Hi All, new here but used to post occasionally on Redfin BA.
The house and senate tax bills aren’t great for primary residences for reasons already discussed, but the 23% deduction for pass through income (reducing the maximum tax rate for LLCs, etc. to 25%) seems like a major win for rental property owners. Am I correct in thinking that you need to put your rentals in an LLC or S corp to take advantage of this? The bill explicitly states that it does not apply to trusts. Based on my read of the bill, it would not apply to rentals owned as individuals and reported on Schedule E, but I’m not a tax professional and would love to hear other opinions.
Looks likes it’s finally time to put the rentals in an LLC…
Maybe S Corp is best… Not sure. Might be an issue if financing is in place…
Another issue is capital gains. If you sell, is it a capital gain or income to the SCorp?
To get the LLC tax treatment, do you have to transfer title to LLC? If you transfer the tilte to LLC and continue to pay mortgages, will your lender be able to find out about the title transfer and can they recall your mortgage?
Once transferred to LLC, I think it would be hard to do refinance
Of course, you can leave the highly mortgaged property to personal tax, only transfer paid off property to LLC.
Question would be whether it’s worthwhile to lower leverage and lower total potential investment size in order to get some tax benefit which might be small?
This issue was talked about in various threads for like 4-5 times. I asked that question since Trump has proposed his tax plan while campaigning for President. My conclusion:
Preferred approach: Ensure aggregate P&L for rentals to be negative i.e. no tax is due, through a combo of mortgage interest (re-financing if necessary), depreciation (1031 and buy more houses) and continuous home improvements & re-modeling (increase your value of your house too).
Incorporation only if you can’t “lose” money and is making profit, best is S corp but LLC is good enough. This is a fairly complex and costly exercise, you should talk to a tax accountant if your goal is to save tax or talk to an attorney if your goal is liability protection. Eventually need to talk to both.
Sch E is all rentals lumped together. So even if one rental is “losing” money if it “lost” big enough it can cover the rest. I still have “loss” carried over from the past so it will be a while before I worry about this.
The more interesting question to me is this. Does rental housing lose come of the appeal compared to stocks? I have no firm opinion on that yet.
Without leverage, stocks is better. When you have too much money and too little time, sell the paid off houses and invest in stocks. But there are numerous strategies in stocks, it depends what strategy you are going to employ
Before reaching that point, what should we do with the taxable rental income? If you have 20k or 50k taxable rental income, can you use a landlord 401k or SEP or a pension to tax shelter all of them in addition to your regular 401k?
BAGB, you’re very consistent. You’ve ignored one critical parameter, the differential rate of appreciation of RE vs stocks (or indices, depending on what you’re comparing). manch is asking, will tax reform causes stocks/ indices to appreciate faster than the gain afforded by the leverage of rentals, presumably means more than 3 times as fast. That is if rental is appreciating at 10% p.a., with leverage becomes 30% p.a., are there stocks that would appreciate faster than that because of the tax reform.
The answer is no. Corporate tax rate reduction is a one time thing, may cause a one time stock jump of 10% at most.
Many countries have lower corporate tax rate. It’s good for the economy but its impact on stock appreciation is not 200%.
After the 1st year, earnings growth should be back close to its norm. I think low corporate tax will encourage more competitions. More businesses will be formed and more employment. Labor cost could rise a lot and the people will have a better life. This will translate to rising stock prices and rising home prices. Both will benefit
One time reduction on Corp tax is good for corps, obviously, but I am not sure long term it will be good for economy. US economy is driven by consumer spending. So you want to put moneg into American consumers’ pockets.
Anyway I don’t think the answer is a simple “No”. I want to read more to form an informed opinion.
After the 1st year, earnings growth should be back close to its norm. I think low corporate tax will encourage more competitions. More businesses will be formed and more employment. Labor cost could rise a lot and the people will have a better life. This will translate to rising stock prices and rising home prices. Both will benefit.
Consumers will benefit a lot due to higher salary and better jobs. Inflation may start picking up and that’s beneficial to houses. We already have a housing shortage.
Corporate profit is mainly driven by competition. If you drop corporate tax rate to zero, more competition will temper the corporate profit growth.
Economics is complex and it’s all connected. No amount of reading will give you the answer, because too many moving parts and even the author has no idea.
For example, what’s the median networth of Nobel prize winner in economics?
Lower comporate tax is a response to lost jobs due to outsourcing. I think it’s a smart move. It could make the workers better off, works better than minimum wages.
The best policy is to provide smart incentives to encourage employment growth. Heavy tax will always fail the workers. Investment will seek the best place and flee the heavy tax and heavy regulation locations
Your reply is too textbook and generic I don’t think what you said would happen.
IMHO, the current context is not the same as that assumed in the textbook where such theory is expounded.
I have no views.
No change to tackle all changes.
以不变应万变
That is continue to buy rentals in Austin, mess with small caps, and keep AAPLs for dividends (10% pay rise every year is too good )
Coincidentally, Apple has tons of cash hoard overseas which should benefit from the low repatriation tax rate and more than 50% businesses overseas which should benefit from the territorial tax system.
Yes, most of the economy is consumer spending. It’s 65-70%. That tells you wages are way bigger than corporate profits, since the bulk of consumer spending is from wages. People complain about greedy corporations and profits, but they pay our far more than their profits in wages to employees.
It’s not blowing up the budget. They always quote the 10 year number. On an annual basis, it’s 2.5% of the federal budget.
If all are re-distributed as dividends, very yummy!
I don’t think what you said would happen.
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