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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Tradelite who wrote (67486)	11/29/2006 5:02:02 PM
From: Travis_Bickle	Respond to of 306849

I know people who have done very well investing in rental properties in the past decade without understanding the tax consequences but imo knowledgable investors know exactly what they are getting into. Tax accounting for real estate rentals is actually pretty simple. For federal tax purposes you have cash expenses and then you have non-cash expense, the latter of which consists of depreciation on the improvements. The specifics of the property aren't important in figuring out the cash flow after taxes. All I need to know is the purchase price, the depreciation schedule, cash in and cash out. For purposes of my example I chose a tax rate that is higher than any in real life. Back in the 70's and part of the 80's, we had accelerated depreciation of improvements on real estate. The depreciation was front-loaded, which meant that there was literally no way to lose on a real estate investment, in the short term. The investment threw off much more in deductions than it produced in income, making it a tax shelter. Unfortunately later in the investment it threw off much more in taxable income than in cash flow, meaning you had to pay someone to take the investment off your hands, or keep bleeding tax cost indefinitely (i.e., a "burned out" tax shelter). We don't currently have a similar system. There is no way (for an individual) to make money off of an investment that is cash flow negative to any significant extent. Congress could go back to accelerated depreciation, which would give real estate a heck of a boost, but the effect on the deficit would be enormous.