Posted on 07/31/2021 8:28:10 AM PDT by karpov
VERSAILLES, Ky.—Five brick apartment buildings in this horse-country town make up Paul Settle’s retirement nest egg. He purchased the complex 27 years ago and has spent almost every day since tidying the grounds, repairing garbage disposals and collecting rent checks.
Mr. Settle, 64 years old, pays himself about $75,000 a year. The idea was always to one day sell and retire off the proceeds.
But now his plans are on hold. The Biden administration’s tax proposal would increase the capital-gains taxes Mr. Settle would pay on the sale of the apartments, which he expects to fetch over $2 million. Mr. Settle’s tax adviser estimates the changes could halve his after-tax proceeds to about $400,000 after paying off the mortgage.
“I’m in limbo,” he said.
Democrats argue for taxing wealth like work and are seeking to equalize the top rates on capital income and labor. But the line between rich investors and middle-class earners isn’t always so clear. Some, like Mr. Settle, fall into both categories.
The Biden plan would increase the top capital-gains tax rate to 43.4% from 23.8% for those earning over $1 million. In any given year, only a sliver of taxpayers fall into this top bracket. Of taxpayers who filed Schedule D, the form for reporting capital gains and losses, only 2.7% had adjusted gross income of $1 million or more in 2018, according to a Tax Policy Center analysis of Internal Revenue Service data.
While many of the wealthiest people in the world are in this group, others more closely resemble Mr. Settle: They usually make less than $1 million, but capital gains from the sale of a property or business pushes them over that threshold for one year only.
(Excerpt) Read more at wsj.com ...
Sounds like they need to listen to Steve Martin’s advice.
Think Weimar Germany.
Democrats are trying to crush the middle class between the millstones of inflation and taxation.
Its what they do.
They hate the idea of middle class intergenerational wealth transfer.
They want everyone dependent and focused on the government (them) and that can’t happen if you don’t need them.
Simple! Do a tax free 1031 exchange for other rental income property with third party management. Retire and enjoy the income and pay no capital gains income tax.
Am I wrong in thinking that equity cannot be achieved without a rather large degree of government sanctioned theft?
Thanks for posting, I’m a WSJ subscriber but had not seen the article. It highlights the reasons I have always avoided rental properties. I’m an advanced DIY person and often thought of getting rental units. Since I could do most maintenance tasks, I could keep costs low.
Then reality set in- you’re dealing with people and where they live. That means their problems can become your problems. It’s interesting that the article makes no mention of Covid effects on his renters abilities to pay.
Next, illiquidity of the asset. This guy has 40 tenants in one property. If he had 40 tenants across ten properties, he could sell one property per year over 10 years and lessen taxes. Even then, the liquidity of real estate is exponentially lower than money in a brokerage account.
I’ve only seen real money made in real estate when you keep tapping the growing equity and buying additional properties. Of course that leverage works both ways.
At the end of the day, I just can’t deal with people. Being a landlord is not for everyone.
I know...why would you dump it all at the same time?
He has 27 properties? Sell three a year. Use the proceeds to pay off the other mortgages or reinvest them into something else.
Have these people never used a pencil and paper to do “what if” excercises?
If you sell the property, you would have to pay off the existing mortgage no matter what the prevailing income tax rate is. It appears the author has been overwhelmed by an abundance of numbers.
Or even better - over 4 or 5 years and pay very little taxes.
After all the tax cuts in the last 40 years (plus expanded child tax credits, etc), the middle class doesn’t really pay anything in taxes....certainly not federal taxes. About half the middle class doesn’t pay federal income taxes and the other half pays less than 10% of their income. Inflation is how they are effectively taxing the middle class without calling it a tax since any tax increase on the middle class is just not palatable.
You can and should make really good money with rentals. The single biggest key is to only rent to quality tenants - the easiest way to do that is to slightly underprice the market (massively increases the # of applicants, which increases probability of strong tenants if only 10-20%of rental applicants are strong). I underwrite all my rentals solely off ongoing cash flow and typically make 10-12% initially, plus principal paydown, plus appreciation. I sold off and started over after moving from one city to another (hard to manage when not local) and just getting going again but back up to 6 rentals generating about $35k/year in income currently (1 paid in full, 5 mortgaged - 2 of which I am splitting with family)
Might be a single apartment building with multiple units but still could sell fractional ownership fairly easily. But to answer your last question, I’ve found most folks are not that creative, especially with finance.
“You didn’t build that”!
BHO v3.0.
My uncle experienced JUST this. He had inherieted about 4 acres of land, in upstate New York, bordering on Braddocks Bay (an estuary of Lake Ontario).
His father-in-law had deeded it to him upon his death. Prior to that, Mr. Burger had made it a public-access park for his neighbors or whoever wanted to use it. While it was still owned by him, he allowed anyone to use it. It had two boat launches and an assortment of griller stands and picnic tables. People would often come and enjoy a summer day there.
My uncle had intended to continue this tradition, but the property taxes became so onerous, that in order to financially make ends meet, he arranged to donate it to the state to allow it to join the rest of the Braddocks Bay nature reserve... in exchange for property-tax forgiveness.
New York State taxed it until my uncle cried "Uncle!" and gave it to the state. The state removed the boat launches and picnic grills and tables, and posted "No Trespassing" signs on the access road leading to the former public park.
Isn’t that sad?
Yes and no. For society as a whole - yes. For me personally - no - It’s allowed me a top 2% income job in corp finance and not far off from top 1% income job - fairly easily.
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