I wonder: if you added it all up, would a flat tax (which is nominally regressive) actually be more progressive than the regressive taxes we have?
> but the ability of corporate owners to use depreciation on a new purchase to offset profits from previous purchases is more significant.
If you're referring to cost segregation, this is probably less true now than in the past. It used to cost a lot of money to do a cost segregation analysis, and made sense only for apartment complexes (i.e. the cost to do the analysis vastly exceeded whatever savings you'd get on a single house). So only rich investors who owned 20+ unit complexes would do it.
I've heard that in the last few years, many accounting firms are providing it for relatively cheap, so ordinary investors can do it now.
RE people make a big deal about depreciation as a tax benefit, but it's minor in my experience. You're effectively reducing the cost basis, so when you ultimately sell, you have to pay a larger tax on the capital gains. Overall you gain, but not by a lot.
Perhaps if you combine with a 1031 exchange, you may get a greater benefit.
Are these companies going to banks and applying for a loan? I'd think they are privately backed and invested in.
The final phase is to exit via UPREIT for OP units rather than cash, with the REIT getting a step up in basis that can be depreciated again, while still not triggering any capital gains for you until you convert
If I am blackrock? If I am smaller PE deploying 10 million a year?
Somewhat more outrageous is the 1031 exchange. Sell VTI at a profit to buy VOO and the government hits you with a capital gains tax. Sell your primary residence for $250k more than you bought it - same thing. But landlords are a special, privileged investor class to whom these rules don't apply. They can sell a house and pay no taxes on gains as long as they buy another property.
Not sure what you're asking.
As the report points out, institutional investors purchase only 3% of homes nationwide (but much higher in some cities). Regular smaller investors likely buy more homes than the institutional ones.
Also, I don't know what you mean about rolling paper losses into the next deal, but I suspect it's not accurate either.
There's a reason this non-existent loophole wasn't mentioned in the article that was looking for reasons to hate on corporate landlords.
And the scale applies at every single step of the process. A citizen homebuyer is playing a oneshot game. There are few discounts to be had and every single fee is its own battle.
A corporation/PE is playing a multi-shot game. There are bulk discounts, relationships, and scale that is applied to everything from title insurance and inspections to cost segregations to filing all of the paperwork.
Source? That looks like a juicy target for state taxation…
Unrelated note but the Homestead exemption in Santa Clara County, average sale price $2,300,000, is $7,000. To be explicit, the home’s value is reduced by $7,000 for valuation purposes.
Edit: the tax deferred part sounds like a 1031 exchange
Not easy to do of course, but the problems that come with building more housing are better then the problems we have now.
They're only deferring the tax on $70-80K, correct?
This is crucial. People are in cities - in the day and age of corporate consolidation, less and less jobs are available, and they are increasingly in-office, and increasingly in only a select few metro areas.
Nobody would give a damn if a glut of housing was built in the middle of South Dakota or Maine or Wyoming. That's because there's very little to no jobs growth in those regions.
This is also not really how depreciation works for assets that retain their value. If you buy a building to rent it out, the cost of the building essentially a cost of doing business, i.e. a tax deduction. You pay tax on the profit which is revenue (rents) minus costs (building, interest, maintenance, advertising, etc.) Depreciation is the building, they make you take it over time instead of all at once when you buy it.
But the depreciation lowers the book value of the building, which is your tax basis when you sell it. If you buy a building for a million dollars, depreciate it down to $500,000 and then sell it for $2M, you have a $1.5M capital gain from the sale. You basically have to give back all the depreciation unless the building actually lost that much value by the time you sold it, and in practice it usually goes up instead of down.
It's really the homeowners who have the advantage here because there is a large capital gains tax exemption from the sale of your primary residence, and that's actually a reduction in taxes instead of just a deferral.
If you're having trouble buying a house in Atlanta, yes - they are a big factor.
In Austin? No - not a big factor.
As long as they buy another property at least as expensive or more, within a certain time period.
And it's not that they don't pay taxes, it's that the cost basis gets reset. That is the benefit.
Yes, if they sell normally. But usually capital gains tax is lower than that on the income so overall they're saving.
To be explicit: They use the $70-80K depreciation to offset their rental income (which often means they pay no tax on the income for that year and several years after). They'll pay it eventually when they sell, but at a (usually) lower tax rate.
There are tricks like 1031 exchange to avoid paying taxes when they sell, but I don't know how depreciation benefits factor in to those.
That's an easy one to fix regardless. Use a flat tax with a large fixed refundable credit. Now everyone pays e.g. 30% but gets a $12,000 credit, so someone who makes $40,000 is effectively paying zero, someone who makes $80,000 is effectively paying 15% and the effective rate approaches 30% as the number goes up. But the marginal rate is the same for everyone so there aren't all these complexities and arbitrage games, and at lower incomes the credit stands in for a lot of assistance programs so you don't get all the marginal rate cliffs from overlapping phase outs.
https://tax.thomsonreuters.com/en/glossary/bonus-depreciatio...
Cost Segregation:
https://warrenaverett.com/insights/what-is-cost-segregation/
I believe bonus depreciation is time limited (unless Congress renews it).
Also if you take a 10% gamble on a strategy to save 50k and it backfires and lands you with a 500k legal bill, that's just the cost of business to a big (or even not that big) company, but it'd be absolutely ruinous to private individuals.
Absolutely not. The US has the most progressive federal tax code in the OECD, mainly because we don't have a VAT like most other countries.
Nearly all of the loopholes you mention are at the federal level, where half of the households in the nation pay <= $0 in income tax.
This only maybe works if you count capital gains as regular income. Otherwise they do the Steve Jobs $1 salary thing.
Even the capital gains can be largely evaded. https://www.propublica.org/article/billionaires-tax-avoidanc... https://www.propublica.org/article/lord-of-the-roths-how-tec... etc.
The homestead exemptions are very small or non-existent in some states, but I believe they are fairly substantial in the south. Ultimately, my point was that they are completely wrong in that I don't know of a single locality where landlords are given discounts on property taxes but owner occupied homes have to pay full freight, but the opposite is true in at least some cases. They could be talking about developer incentives for new construction, but that's not the same thing IMO and it's difficult to understand what they meant.
It's very, very hard to talk to people who have such strong, completely uninformed opinions and seem to be completely unwilling to even attempt to educate themselves on the topic. To be clear, this is not pointed at you, I'm just not willing to invest the time you did to seriously guess at what the parent poster was going on about.
First, depreciation on real property is about 27 years. 80k annual depreciation indicates a 2.2m purchase price.
Corporate capital gains don't get a special rate. They're taxed the same as regular corporate income. The 1031 like kind exchange is also very difficult to achieve as the bar is very high even under the Trump admin.
Homeowners get a tax exemption but only up to a certain amount in gains.
That's straight line depreciation. Look elsewhere in the thread and you'll see cost segregation and bonus depreciation. To give you an idea, I once invested $50K in a multifamily property and my depreciation for the first year was $18K. I never paid taxes on any of my income (but did pay more taxes when it was sold due to the lowered cost basis).
a lot of temporarily embarrassed millionaires, some of whom may actually cross that threshold.
Yes, that's how a flat tax works. It's flat, for everything.
The nominal reason capital gains has a lower rate is that the amount of the gain is calculated without respect to inflation. But that's dumb; just use the normal rate and actually do the inflation adjustment from the time of purchase.
They can also keep the property forever and continue renting it out, and then never realize the gain. But in both cases that means they don't get to realize the gain -- or even recover their original principal -- except insofar as they're renting it out, and the rent is taxable income.