Tax Reform Hacks For Real Estate A Bit More Complicated

On Thursday I posted some ideas on how to retain the benefits of the mortgage interest and property tax deductions under the new tax law. But I think I oversimplified it a bit so I wanted to backtrack for a few minutes. Let me clarify a few things.
First, I want to make sure that I didn’t leave the impression that real estate investing is suddenly more attractive under the new tax law than it used to be because it’s not. It’s that owning a home is less attractive now so, relative to home ownership, investing is more attractive.
Second, the deductibility of property taxes and mortgage interest is offset by the fact that the rent is taxable income. The government giveth and the government taketh away.
However, a real estate investor does get to depreciate a property at about 3.6% per year. So on that $625,000 condo that I used as an example in my first post on this subject the depreciation would be around $22,700/ year compared to property taxes of about $12,500 per year + the mortgage interest.
On the other hand that depreciation gets recaptured upon sale – i.e. it’s taxed. And it’s taxed at the ordinary income tax rate. So the real benefit of the depreciation is the delay in paying income taxes. But because the depreciation is spread out over many years and the recapture is a lump sum in one year the recapture may very well kick you into a higher marginal tax bracket than the tax bracket in which you took the depreciation deduction.
Let’s just say it gets complicated and you probably need help in evaluating your options.
#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.

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