxes, not so much....


OH, and when I said it did not look like you paid taxes on the properties, I meant to say capital gain taxes.... IOW, when you sold you should have reported the sale on your tax return with proper basis.... I am not sure you reported anything and from a previous post I do not think you reported proper basis....
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Old 04-16-2018, 11:15 PM   #125
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One last thought....

You said you would have been OK if you had not taken out the money from the property.... that you would have lived there and rented it out (I could be mistaken as I am going by memory)....

But, if nobody was renting (I do remember this) then what rental income would you have? IOW, no income coming in to live off.... you would be living off savings.... I do not think you ever said how much you had so do not know how long you could have held out before you spent everything...

I am guessing you would have been in a bad situation and living off your pension... but you say you can live off half of that right now so maybe you could have then....
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Old 04-17-2018, 04:45 AM   #126
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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.
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Old 04-17-2018, 04:47 AM   #127
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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)
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Old 04-17-2018, 05:18 AM   #128
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"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".

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Old 04-17-2018, 05:37 AM   #129
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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.
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Old 04-17-2018, 05:51 AM   #130
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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.
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Old 04-17-2018, 05:51 AM   #131
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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 itís capital spend. Youíll 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.
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Old 04-17-2018, 05:59 AM   #132
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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.
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Old 04-17-2018, 06:04 AM   #133
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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.
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Old 04-17-2018, 06:57 AM   #134
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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.

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Old 04-17-2018, 06:58 AM   #135
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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.


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Old 04-17-2018, 07:08 AM   #136
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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.
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Old 04-17-2018, 08:08 AM   #137
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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
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Old 04-17-2018, 08:15 AM   #138
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Not true. Spending does increase your basis if itís capital spend. Youíll 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....
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Old 04-17-2018, 08:21 AM   #139
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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...
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Old 04-17-2018, 08:22 AM   #140
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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.
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