Somebody Please Give a Briefing on the Tax Reform Act of 1986 - Posted by Sparky

Posted by David on April 17, 2000 at 15:03:58:

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Somebody Please Give a Briefing on the Tax Reform Act of 1986 - Posted by Sparky

Posted by Sparky on April 15, 2000 at 19:15:43:

I’ve heard from some investors that the Tax Reform Act of 1986 was the best thing to ever happer to RE investors. But others say it was the worst. Can someone reply to this and mention briefly the basics of what this Act stood for?

There were THREE bad things in the Tax Reform Act of 1986 - Posted by David

Posted by David on April 15, 2000 at 20:34:28:

  1. As Phil stated the depreciation schedules were lenghtened. I had buildings at 15 year depreciation straight line and there were other accelerated methods too. Going from 15 years to 27.5 years almost reduced the depreciation by 50%!

  2. The paper losses including depreciation were capped at $25,000. Before 1986 there was no cap. It was great you could have $50,000 loss from rentals and $50,000 income from another source and pay NO FEDERAL INCOME TAXES. Read my lips!

  3. At $100,000 income the $25,000 loss is reduced until $150,000 income when it is eliminated. So if you make $150,000 a year, you can NOT use any rental losses to offset other income.

  4. And at no extra charge another change is that rental income became passive income, since then there are so changes that rental income for someone spending 750 hours a year can be active income.

All in all I for one did not like the tax reform of 1986, but you can make money no matter the market conditions, tech stocks plummet, interest rates rise, or even tax law changes.

Two results of the cjanges were that people didn’t buy just for tax advantage, but on the merits of the deal. Vacation homes rented for 12 weeks a year didn’t make as much sence without the tax loss. Many vacation area prices declined or stagnated. Additionally apartment prices declined or stagnated in some areas, as they didn’t make as much sence as they did with big tax incentives.
hth
David
www.centralpennlots.com

Re: Somebody Please Give a Briefing on the Tax Reform Act of 1986 - Posted by phil fernandez

Posted by phil fernandez on April 15, 2000 at 19:41:11:

You’ll probably need a CPA to go over the entire tax reform act of 1986. Prior to 1986 there was a componnet of the tax code that said you could write off ( depreciate ) rental real estate over a 19 year period at an accelerated rate. So the first few years of ownership you could shelter more of your money than you could toward the end of this 19 period. People looking for write offs such as doctors and other high income earners were buying rental real estate soley for the large writeoffs. Often these buyers bought the real estate just for this write off and not buying it based on the income stream ( cash flow ).

In 1986 the depreciation of rental real estate was changed. You could no longer accelerate it for the 19 years. You only could straight line this depreciation and the period was stretched out from 19 years to 27.5 years. This limited the depreciation one could take in any given year.

This law became effective on Jan. 1, 1987 and it shook out the big guys that were using real estate mainly as a tax shelter. There were some good deals to be had at the end of 1986 as these guys were trying to unload property. I bought a nice 10 unit on Dec. 1, 1986 that I have to this day.

In my opinion the act of 1986 was a good one because it eliminated the big guys who were pumping up prices for their tax breaks. Now all rental real estate had to make since pertaining to the actual cashflow that the property produced.

Re: There were THREE bad things in the Tax Reform Act of 1986 - Posted by Dave

Posted by Dave on April 17, 2000 at 14:26:45:

Is the $25,000 loss limit the same for married vs single?