Author Topic: I have a unique situation, here is my plan, what do you think?  (Read 4039 times)

thebeachbum

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So I have been a long time reader and fan of MMM, and believed in his thinking before reading, but after reading he has challenged me to the next level.

I Think I have a unique situation that allows me to use save my money in different capacities than the traditional mustachians. But I wanted to run it past yall to make sure I’m not overlooking anything.

Our Situation:

My wife and I are 25 been married for 3 years have no kids, and make $40,000 each and I get occasional bonuses.

My wife has a 403b which her employer puts 10% in whether or not she contributes, to which we contribute 3%

I have a simple IRA offered through my work with a 3% match and I am currently contributing 3%

What makes our situation unique is that my wife is an “ordained minister” and as such she qualifies for a “Housing Allowance” every year. To the best of my knowledge and understanding (CPA’s chime in if I’m off base) we designate an amount of her income every year that we think will be spent on our home, which includes down payments, Interest (we get to double dip and still write the interest off), principal, taxes, insurance, furniture, appliances, upgrades, extra principal payments etc. and this amount is not federally income taxed.

So my current strategy has been to buy a house every year, and then move out and buy another house keeping the old one as a rental. We have done this once already and are planning to do it again this summer, giving us 2 rental properties and a home that we live in.

Now as I understand it, everyone here is pro maxing 401K because of the tax benefits, which I believe I am getting by putting my money “into” my home.

We basically designate her whole salary as “housing allowance” minus what she contributes to her 403b.

So I know that was long but basically I guess my question is does this sound like a good plan? Does it make since to not max the 403b and IRA since we can put that money “into” our home with the same tax advantages, and have access to it before reaching 59.5?

Thanks in advance for your feedback.

MDM

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #1 on: May 27, 2015, 03:17:33 PM »
Are you familiar with http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Minister-Audit-Technique-Guide and does your plan meet all the rules discussed there?

Tremeroy

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #2 on: May 27, 2015, 03:32:14 PM »
Echoing above, I would be very careful with this strategy. The guidance on the IRS's website instructs you that the excludable amount of a housing allowance is the lesser of:
  • The amount designated
  • Fair market value of renting the place you lived (as furnished)
  • "Reasonable" pay for your services

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/Ministers'-Compensation-&-Housing-Allowance/Ministers'-Compensation-&-Housing-Allowance

I don't know the sorts of houses you live in, but the second item seems like it should be an impediment to your strategy.

thebeachbum

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #3 on: May 27, 2015, 03:44:30 PM »
Yes we follow in accordance with all of the IRS rules, the housing allowance is only used for the current house that we live in at any given point, and being mustachian our homes are well below the average home in the area. because we move into each home and put a down payment on it, that money which is being used to "purchase a home" is eligible for the "Housing Allowance".

Now yes once we move the old house and all of its costs are no longer eligible for the "housing allowance" but they are now rentals and have their own tax benefits. 

and yes we do designate an amount at the beginning of the year, and if we don't use that much we pay taxes on the difference.

essentially it would be the same if she got a new "ordained minister" job every year in a different town that required us to move.
« Last Edit: May 27, 2015, 03:49:22 PM by thebeachbum »

Warbler

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #4 on: May 27, 2015, 03:57:38 PM »
I'm an ordained minister. If the contributions to your wife's 403(b) are made by her employer they are not included in income subject to SE tax. Her housing allowance is subject to SE tax. There is also no capital gains tax on the 403(b), though you will pay income tax on your withdrawals. So unless she opted out of social security there are significant tax advantages to the 403(b).

BrickByBrick

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #5 on: May 27, 2015, 08:13:58 PM »
Since others are bringing up the tax implications, I will just voice concern at collecting too many rental properties too quickly on 80K a year.  I have a friend who found his own little "unique" situation (not really unique), and immediately collected four rental properties.  He's learning now just how expensive maintaining rental properties can be when everything is not ideal (no renters) - he's way too leveraged.  Now he's becoming a flipper (to get rid of 2 of them).

kendallf

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #6 on: May 27, 2015, 09:44:43 PM »
Echoing above, I would be very careful with this strategy. The guidance on the IRS's website instructs you that the excludable amount of a housing allowance is the lesser of:
  • The amount designated
  • Fair market value of renting the place you lived (as furnished)
  • "Reasonable" pay for your services

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/Ministers'-Compensation-&-Housing-Allowance/Ministers'-Compensation-&-Housing-Allowance

I don't know the sorts of houses you live in, but the second item seems like it should be an impediment to your strategy.

.. and the IRS link above mentions specifically that the housing allowance is taken from "salary (for services as a minister)".  I get the sense from your original post that her job is unrelated to her ordination.  If she has a secular job you can't just declare some of that income as "housing allowance" and exclude it from taxes. 

Tremeroy

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #7 on: May 28, 2015, 08:06:56 AM »
Yes we follow in accordance with all of the IRS rules, the housing allowance is only used for the current house that we live in at any given point, and being mustachian our homes are well below the average home in the area. because we move into each home and put a down payment on it, that money which is being used to "purchase a home" is eligible for the "Housing Allowance".

It is difficult for me to think of a situation where a down payment + 1 year's taxes + 1 year's mortgage payments is not greater than 1 year's FMV rental value. Remember, from the list of possible exclusion amounts, you are required to choose the lowest amount (irrespective of how much is "designated" as housing allowance). And, as kendallf pointed out, only income received for performing ministerial services can be excluded.

thebeachbum

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #8 on: May 28, 2015, 08:55:20 AM »
Thanks to everyone for their feedback. I am sure we are following all of the IRS guidelines. I will get in touch with my CPA and double check, however . The law states:

"The amount of the parsonage allowance excludible from gross income is the LEAST of:
1. The amount actually used to provide a home,
2. The amount officially designated as a housing allowance, or
3. The fair rental value (FRV) of the home, including furnishings and appurtenances such as a garage plus the cost of utilities. IRC § 107(2)."

Since the amount "officially designated" is completely arbitrary (i pick it) and i usually guess high in case there are any unforeseen expenses, and the only penalty is to pay taxes on what was not used.

As well rental rates in this area are significantly higher than owning, hence why I am acquiring rental properties and why i want to own instead of rent,so the FRV would generally be higher that the "amount actually used to provide a home". and I basically use the down payment to maximize the benefit by making option 1 =option 3.

Also my wife's job is in her ordained minister capacity, I am sorry if that wasnt clear, but yes she works for a church and gets paid by the church.

Hopefully that clears everything up on that end. But assuming everything from the legal side is in order, do you think the benefit is worth taking advantage of? or am i trying too hard and should just throw everything at 403b/IRA/Vangaurd?

Warbler

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #9 on: May 28, 2015, 12:51:12 PM »
I'd just like to double-check that when you say you pick the amount of the housing allowance, that her congregation asks "how much do you want us to designate" since the amount must be set by your wife's employer.

milesdividendmd

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Re: I have a unique situation, here is my plan, what do you think?
« Reply #10 on: May 28, 2015, 09:36:01 PM »
I like your strategy! I'm all for creative structuring of your finances to lower your tax bill.

In the name of diversification is there any reason not to sell some of your old properties to clear up room for contributions into your tax protected investment accounts?  Is it capital gains that stops you from doing this?

On a philosophical level it's hard to look at this tax loophole and not conclude that we need a simpler tax system.

After all, why should the federal government care a whit how your wife makes her money?

Again, I mean this in no way as a criticism of your personal strategy, but more as a criticism of our labyrinthine tax code.   

The Backdoor Roth that I use every year is equally nonsensical.