Real (Estate) Short Stories
Jan and Jim loved to increase their net worth and move up in the world. They would buy a house (slightly run down) and fix it up, renovate it perhaps even add on to it. Then they would live in it for two years and sell it for a large tax-free gain. Therefore, they lived happily ever after.
The Race is on!
Turtle Dave and Eddie Rabbit decided to become real estate investors. Dave found houses that would make good rentals but that needed some love and fixed them up. He then rented them out for at least one year. If he could achieve his target profit, he would sell them at the low capital gains tax rate. If not, he would continue to rent them out. His real estate income was relatively consistent and the taxes he paid were quite low.
On the other hand, Eddie bought houses that needed lots of love. He would spend three months going as hard as he could to renovate his ugly ducklings and turn them into beautiful swans. Sometimes Eddie made a killing on his flips. Other times, he lost money. His gains were taxed at his highest marginal rate and his losses were sometimes limited. The taxes he paid on his real estate income varied considerable from year to year, however, the overall taxes he paid on his real estate income was considerable higher than Dave’s taxes.
One Smart Mama
Scarlett had a nice inventory of local rental properties that were generating enough cash flow for her to live quite comfortably on. When she wanted to sell a property that she had held for awhile (lots of depreciation), she would do a Section 1031 Like Kind Exchange. This allowed her to avoid paying income taxes on the depreciation recapture (taxed at her highest marginal rate). Her properties were in her will to bequeath to her children. When the kids inherit the houses, all the built-in gain and depreciation vanishes. They get the houses at their current fair market value and can start depreciating them all over again from that higher basis or sell them at possibly no taxable gain.
Call us at 727.310.8106 to set up your appointment to structure your real estate activities in the most tax advantaged way.