Author Topic: Tax advantage to owning negative cash flow property?  (Read 5332 times)

money_bunny

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Tax advantage to owning negative cash flow property?
« on: January 10, 2014, 06:21:39 AM »
I feel this may be "I am new and will believe anything I am told."

Are there any advantages to owing negative cash flow property? I have seen things sell around me like a big quad that by my numbers was about -500/mo after the expenses. I'm not saying I want to do this, I just am wondering what would be the reasons for doing this? Tax strategy?

1. Have 500K in a bank account and investing it (no mortgage so it will flow) since the banks are at 0 interest?
2. Setting up known losses to offset gains like a very high income knowing that they would lose the money in taxes anyway?

_JT

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Re: Tax advantage to owning negative cash flow property?
« Reply #1 on: January 10, 2014, 12:02:27 PM »
Appreciation, I believe, is the most common reason to own negative cash flow property.

Undecided

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Re: Tax advantage to owning negative cash flow property?
« Reply #2 on: January 10, 2014, 01:05:06 PM »
I feel this may be "I am new and will believe anything I am told."

Are there any advantages to owing negative cash flow property? I have seen things sell around me like a big quad that by my numbers was about -500/mo after the expenses. I'm not saying I want to do this, I just am wondering what would be the reasons for doing this? Tax strategy?

1. Have 500K in a bank account and investing it (no mortgage so it will flow) since the banks are at 0 interest?
2. Setting up known losses to offset gains like a very high income knowing that they would lose the money in taxes anyway?

If you have a very high income, it's unlikely that you could take the losses as a current offset against any of your other income unless you are a real estate professional.

money_bunny

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Re: Tax advantage to owning negative cash flow property?
« Reply #3 on: January 10, 2014, 07:00:00 PM »


If you have a very high income, it's unlikely that you could take the losses as a current offset against any of your other income unless you are a real estate professional.

Which is simply having a RE license if I recall?

arebelspy

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Re: Tax advantage to owning negative cash flow property?
« Reply #4 on: January 10, 2014, 07:08:36 PM »


If you have a very high income, it's unlikely that you could take the losses as a current offset against any of your other income unless you are a real estate professional.

Which is simply having a RE license if I recall?

No.  License or not doesn't matter. You have to spend at least 750 hours at it, and it needs to be your primary business.  There are other nuances but those are the big 2.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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marty998

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Re: Tax advantage to owning negative cash flow property?
« Reply #5 on: January 10, 2014, 08:37:59 PM »
Appreciation, I believe, is the most common reason to own negative cash flow property.

Yep, thats how it is done down under. Claim the income loss as a tax deduction, and the capital gains are taxed at 50%.

Magic pudding if ever there was one.

money_bunny

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Re: Tax advantage to owning negative cash flow property?
« Reply #6 on: January 11, 2014, 07:22:04 AM »

No.  License or not doesn't matter. You have to spend at least 750 hours at it, and it needs to be your primary business.  There are other nuances but those are the big 2.

Thank you.

Can you think of any reason why .5% duplexes that negative cash flow are staying on the market only for a few days around here? Is there something that I am missing? Which is why I am asking. I've read most of your posts about investing here in the forum. I get the 1% rule and the 50% estimation both from reading here and BiggerPockets.

I'm thinking maybe investing in NJ may not be the best idea other than a duplex or a quad that I live in one of the units (I'm single and currently renting, while renting my last place). I need to do an introduction and a "Does this game plan work?" post soon as well.


arebelspy

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Re: Tax advantage to owning negative cash flow property?
« Reply #7 on: January 11, 2014, 07:27:46 AM »
People with more money than sense, being used to those prices, wanting somewhere to invest their funds, and/or people making appreciaton plays.  I'd bet more on the former than the latter in NJ.

Most real estate is bought by regular people, not investors.  They see a home as a great investment, and aren't actually running many numbers on it, let alone comparing it to other real estate markets in the country or elsewhere in the world.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Undecided

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Re: Tax advantage to owning negative cash flow property?
« Reply #8 on: January 11, 2014, 09:18:18 AM »
People with more money than sense, being used to those prices, wanting somewhere to invest their funds, and/or people making appreciaton plays.  I'd bet more on the former than the latter in NJ.

Most real estate is bought by regular people, not investors.  They see a home as a great investment, and aren't actually running many numbers on it, let alone comparing it to other real estate markets in the country or elsewhere in the world.

As a counterpoint, while I wouldn't have considered .5%, I bought a rental duplex at around .7% in a market that I considered a strong contender for appreciation and rent increases (and in which I wanted to be hedged against that market's appreciation), at a time when I projected that the negative cash flow years would see my PAL suspended from the 28% bracket, anticipating that I would be taking the passive gains (and be able to manage the final disposition of the property to take the suspended PAL) when I was otherwise in the 33% or 35% brackets (which have now turned out to be the 35% bracket tipping somewhat into the 39.6% bracket)---covered by the suspended PAL. I haven't disposed of the property yet, but so far, so good, as to what I'd expected (7 years in), and I've been satisfied with the investment (which was largely isolated from the real estate market woes of most of the U.S., not that I had ever projected selling during that period).

Which is really just to say, everyone has their unique circumstances, and the OP really has to model on those unique circumstances.

Hamster

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Re: Tax advantage to owning negative cash flow property?
« Reply #9 on: January 12, 2014, 12:06:21 AM »
Can you think of any reason why .5% duplexes that negative cash flow are staying on the market only for a few days around here? Is there something that I am missing? Which is why I am asking. I've read most of your posts about investing here in the forum. I get the 1% rule and the 50% estimation both from reading here and BiggerPockets.

I'm thinking maybe investing in NJ may not be the best idea...
You may be right about NJ properties. Property taxes and rent vs purchase price in much of the NE are pretty absurd.
As for being cash flow negative, that all depends on how much cash you are putting into it. I assume that if you pay cash (no financing), you get positive cash flow. Not that I am saying that it is a good idea, but you can get cash flow on almost anything if you don't finance, and there are investors out there who are perfectly willing to do that, even if the return is pretty abysmal.

Many markets may not have any properties that come close to the 1% rule, and there are plenty of buyers that have much looser criteria. Look at Vancouver BC if you want an extreme example of ridiculously high price to rent ratios. There are still plenty of people willing to buy Vancouver properties as rentals, though (e.g. wealthy Chinese nationals trying to park money outside of China). There are also plenty of people who keep all of their money in CDs, people who think gold is the smartest investment, etc. etc.