income tax problem


#1

I have been investing in real estate rentals for almost 19 years and these income taxes are killing me. In short I am so “right side” up in my bank loans that it is costing me money. A lot of my loans are set to pay off in the next 4 to 6 years of a 15 year loan. Sounds great to me, however the tax law only allows a depreciation of 27.5 years. Now that i am at the end of my loans i am paying more principal than interest and with a small amount of depreciation I am actually spending more money in payments every month than the IRS is allowing me to write off. This is causing me to pay 15,000 to 20,000 dollars a year in income taxes on income that I really don’t have. My accountant suggested refinancing and stretching out the payments closer to the depreciation schedule. I was going to do that and borrow an extra 17,000 to pay my taxes and about 15,000 to pay off some credit cards that we used to do some past repairs. But the bank only wanted to do 7 years (just one year longer) and wanted to do some appraisals that are going to cost $7,000. This would only lower my current payments by $1,300 a month. This isn’t too bad, but I was thinking more like 10-15 years and lowering my payments by about $3000 a month so that I could actually have the money (that the IRS says I am making) to pay my future taxes. I don’t want to sell any properties because i am so close to paying out and realizing some serious cash flow. Do you have any suggestions as to what the correct solution is. I am sure that i am not the only person who has seen this problem.


#2

For this exact reason, I don’t like 15 year notes. You can’t deduct as much, and your DTI ratios are more adversely affected. You can always pay more principal if you want on a 30 year note, but on a 15 you are forced every month to the higher payment.


#3

so what’s the solution


#4

Sounds like its time to restructure your portfolio. If you can’t pay the taxes then its simply not cashflowing. If you re-fi for a longer term you are simply exchanging paying more in interest for less in taxes. Why bother ? Instead I would spend some serious time on a plan to liquidate some properties to payoff others completely. Reduce the size of your portfolio to all or mostly free and clear properties. Cash flow and taxes will no longer be an issue.

Keith


#5

The Dirty Ugly Secret…

You have just discovered the DIRTY UGLY SECRET…
about holding Rentals…

For years… I have challenged rental property owners
to show me a P&L where there are making money…

And it always ends up the same…

They equate Cashflow to profit…

And they aren’t one in the same…

You can have a business that has tons of cashflow
that masks all kinds of problems… and the
business owner/ real estate holder is none the wiser…

So, the solution… two of them… the first one… is the one I chose
back in 2003 and I have been happier every since… so happy it’s all I
do now…

  1. Sell them All… Owner Finance everyone of them out and then take your
    profit on an installment sale basis…

  2. Set up a C Corp as a management company and get the income off of
    your personal tax return… a C Corp will allow you to expense the money out over a year or so…

Me… as far as SFR’s go… I just say NO… and I owner finance 100% of the time…


#6

David Alexander - Please email me jeanne@creonline.com (Check your private messages on this forum)

~Jeanne