How to Cheat Death & Taxes

So it’s almost everyone’s favorite time of year. The time of year when you consider doing your taxes, realize you forgot to tell your friend about what your other friend said to their maybe ex, put it off, and file an extension. DISCLAIMER: I AM NOT AN ACCOUNTANT AND AM NOT QUALIFIED TO GIVE TAX ADVICE.

Recently people who had considered buying a home in the past are lighting up my line saying, we have to buy something, we need write offs. What, pray tell, are they referring to?

Well as a US Citizen, you might not feel your Uncle Sam hooks you up that much. In fact if you are a resident of NYC, you might hate your Uncle Sam, and his cousin’s Andrew & Bill.

Some highlights of these deductions are (and I am not an accountant, whom you should consult for any tax advice):

At least 95% of a mortgage payments during the first 20 years of a 30 year fixed, or almost 100% of an Adjustable Rate, or Interest Only note is interest. The interest is a tax deduction. So if your mortgage payment is $4,000 a month, and $48,000 a year, you can write off most of that. It’s kind of a big deal. This is only true of interest on up to $1,000,000 of debt.

If you live in a condo, you can write off the property taxes. If you live is a coop, a prescribed portion of the maintenance is tax deductible (on average, 50%) So if you have a monthly payment of $1,500, over a year you would have an additional $9,000 deduction from your Gross Income.

mortgage-insurance-tax-deduction

One deduction that’s underappreciated, is depreciation. Commercial real estate depreciates faster than residential real estate, but residential real estate depreciates over 27.5 years. So if you paid $1,500,000 for a property, in the first year of living there you can deduct $54,545.45 off your taxes (again consult your CPA to verify.) The next year you can deduct $52,561.98  – a lower amount because you have a lower basis. This can be done until you have depreciated the property completely.

When you sell – you have to pay income taxes on the profits – which means you have to make the basis the depreciated amount. So if you depreciate $500,000, and you profit $500,000, your income from the sale is $1,000,000. However, the first $500,000 of profits in a real estate transaction for a married couple is TAX FREEZY.

You can also pad the basis by including all improvements you made to the property in the equation. So if you paid $1.5M, and then you spent $100K to improve it, you get to balance the ledger in your favor based on those costs.

So if you are renting, in addition to wasting money, and not building equity, you are missing out on interest deductions, property tax deductions, depreciation, and the tax exemption from the sale. If you do all these things you might also live longer.

In addition, here are some great tax deductions for:

And here is Johnny Cash singing “After Taxes”https://www.youtube.com/watch?v=_RWEZ8ddexo#t=48

Comments

  1. John Reiner says

    David, your piece gives the impression that depreciation is deductible even if the residence is not used commercially. That is not the case. Depreciation is deductible if the residence is rented out for profit or to the extent that a portion of it is used for a home office.

    John

    • David_Rosen says

      John, I make many disclaimers, but what they taught us in real estate school is that Residential Real Estate can be depreciated at a 27.5 year schedule.

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