Can someone break down a "write off"?

General Real Estate Investing
1

My dad keeps saying “write off” and how everything is one. I think he just repeats what his accountant tells him without doint any research on it.

He tells me how a mortgage is a write off. I know it is but you pay way more in interest on a 30 yr mortagage than you would ever get in tax deductions. Right? (we are not talking about a fast turnover).

I once read that your write off becomes very little after 5 years. Can comeone give me the details on how much you actually save at tax time writing off a mortgage?

2

stoop,

A “write off” means that you can write off that amount as a deduction on Schedule A of Form 1040. Every $1 ‘written off’ like a dollar that you didn’t make as income. The amount you save is a factor of the amount ‘written off’ and the tax bracke that your taxable income falls within.

As a homeowner, you can write off any interest that you pay on your mortgage, any property taxes that you pay, etc. As an investor with a rental property, you get a whole new list of deductible items. You still get interest and isurance but you can also take maintenance costs, advertising, cleaning, repairs, and DEPRECIATION. Depreciation allows you to take an amount off your taxes for items “wearing out”. There are several timelines against which you depreciate items. While buildings don’t really “wear out”, the IRS allows you to depreciate investment real estate over a period of 27.5 years. For instance…you buy a rental property for $145K. Of that it is determined that the structure is worth $110K and the land is worth $35K. Land doesn’t wea out and can’t be depreciated, so the basis for your building is $110K. Every year that you keep that building in service as an investment property, you can ‘write off’ $4000 in depreciation…there are a lot more tax advantages to holding renatl properties than there is for a private residence. In this example, if you are in the 15% tax bracket, you will realize an actual tax savings of about $600 ($4K X15%)…

This is not simple stuff…people make their livings (CPAs, enrolled agents, tax accountants, etc.) figuring this out. I would recommend that as an investor that you get a decent accountant/tax professional on your “team” or get REALLY smart about taxes, tax sheltering, and tax implications…

I look at tax savings as “icing on the cake” and don’t include it as a mojor deciding point in investment properties…

Keith

3

“Tax write off” is a slang term which is usually misunderstood by those who use it. I say it is a slang term because although it is commonly used, I don’t think you will find it in any IRS publication or instruction. So it is one of those things which means different things to different people. Let’s assume that the term means that the “written off” item is a tax deductible item.

I’m going to quickly explore the most common “tax writeoff”, the mortgage interest deduction which will apply if you own and live in a home with a mortgage.

I grabbed a 2004 tax return to make this example: Let’s assume that you are married filing jointly and you paid $8000 in interest on your primary residence. You can “write it off”, right? Yep, you can fill out the Schedule 1040 A (Itemized Deductions). Upon completing that form you have a total of $9000 in deductions which you can carry to line 39 of your 1040.

Wow! I just saved $9000 on my taxes, right? Nope. This is just a deduction, not a credit.

If I am in a marginal tax bracket of 25% then I saved $2250, right? Nope. You saved nothing. The Standard Deduction for 2004 (which you can use instead of Itemized Deductions) is $9700. Since the Standard Deduction is higher, you would use that figure. Your writeoff saved you ZERO.

You may have Itemized Deductions which are much higher. In that case you probably have much higher income. And you will have to use a worksheet which phases out a chunk of your itemized deductions. So the value of the deductions is less than it appeared to be.

This is just a quick attempt to show that the value of a deduction is variable, depending upon your income, your total deductions, and other factors. It is much more complex and variable than people make it out to be. And, of course, many “writeoffs” give no benefit whatsoever.

I am not an accountant or tax preparer. I am just a guy who does my own personal tax returns. At one time when I wrote the monthly check for my primary residence mortgage I would think “$1500 interest, 33% bracket, that actually costs me $1000.” Now I know better.

4

when my partner and i sold our small business - i paid 400 and change in capital gains taxes. my partner, who also was married, owned a home, and made a significant amount of money as a NYC firefighter as well - paid over 2500 in capital gains…

on his K1 ( i think that’s what it’s called) - he received 13,000 more than i did, but paid almost 5 times more in cap gains because of what Steve Smith and KD were saying.

tax brackets make a HUGE difference. also, our CPA would try and explain depreciation on the company assets…or equipment…things i did not understand…until now…we made a pretty significant amount of money…and at the time, i couldn’t believe that i was only paying 400 bucks in cap gains. unreal.

like for instance, people think that the tax deferred monies that go into a 401k lowers their taxable income…

correct me if i’m wrong, but it only lowers what you are taxed on…but does little unless such deductions move you from a higher tax bracket to a lower tax bracket…but the differences in income brackets, as i understand them, are pretty big. i mean to move from 27% to 25%, we’re talking upwards of 69,999…

am i making sense?

in this case, if you were to earn 75,000 from your employer, but put 10k into your 401k, then you’d move from 27% bracket to whatever…25% bracket…thus saving you.

but the 401k is a tax DEFERRED…meaning, you pay it BIGTIME in the end.

it’s funny, how in God’s name do people presume that they will pay less in taxes in the future…who cares about retirement and senior citizen status…you’re still gonna get banged one way or the other. and by the time i reach the “standard retirement of the working man”…what is it now…umm 65…and the mandatory draw is what 69…and…in 10 years it will be 72…in another 10 years who the hell knows!

wow…if you were to listen to a democrat or republican these days, they’d convince you…as they have convinced most…to actually believe this crap! believe your employer will solve your problems, believe that a 30 year mortgage is good because you get to “write off” the interst…believe that a 401k is good…invest for the long term…

OH MY GOD. God help us!

5

your “write off” is going to be determined by your personal tax situation. start thinking in terms of marginal income tax bracket and average income tax bracket. in my opinion, don’t ever make a purchase based on the “write off”. governments have a bad habit of changing the tax rules in mid stream.

6

Another misconception that many people have concerns having additional income put you into a higher tax bracket. Example: In 2006, married filing jointly, a taxable income of $61,300 would put you at the absolute top of the 15% bracket. You would owe $8440 per the table.

What if you were to make $1,000 more than that? You would be in the 25% marginal bracket. And here is where people get confused. They think that they will have to pay much higher taxes on all their income due to going into that dreaded “higher bracket”. That is wrong. The total tax is only $250 more.

I have heard and read statement to the effect of “There is no point in making any more money this year because it all goes to taxes”. That is not correct. Making more will cause you to pay a higher percentage of taxes overall. But there is no 100% marginal rate.

7

<<But there is no 100% marginal rate.>>

But if the libs get their way, look for one!

:frowning:

Keith