<p>I am having a problem with the use of the word losses.</p>
<p>To simplify things… let’s say a property has rental income of 12,000, mortgage interest and property tax is 10,000…so the property generates 2,000 a year of income. Pretending there are no other costs to keep things simple.</p>
<p>The owner of the property has income above 150,000 a year.</p>
<p>The property owner pays income taxes on the 2,000 year of income, correct? The mortgage interest and property tax can be written off because the income from the property is more than the costs. There is no loss. The property makes 2,000 a year. Is this analysis correct?</p>
<p>Correct, but utterly irrelevant. The rest of us are talking about a situation in which there are losses, not merely deductions.</p>
<p>Say you have rental income of $12k, mortgage interest and property tax are $10k, insurance is $2k, and depreciation is $3k, and principal payments on the mortgage total $4k. You have a $4k negative cash flow, and a $3k loss for tax purposes. Except that if your AGI is over $150k, you have a $3k suspended loss for tax purposes, so have no tax benefit from it.</p>
<p>There is a difference between cash flow and taxable losses. In busdriver’s case, the losses are most likely due to depreciation deduction, even if the properties bring positive cash flow.</p>
<p>This is one example why they should get rid of deductions. busdriver, nothing personal. For the most part, deductions are not for the struggling poor. People with means use them to enhance their income or reduce the taxes. What kind of poor people have a second home to deduct mortgage from? If housing price is too high, people should move to other places equalizing the price instead of asking help from the government and driving the prices even higher while suppressing prices in the surrounding area. It amounts to robbing from the poor to help the rich.</p>
<p>" It amounts to robbing from the poor to help the rich."</p>
<p>Except for the fact that you can’t use this deduction if you make over 150K, so unless you have a different definition of rich, it doesn’t help anyways.</p>
<p>And yes, dstark, the rentals are positive cash flow, but it would be handy to be able to take the deduction if we could. They requirie some money into them initially to fix them up, including painting, appliances, and God knows what. Plus depreciation, and it would be nice to write off that massive water loss on one of them…to the tune of $7-8K. Who knows what other goodies are in store?</p>
<p>Didn’t mean to single you out. I was looking at a bigger picture; it helps rich cities on either coast with high housing prices. If they stop this “subsidy”, some companies may move.</p>
<p>Your post mixes so many things together, I am not even sure where to begin.</p>
<p>The depreciation expense is nothing more than delayed deduction. If I need to purchase something to operate my business which is not considered by IRS an ordinary business expense, I don’t get to deduct the entire purchase right away. I have to do it over time. So, now I am not only out of money, I am also liable for taxes on income I did not get to enjoy.</p>
<p>As for rich robbing the poor, please check the tax code. Nobody robs the poor. The working poor not only often have zero income tax liability, they often have fully refundable income tax credit, funded by those of us who actually pay taxes.</p>
<p>To me it seems that independently rich, of the kind of Waren Buffet, are robbing the middle and upper middle class who actually have to work for living. </p>
<p>And so much of your argument can be applied to all layers of our society, including the poor. I.e. if you don’t like how expensive the housing is, then move somewhere where you can afford instead of asking for rent subsidy.</p>
<p>No way I meant the discussion turn this way. I was exploring a way we can agree not disagree. If top 1% earn 17% and hold assets 40%, what tax burden should we expect of them? Or is top 1% a good way to group them or should it be differenciated finer maybe to 0.1%?</p>
<p>I know the difference between cash flow and profits.</p>
<p>Thanks.</p>
<p>Busdriver11, even with the mishap, and all the other expenses, are the properties cash flow positive?</p>
<p>Is depreciation making the properties show a loss?</p>
<p>Lerkin, every class has their perks. The middle class get the mortgage
deduction, tax free healthcare, retirement accounts.</p>
<p>The upper class gets capital gains, generation skipping inheritance, off shore accounts.</p>
<p>There is a mathematical reason why the top 1 percent pay 17 percent of their income in taxes.</p>
<p>We started out with a progressive income tax system. The top 1 percent continues to receive the vast majority of income increases in the country.
The top 1 percent used to make approximately 80 percent of ALL the income gains in this country. Now the top 1 percent in 2011 made 93 percent of ALL income gains. 93 percent of theincome increases went to 1 percent of the population.</p>
<p>And the net worth numbers sre more skewed to those at the top than the income gains.</p>
<p>Outside of income taxes there are other taxes that are regressive. To single out income taxes to complain about the poor is disgusting. Ronald Reagan wanted the poor off the income tax rolls. Ronald Reagan made it happen. Helping people by using tax credits is more efficient than setting up bureaucracies. George Bush accelerated this. And while they did this tax breaks were given to everyone, especially the wealthy.</p>
<p>I am not sure if it was directed at me, but I did not complain about the poor. Just as you said, every layer of society has their perks. I was pointing out the earned income credit perk.</p>
<p>What I would like to point out that from what I read in your post you would like the wealth to be distributed more evenly. I grew up in a society that pioneered that idea. And it did not work. Instead of having a small slice of population being miserable and poor, we had majority of the population being miserable and poor, with absolutely no prospect to ever being on the top. I much more prefer the system where 80 percent of all income goes to 1% - with the idea, that even if I am not in 1%, if I work hard and make smart choices, barring extra ordinary circumstances, I will do just fine.</p>
<p>P.S. I know you did not ask me, but I guarantee you that depreciation is what makes properties show losses. This is because you get depreciate the value of the building or condo, which might be quite substantial.</p>
<p>Some people will take on negative cash flow for a while in hopes that they can flip it for a gain. Unfortunately, if that doesn’t work out, these people tend to make lousy landlords, so they lose tenants or rent to lousy tenants, and before they know it they have no income at all. Foreclosure isn’t far behind.</p>
<p>It creates nice opportunities for people who know how to manage property. I’ve picked up some really nice rentals this way.</p>
<p>And while the depreciation is nice, don’t forget that you will have to recapture it and pay taxes on in when you sell the property.</p>
<p>401K is on the block too. Unfortunately there aren’t any details on what they might do. Does it still make sense to contribute to a 401K? For the past ten years, you could pay lower capital gains and dividend tax rates whereas 401K withdrawals will be paid at ordinary income rates.</p>
<p>Yes, I know. I was just making assumptions about busdriver’s situation. However, fortunately (or unfortunately) for her she probably will not have re-capture the depreciation because her losses are suspended due to income limitations.</p>
<p>I have a negative cash flow on some of my properties, but I view my properties as one of my retirement vehicles, so it is OK by me. I am some years away from retirement, so hopefully by the time I retire the properties will grow in value. If that does not happen, at least they will be either paid off or almost paid off. Then I can either keep them for cash flow or sell them.</p>
<p>I understand depreciation. I don’t want to assume anything with busdrivers11’s situation.</p>
<p>We are not at 80 percent of the income gains going to the top 1 percent anymore. We are in the 90’s now. When the standard of living is going up that is one thing. The standard of living is going down now. That changes society.</p>
<p>I read all the time about people’s experiences with countries with more even wealth distributions and how they don’t work well economically. The choice isn’t between the choice you are talking about, other country’s equality, and today’s economy in the US. There are a whole spectrum of
choices in between those two choices.</p>
<p>The United States used to have more income equality than it has today. Incomes weren’t equal. We just had more income equality in this country. There is a big difference between more income equality and income equality. I do not want income equality. That doesn’t work.</p>
<p>More income equality than we have now does work. The US economy did better when there was less income inequality in this country than there is today. Right now, income inequality might be at record highs. That is not
good for the economy.</p>
<p>There are many reasons why the levels of income inequality we have now is hurtful to the country. There are many places to get that information.</p>
<p>The “work” subject. It is not a person’s work that makes a person
wealthy. If you want to get wealthy make your money work. Or make other people’s money work for you.</p>
<p>Maybe working hard is working for you, but that road is working less and less for others. And as more of the income gains go to fewer and fewer people, that working road is gettn narrower and narrower.</p>
<p>Going back to the original posting about new windows and such, I was wondering if I will be able to get the tax credit for my situation: </p>
<p>Due to foundation issues this year we had to completely demolish our house and build a new one (we still have original attached garage). So everything is brand new and is extremely energy efficient. I am amazed at how small my utility bill for a house that is larger than the original was. Does my situation count for energy efficiency tax credit?</p>
<p>depreciation is not a delayed deduction. It is an expense spread over the lifetime of that expense. You purchase a piece of equipment, and you still own it at the end of the year - your wealth has not changed. You don’t use up that equipment that first year that you own it. It is not different than placing that money into the bank, except that you can use that equipment to produce income.</p>
<p>If that piece of equipment has a expected life of 20 years, you spread the expense over those 20 years. If you sell it after 5 years, any gain is based on your basis - the original purchase price minus the depreciation (the part you’ve used up). In the case of a rental property, in most cases, the property is still there long after it is fully depreciated, so it is actually better in the long run to not have to depreciate (you have to take depreciation if you can), because those delayed losses will end up offsetting the capital gains when you sell the property. If you realize $5000 in losses each year for the next 20 years, you just delay paying taxes on that $100,000 when you sell - all paid as a lump sum most likely at a higher tax rate!</p>
<p>Busdriver - you are correct, you can’t use the losses - but that doesn’t mean you can’t deduct mortgage interest or any other expenses. You just can’t use them to realize a loss on your tax return, except under certain circumstances where you run a real estate business, as opposed to simply renting out your property. It has to do with whether your income and losses are considered “passive” activities.</p>
<p>It’s not the negative you think it is. If you have the kind of income where the losses would reduce your marginal tax rate significantly, the gain when you sell the property is likely to increase you marginal rate even more (unless you’re retired and have little taxable income at that point). All you accomplish by claiming that loss now is [i[delaying the taxes until you sell the property* - and that can get you into a heap of trouble when you go to sell. I’ve had tax clients who sold rental property that was mortgaged, only to find the taxes they owned due to recapture of depreciation were more than the payout from selling the house.</p>
<p>Mortgage interest is under attack. 401ks are under attack. Those are upper middle class benefits.</p>
<p>I am not reading too much about capital gains. There is a push to keep the upper tax rates alone. </p>
<p>Does the upper middle class want to lose the mortgage tax break, 401ks, tax deductility of health care, property tax breaks so that rates can stay the same?</p>
<p>I think the wealthy would be extremely happy with the above outcome. Maybe the majority of the upper middle class would too. I am not sure. I think the upper middle class would end up a net loser and compared to the wealthy would be a big loser, but I am not sure.</p>
<p>Depreciation is taken off ordinary rates while depreciation recapture is taxed at a maximum rate of 25 percent. There could be a benefit of this if people are in a higher bracket than 25 percent.</p>
<p>Then there is the time value of money. Getting the money now is worth more than getting money years out.</p>
<p>I don’t want to start a war here, but I in addition to “work hard”, I also said “make smart choices”, which among other things, include what you are talking about. I am fully aware that I would not have what I have right now if I did not make money work for me. And this is where “making smart choices” comes in. </p>
<p>Believe me, I know what it is like to be poor - in my country of origin and in the US. So, I am not some entitled brat who grew up with the silver spoon in my mouth. And I don’t want to feel guilty that I have what I have. Because everything I have - I earned (one way or another).</p>
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