nbb@packet.UUCP (11/12/83)
Here is a question for all you tax experts. I hope it will stimulate some good discussion here in net.taxes - so send all your replys here to net.taxes. Suppose I buy a house for rental income, each year for five years. At the end of 5 years, I refinance the first house, and get all (or 95%) of my equity out of it, and live for the next year on that borrowed money. Of course, I will need to raise the rent to cover the higher monthly debt service, but inflation will make that easy. The next year, I do the same thing with the second house. I borrow out all my equity, (borrowings are tax free) and live off it for a year. I keep doing this for the rest of my life, each year borrowing off all the equity in the house which has gone the longest since last (re)financed and living off it for a year. At the end of 50 years, when I die, I own 5 houses, now priced many times their original cost (assuming an essentially constant rate of inflation) each of which is mortgaged to the hilt. I have managed to live comfortably off of capital gains on which I have NEVER PAID ANY TAXES. When I die, won't somebody (my estate or my children or ...) owe a whopping capital gains tax to the IRS? I suppose it makes a difference whether my houses are sold, and whether or not I leave them to my children, or maybe I could just let the banks foreclose on them. I really don't know what would/should/could be done, but I don't want my heirs burdened with a tax bill, and I know the IRS has ways of getting tax money out of those who should not rightly have to pay it. Believe it or not, this scheme is exactly what is proposed in the famous "Robert Allen Nothing Down" (R.A.N.D.) Seminars! All across the USA, thousands of people shell out $445 dollars to attend a two day seminar to hear this idea, and how to buy houses with little or nothing down - then they go out and try it! Is it possible that all these people are headed for a big disaster? Or mayber their children are all going to be the big losers??? PLEASE REPLY TO net.taxes !!!
halle1@houxz.UUCP (11/18/83)
As I understand it, capital gains are forgiven upon death, at least if the estate goes to a spouse (this restriction might not exist). However, the estate is practically zero anyway, since the bank gets its money first. It seems awfully risky to me.
johnson@saturn.UUCP (Mark Scott Johnson) (11/19/83)
What you say about deferring taxes until death thru rental properties is basically correct. Real estate is the Congressional sacred cow. A fews points, however: 1. It unlikely you'll NEVER pay taxes on the income from the properties. Rent is taxable income, after all. With time your depreciation deductions will evaporate, so you're likely to start making profits on paper at some point. Even "tax free" property exchanges don't avoid this problem. 2. The disposition of the houses at your death is immaterial. The IRS will assess them at their full current market value and calculate the estate taxes accordingly. Yes, your heirs will have their inheritance diluted. But the estate-tax rate is generally lower than the income-tax rate and has a sizeable deductible. 3. By not paying taxes now, you have more capital to invest and, thus, you'll leave a larger estate. (This is the main argument for putting money into IRA and salary reduction programs.) 4. In some sense, your heirs will be paying your accumulated income taxes at the time of your death. You either pay the IRS now, or you pay later; there really isn't any free lunch. The prevailing wisdom on taxes is "defer, defer". There is some gamble to this, of course. Who knows how Congress will change the tax laws? But just because you pay taxes now doesn't mean you won't pay them again later. After all, estate taxes are charged on your total net worth at death, even on money you've already paid income taxes on! So you might as well defer. It can't be worse than not deferring--even for your heirs. -- Mark Scott Johnson
z@rocksvax.UUCP (Jim Ziobro) (11/19/83)
Everything sounds neat except-
Everytime you refinance there is a wide variety of costs. Many of which
are not deductible till the house is sold.
It is also unlikely that you could maintain only 5% equity in your houses.
Banks require the borrower to maintain a higher equity in rental units
and/or a higher interest rate.
You can only raise your rent so high before you have an empty house.
All this assumes property values will go up and you like being a land-lord.
Remember you can get pretty good rates with some tax-free bonds and
have a lot less hassle.
--
//Z\\
James M. Ziobro
Ziobro.Henr@parc-maxc
{rochester,rocks34,amd70}!rocksvax!zdave@utcsrgv.UUCP (Dave Sherman) (11/20/83)
Yes, my understanding is also (as houxz!halle1 says) that capital
gains are forgiven on death. In Canada that is not the case. We have
no official "death duties", but a "deemed disposition" of all capital
property at fair market value*, unless the property is left to a spouse
or spousal trust. The deceased's estate then has to pay tax on all the
underlying but unrealized capital gain.
_____________
* Unless the property is depreciable property, in which case the
deemed disposition is deemed to be for proceeds of disposition equal
to the average of fair market value and undepreciated capital cost.
Dave Sherman
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{allegra,cornell,decvax,ihnp4,linus,utzoo}!utcsrgv!dave