Real Estate Tax Reform Hacks: Renting, Buying, And Investing

Last week I posted on how the new tax reform law has increased the attractiveness of renting a home vs. buying a home because of the increase in the standard deduction and the $10,000 limit on the deductibility of state and local taxes. As I pointed out in a November 2017 post the real problem for homeowners with the new tax law is that it has created an asymmetry between landlords and homeowners. Landlords can fully deduct property taxes and probably itemize while many homeowners won’t.
But you can make this assymetry work in your favor if you are adventurous enough. I’m about to propose some pretty far out strategies for capturing the full benefit of property tax and mortgage interest deductions so I should state a few caveats here. First, don’t do anything without first consulting a tax professional. Second, I am not a tax professional so take whatever I say with a grain of salt. Third, these ideas are just directional. In other words, you could tweak them endlessly to suit your own needs.
I actually referenced this first strategy in my November 2017 post: the sale/ lease back. The idea here is that you sell your home to a “friendly” investor – could be a relative, neighbor, or a friend – who will let you rent the home back from them at a rate that basically covers their net carrying costs. Since, as an investor, they can take deductions that you can’t their carrying cost should be lower than yours – i.e. they will be able to pass their tax savings onto you. Now, I wonder if you could combine the sale/ lease back with seller financing or does that just get too weird for the IRS?

Hacking tax reform
Yeah, that’s how taxes feel.

If you are worried about the optics of this arrangement or the financial risk of a relative/ friend/ neighbor owning your home there is actually at least one company out there that will do the same thing for you. (Interestingly, I actually predicted the formation of these companies in my November 2017 post). EasyKnock will buy your home, lease it back to you for up to 5 years, and then you can either buy your home back or let them sell it for you. If they sell it you take the gains or losses upon sale as if you had owned it all along.
What I don’t know about this alternative is how the economics work out. EasyKnock is obviously in business to make money and I don’t know if they set up their company to explicitly leverage the asymmetry in the tax laws or not. However, it’s probably worth investigating.
Of course, you could also just rent if the math works out better for you – and that just might be the case since a landlord’s carrying cost is lower than a homeowner’s now. However, the main downside of renting, and this is one of the main reasons that people buy, is that your rent will go up over time whereas mortgage payments will stay flat. Well, it turns out that you can offset rising rents by buying an equivalent rental property and using the rent from that property to cover the rent on your home.
OK, that might have just left your head spinning so let me explain what I’m proposing here without throwing a lot of numbers around (If you really need the numbers I can certainly provide them but I would probably lose a lot of readers). Picture a couple renting a condo that they really like and an identical condo comes on the market that they are interested in buying. Well, from a purely financial perspective they would clearly be better off buying the other condo as an investment property, and continuing to rent their current home, instead of buying the other condo to live in.
There are a couple of ways to think about this. One way is to simply recognize that if you are going to own a condo it is cheaper to own it as an investor than owning it as a homeowner. The other way to think about it is that the investment property rent eliminates the rent on your home in perpetuity – they rise in tandem. So in the end you are living in the condo of your dreams and paying a mortgage with the tax benefits of owning an investment property. You have essentially converted your rental property into an owner occupied property.
In reality it doesn’t matter if you buy an investment property identical to the one you are renting or not. It just needs to be close in value, carrying costs, and rental income.
Let me know what you think of these ideas.
#PropertyTaxes #RentVsBuy #TaxReform #TCJA
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

Enter your email address:Delivered by FeedBurner


Leave a Reply