Re: buying a house for tax reasons… - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on September 04, 2003 at 16:14:15:
Well, 80-10-10 means 80% first loan from institutional lender, 10% second loan from some other source, typically the seller, and 10% down payment by the buyer.
Is that the same a 80-20 loan? I wouldn’t think so. 80% first loan from institutional investor, 20% down payment by buyer? Doesn’t sound the same to me. From the first lender’s point of view, it is the same, they are only lending 80% LTV. In a way 80-10-10 is actually better, as there are two different people who could pay them, the owner and the second lender.
A 80-10-10 would be good for your friend, assuming that he can make the payments on both loans, which sounds likely as you say “He’s making too much money.”
He can reduce taxes also by the deduction for the interest on the loans on his own home, assuming that he itemizes his deductions on his 1040. So, the more loan interest he has to pay the better.
If his income is less than $150K taxable income each year, there are yearly tax benefits from investing in long-term rental real estate. For those between $100K and $150K taxable income, the immediate tax benefits of rental properties are reduced progressively, the more income, the less tax savings. At least immediately. The tax benefits which cannot be taken on a yearly basis can be saved up and obtained should one sell a investment property. However, that is not a good strategy. It is better to never sell rental properties, from a tax standpoint. It is better to either exchange into other income properties or die with properties which your heirs get with a stepup in basis which may completely eliminate capital gains tax if they sell soon after inheriting from you.
To maximize tax benefits, one wants to own lots of properties to depreciate. This suggest highly leveraging–small cash payment, big loans. However, this is not applicable to one’s own home, as one does not depreciate it, unless one uses part of it for income purchases, such as renting it out or running a business in it.
If he needs to reduce taxes even more, he should consider getting into tax credits. These are found by investing in historical properties and low-income property investments. They are usually larger projects, not individually owned. I would expect that tax advisors would know of some. Perhaps an internet search would turn up such investments.
Good Investing*Ron Starr