Author Topic: Rental Properties in FIRE to Reduce AGI  (Read 939 times)

DMAC

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Rental Properties in FIRE to Reduce AGI
« on: January 12, 2018, 11:14:10 AM »
I'd like some feedback on this scenario and it's potential advantages and pitfalls. I'm currently on track to fire in 10 yrs at the age of 45.  My stache will be about 1.5 M at that time and with a 4% withdrawal rate throwing off 60k a year my basic expenses will be covered.  I also have a rental property that will be paid off at that time that will cash flow 20k annually, all of which will be above and beyond my basic expenses.

I'm considering purchasing another rental property.  To purchase that property my stache will decrease by 100k today, thus causing the ending balance of my stache to decrease to 1.25 M at the time of FIRE.  At a 4% withdrawal rate I'd be pulling in 50k off of that, but the additional rental property can make up most of that annual 10k shortfall (net of expenses) even if it's not paid off.  Thus leaving me with about the same income, just distributed differently with more in real estate.

I'm considering doing this for the purposes of taking advantage of depreciation deductions and mortgage interest deductions to reduce my AGI to lower my FIRE taxes and possibly qualify for health care subsidies in whatever form they exist at that time.  I'd even consider doing a 1031 exchange on the 1st rental property to reset the depreciation with a new property.

Is there anything I'm missing that I should be considering?  Thanks for your thoughts.   

drudgep

  • 5 O'Clock Shadow
  • *
  • Posts: 64
Re: Rental Properties in FIRE to Reduce AGI
« Reply #1 on: January 12, 2018, 03:57:41 PM »
I'm PTF since I think this is an interesting question... Hypothetically if you had 5-6 rental properties with mortgages and went to leanfire with 20-25K per year- your technical taxable income due to depreciation and interest could be negative... so would one qualify for medicaid, etc?


DMAC

  • 5 O'Clock Shadow
  • *
  • Posts: 32
Re: Rental Properties in FIRE to Reduce AGI
« Reply #2 on: January 16, 2018, 10:02:50 AM »
I guess not many here have experience in this area.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2207
  • Age: 39
Re: Rental Properties in FIRE to Reduce AGI
« Reply #3 on: January 16, 2018, 10:45:59 AM »
I guess not many here have experience in this area.

Various methods for reducing reportable income in order to qualify for income-based benefit programs (including allocating capital to real estate as you've suggested) are frequently discussed around here.  Just take care to try to plug all relevant factors into your cost-benefit analysis (including opportunity costs, and including the potential for changes in income-based benefit programs that could defeat the purpose of your financial planning), and don't let the tail wag the dog.

One potential error I see in your OP is that you seem to be assuming that all withdrawals from your paper investment portfolio will translate into income on a dollar-for-dollar basis, which will probably not be the case (assuming your paper portfolio includes assets that generate at least a portion of their returns through capital appreciation, like stocks).  So $60k of withdrawals (from your $1.5m stash) will probably not result in $60k of income, because a portion of that $60k of proceeds will probably represent return of invested principal, not gains (and therefore not income).  The income-to-withdrawal ratio will increase over time, though, as your cost basis in the investments drifts up.

midwesterner1982

  • 5 O'Clock Shadow
  • *
  • Posts: 42
    • Follow the link to open a Personal Capital acct and we both get $20 Amazon Gift Card!
Re: Rental Properties in FIRE to Reduce AGI
« Reply #4 on: January 21, 2018, 04:04:51 AM »
Interesting topic.  Posting to follow along.  Hope others will add their thoughts.