My dad found out how much im paying in rent. And knows I can’t save shit cuz of student loan payments. We looked up my apartment building’s worth and I alone am paying almost half of my landlord’s mortgage. Dad basically said, “fuck your landlord. What if I help you buy a small house with my name?” I told him I was down if possible.
Turns out that he’d have a huge tax write off go away when he finishes paying his house — which is soon. The tax gist of it is that dad can buy a second home or apartment building and write off property taxes and interests paid if I’m living there.
So, now we’re realizing that the write off basically encourages ppl to buy shit. Then add the possibility of making money off tenants and bam: huge fucking incentive to buy apartments.
Luckily my dad hates the idea of ever collecting rent from ppl and he’s not out encouraging me to buy apartments or some other stupid shit. But I can imagine others seeing it as a cash grab —especially if they can cover the mortgage by leeching off renters or just make fucking money of em. Shit is so fucked. Holy shit I hate this country.
:the-more-you-know-png:
Mortgage interest and property tax are just the beginning of the tax breaks landlords get. They also get to deduct depreciation and maintenance, which regular homeowners don't get to do.
You can deduct a lot of things if your place is a rental. Take a look at the Schedule E form: https://www.irs.gov/forms-pubs/about-schedule-e-form-1040
Basically your mom n pop landlord gets to deduct pretty much anything they can reasonably attribute to the rental property they own as a business expense. If they live in another state, it's fair game to fly in, stay at a hotel, visit the property for some reason, then deduct their expenses (travel, meals, etc) on Schedule E. Property taxes, management fees, and more are fair game.
But honestly even with some of these perverse incentives a lot of it doesn't even seem that overpowered from a liberal perspective.
The one I still can't wrap my head around however is depreciation. I thought the whole point of doing repairs, cleaning, making improvements, etc. was literally a way to measure depreciation of a property. Like oh I just spent $500 paying someone to repair a sink--I thought that meant my property had effectively depreciated $500 (which I then mitigated). Nope, you can just straight up deduct 3.6% of the value of the property's improvements (this, together with the land value are what you paid for the property, in the eyes of tax assessors) each year, until you have fully depreciated the property.
For example let's say my property is valued by the government at $300k, and $175k of that is considered improvements (an apartment, for example). Then when I rent it for a year, on my Schedule I can claim $6,300 in depreciation. Tack on another $8,000 in expenses that year like property taxes, management fees, repairs, etc. and my Schedule E will show I've actually lost money if I didn't collect over $14,300 in rent money that year, from that property. But the reality is, $6300 of those losses were basically intangible in the form of depreciation. At the end of the year if I "broke even" I would still have $6300 in my pocket from that property.
Now, when I sell the property, I have to pay taxes on however much money I had deducted previously via depreciation. But it's taxed at the fucking capital gains rate. So rental properties are literal fucking tax shelters--the government is just begging rich people to scoop up all every property, and it's fucking disgusting.
Yeah, the depreciation is in theory increasing your capital gains tax down the road at some point (like you said, that's already a "win", since that rate is lower) but you can still dodge even that with a 1031 exchange, and/or a "step up in basis" when you die and your little slumlordlets take over. You can dodge capital gains until you die, and then when you do, neither your estate or your heirs have to pay it. It's a racket.
Oh my god I just read up on both of those and it's so incredible how meritocratic this country is. I can depreciate my assets then when I die and my kid sells the place they don't have to pay any taxes on the money I saved from depreciation which I also passed down to them! I love how this country is just like "yes but how can we enshrine generational slumlords in our laws?"
:agony-deep:
I'm doing this when I'm 84 and can finally afford a downpayment on a house.
Your dad sounds cool. My parents would tell me to fuck off out of sheer spite and just buy themselves a second home to turn into a rental.
I def realize I’m in a unique situation. Dad’s got heavy socialist tendencies and so that helps.
If you're interested in how fucked this country is in favor of the real estate industry capital city is a great book.
Gonna have to check it out. The current tone of the convo with my dad is how fucked everything is. He’s ripe of radicalizing
Time to turn his principles into actual theory.
honestly australia is even worse than the US about this. the material conditions aren't quite as terrible as america but the rent-seeking element of society and the laws/tax codes that encourage it are absolutely bonkers.
Negative gearing is a fuck. They justify it by saying it keeps rent down, but all it really does is cause a speculation spiral, which ultimately drives rents even higher.
Are you sure your dad wouldn't have to be living there to get the tax write-offs?
I’m skeptical of it too.. but everything so far says yes.
“ If you stay at the property for more than 14 days per year, or more than 10% of the total days in which the property was rented, then the second home is considered a personal residence. This means you can deduct mortgage interest and property taxes as you would with any home, but you cannot claim rental losses. If a member of your family uses the property (including your spouse, siblings, parents, grandparents, children, and grandchildren), those days count as personal days unless you are collecting a fair rental price during those family stays.” https://www.investopedia.com/articles/personal-finance/013014/tax-breaks-secondhome-owners.asp
Gonna talk to a CFA before I move further. But it’s wild af.
Oooh you’re right. That’s even better, have a friend who’s one.
Yeah. And he just bought a house so he might be well-read on it. Should I be looking for a specific type?
