<p>^ For a family business, a kid under 18 is exempt from paying FICA and FUTA taxes.</p>
<p>You do have to fill out some paperwork and issue W2’s. </p>
<p>It might be hard for a 10-year-old to do $5000 of work, you can’t arbitrarily pay them $100/hour.</p>
<p>“It might be hard for a 10-year-old to do $5000 of work, you can’t arbitrarily pay them $100/hour.”</p>
<p>True, but I’ve gotten a lot of work out of them, painting, cleaning. And plenty of tech help, could easily get more than 50 hours of work in a year, and actually those years, I think you could only put about 3K (I think) into a Roth. Certainly in the later years, they could have made good money without a family business.</p>
<p>In my past, I have had received inheritances in the amount of 100k or so. They were from grand dad and mom. I am a conservative person and my first cut of the money received goes to pay down the mortgage. I do not like owe the banks, large or small amounts. So far until today, for the last 30 years, I pay off all debts or cash and carry including investing in real estates. I look credit cards as convenience, in stead of a means to buy stuff over my head. I’m happy with that. I think the world will be much happier without debt.</p>
<p>As far as taking the loot and put into a Roth IRA, I don’t know about that. Any investments into stocks or bonds carry a risk and most likely, you cannot beat the bank interest on mortgages. If you are absolutely sure you can beat the bank, then go ahead. Put it into a CD does not make it better as you certainly cannot beat the mortgage interest. </p>
<p>My own “risk” money goes to investment in real estate, but you may not be able to tolerate the “risk”.</p>
<p>^^I have to disagree with paying off the mortgage. 3.25%, presumably also being able to deduct that on taxes also, you can beat that. Maybe not if you daytrade or do something risky, but Vanguard has all sorts of low cost funds with lengthy histories.</p>
<p>I’m not recommending these specifically, but just as a comparison, some Vanguard funds:
Growth and Income (large cap)-9.61% return since inception, 1986
Health Care-16.73% since 1984
Mid Cap Growth-9.8% since 1997
US Growth-10.02% since 1959</p>
<p>I’d pick a diverse smattering of funds that have a great return over a long timeframe, and a shorter time frame. I know people have been freaked out over what has happened in the market over the last several years, but dollar cost average, decades long time frame, tax free…beats paying off a low cost mortgage. Then again, I guess it’s about risk tolerance. I’m more annoyed at the opportunities that I’ve missed out on, than the mistakes I’ve made.</p>
<p>Well, if so, busdriver, can you beat my investing in to risky real estate deal? for the past 2 years, I bought 4 houses and turned over one for a profit of around 60K(cost:140K, sold: 200K) total investment around 500K, net worth today is about 800K. I am holding back the sale of two houses as I am waiting for some increases in value since the market went wild over here.</p>
<p>So, Mutual fund investing does not look that good compared to more risky investments. However, as I said, I cannot tolerate owing some bank money. thus, my vote is to pay off the mortgage and then take the balance as risk money.</p>
<p>Before you do anything with the money, if you are unfamiliar with investing, turn off CNBC and read this book [A</a> Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing / Edition 10 by Burton G. Malkiel | 9780393081435 | Hardcover | Barnes & Noble](<a href=“http://www.barnesandnoble.com/w/random-walk-down-wall-street-burton-g-malkiel/1005527159?ean=9780393081435]A”>http://www.barnesandnoble.com/w/random-walk-down-wall-street-burton-g-malkiel/1005527159?ean=9780393081435)</p>
<p>I would also pay off your mortgage. H received for several years sizable bonuses. We put some in the girls’ college funds and the rest paid of the mortgage.( We already max out on 401k, earn too much for Roths, and have our emergency fund) We have been totally debt free for the past 2 years. The relief of having no debt is amazing! We know take our monthly mortgage payment and invest in a mutual fund. We split it into 4 payments every month to take advantage of dollar cost averaging. Last years bonus bought me a new car!</p>
<p>It surprises me how many of our friends still have mortgages, we never got caught up in the moving to a bigger and better house. Happily have been in our home for 15 years.</p>
<p>[Clark</a> Howard: Save More, Spend Less and Avoid Rip-offs | <a href=“http://www.clarkhoward.com%5B/url%5D”>www.clarkhoward.com](<a href=“Clark.com - Advice You Can Trust From Clark Howard and Team Clark”>http://www.clarkhoward.com/)</a><br>
always advises with windfall money to take some and have fun with it!</p>
<p>“Well, if so, busdriver, can you beat my investing in to risky real estate deal?”</p>
<p>Not sure, artlovers. Two of the short sale condos we bought were 75K/85K, probably could sell them now for $140-$160K, but honestly, our rental property deals have been a pain in the butt. I know that financially it was smart, but I really hate dealing with tenants, the entire hassle, fixing them up and cleaning (though my husband does most of that). Some people enjoy it, but for me…yuck. Can’t wait to sell them, but my husband wants to keep them. I would prefer a more passive investment, so I can’t really compare investing to the real estate dealings.</p>
<p>“We already max out on 401k, earn too much for Roths, and have our emergency fund) We have been totally debt free for the past 2 years”</p>
<p>That has got to feel great. I can’t imagine. All of our debt is very low interest, but it’s still a bit of a scramble always trying to get the great interest rates. Dave Ramsey would love you. But consider doing the backdoor Roth option since you earn to much to fund them directly, if you don’t have any deductible IRA’s.</p>
<p>If you itemize your taxes, it absolutely makes no sense to pay off a low-interest mortgage when you can make much more money with investments. The tax deduction alone is huge.</p>
<p>busdriver</p>
<p>I don’t buy real estate to rent, I buy them to flip. I will always do… I have enough problems with tenants as you do, as I manage several properties for my family. The house I bought has been vacant for 3 mo and I have yet to find a tenants, I am just holding it for better market.</p>
<p>Its a psychological thing, the tax advantage of a mortgage interest is obvious, but the relief of not having a mortgage is much greater than the few thousand dollars of tax advantages. IMO.</p>
<p>
I think you are much closer to running a business than investing. </p>
<p>Flip too many in too short a time, and the IRS will have this opinion as well.</p>
<p>nre</p>
<p>Absolutely, flip houses and rent apartments are all businesses, they are also investments. While in rental you will encounter bad tenants, in flipping you will encounter bad contractors and problem structures, so big risk comes with big rewards, they never fail.</p>
<p>IRS will close look at ANY quick Revenue generating entities, don’t they… LOL</p>
<p>If you want safe investment, buy treasuries, but that defeats the purpose of not pay down the mortgage.</p>
<p>“Its a psychological thing, the tax advantage of a mortgage interest is obvious, but the relief of not having a mortgage is much greater than the few thousand dollars of tax advantages. IMO.”</p>
<p>It would definitely be a relief to be free of mortgage debt. We have so much mortgage debt (4 rentals, one home) that it would make you laugh, but we console ourselves that at least it’s at a very low rate. I suppose a lot depends upon your tax rate, and if you need to try to conserve income after retirement. If you expect to pay 40% or even more if they raise tax rates by your retirement (they sure aren’t going down), it becomes more critical to maximize zero tax investments as long as they’re available. I don’t expect the Roth to last forever.</p>
<p>" I don’t expect the Roth to last forever."
Nobody does. If you can take advantage of this huge tax loophole who can blame you?</p>
<p>
I view flipping as using your capital to acquire inventory or raw materials. I don’t think you would say that a factory that buys sheet metal to make a widget is “investing” in metal, or a grocery store that buys stock for its shelves is “investing” in canned soup.</p>
<p>The IRS takes this viewpoint as well, which is why you will be taxed as a business - your “profits” are regular income, you have to pay FICA, etc.</p>
<p>This is never true rental of real property other than very short-term rentals (7 days or less).</p>
<p>^^That’s a subject I think I might start a thread on. We’re trying to decide whether to put our rentals in an LLC, as far as tax issues, and take business writeoffs. We have no writeoff for losses or depreciation otherwise. It just sounds very complicated, and I don’t like doing anything even questionable when it comes to the IRS, so I’ve delayed it. I need to get into a knowledgeable tax attorney, but I’m just used to taking care of things myself.</p>
<p>^^ House flippers always have few houses on hand to be flipped, its different house in different time zone. You own real estate, just different one’s… Of course, the profit from it is always ordinary income, if it is held less than certain periods. I have people became house hoppers so they can take advantage of the profit exclusion. And it does not have to be short term, I’d rather put my money in real estate than the 1% return from a bank.</p>
<p>I had the fortune to flip houses in my 401k, so capital gains are not a problem, until I am 70.</p>
<p>OTOH, for house lessors, the rental income is always ordinary income. Its a business no different from the flippers, you just hold on to the real estate longer.</p>
<p>In addition, flippers can use 1031 exchange to shield their gains.</p>
<p>
At which time, it won’t be capital gains, it will be taxed as ordinary income. Hence the benefit of a Roth: the capital gains are never taxed.</p>
<p>
What write offs would you have in the LLC that would not be deductible on the rental? Meanwhile, you’ve changed the income to earned income subject to self employment taxes? But I definitely agree you should talk to a tax pro. Just make sure you do your own research and understand what they are telling you.</p>
<p>
Not if the IRS decides you are a dealer, rather than an investor. There is no hard-and-fast definition for when one transitions from one to the other.</p>
<p>[Taxation</a> of Real Estate Flipping](<a href=“http://www.realestate.com/advice/taxation-of-real-estate-flipping-26154/]Taxation”>http://www.realestate.com/advice/taxation-of-real-estate-flipping-26154/)</p>
<p>
LLCs complicate things, and may not provide any financial benefit. I’m not sure that putting a property in an LLC will let you recharacterize the income to not be passive. Another thing to consider is how your state taxes LLCs - some states have a minimum tax regardless of whether the LLC makes a profit or not.</p>
<p>We looked at using LLCs for asset protection, but it turned out to be much more cost-effective to buy a large umbrella liability policy than go through the expense of setting up the LLCs, dealing with the tax filing complications, and having to pay $500+ per year per LLC to the state.</p>
<p>This is definitely an area to seek professional advice.</p>
<p>Our problem is not that it’s a passive investment, but we are income limited and can’t deduct one cent in losses. In an LLC, we could write off everything. At least that’s what someone told me.</p>