property, real estate

The Dual Nature of Owning Memphis Real Estate


“The US Government DISFAVORS work by taxing it heavily this is why people who work routinely pay 30% – 40% annually in taxes where as people like Mitt Romney only pay 15%.” – Jimmy Luke, CPA/CEO of Titan Financial. The time to buy real estate has never been better than it is as of this writing, September 17th 2012, to invest in real estate. Prices have been at an all time low(lowest price points since the 1980’s), and now we are seeing prices begin to creep back up. The good news is, prices are still low, relatively speaking – the bad news is, hedge funds and other large private investing conglomerates recognize that it is to their advantage to overpay for foreclosed homes since prices are suppressed far below what is their actual fair market value(thank to a variety of reasons, but the skew of foreclosures affecting the average sale price of normal sale type homes being one major contributor) and now prices are beginning to creep up. Whether this indicates an actual ‘recovery’ or just a growing inflationary trend in the market value of homes remains to be seen. However, the focus of this article is not to convince you to buy investment real estate specifically for passive income or capital gains purposes, but to discuss in some detail WHY it makes sense from a tax standpoint to develop an awareness of the NATURE of your income and the consequences it carries for you. And if you are able to internalize the fundamental differences and nature of these tax principles you are well on your way to becoming a more wealthy(and tax savvy) individual, regardless of whether owning investment memphis real estate is for you. Real Estate gives us a substantial tax advantage over those that do not own memphis real estate. Among these are: Here is a simple example of why owning memphis real estate makes sense for everyone, and why it is so hard to get ahead financially when you are using the traditional mindset of going to work everyday and hoping for a raise. Suppose an investor buys a house for 50k. His mortgage payment is $500/month. His rent is $700/month. His gross income for 12 months for a total gross gain of $8400. How much tax does he have to pay when he reports his income? Let’s break down the cost basis of the house: Mortgage interest a year(assumes $350/month) x 12 = $4200 Taxes and insurance a year(assumes $150 a month, part of his mortgage payment) = $1800/year Depreciation – we are allowed to take 1/27.5 of our cost basis(minus the land, not depreciable) each year for 27.5 years. Let’s assume the land is worth $5,000. His cost basis is $45,000, so each year we can legally deduct 1/27.5 of 45k which is: $1,636.36 Total costs per year for our investor: $7,636.36 Total Gain: $163.64 Total amount of tax due on subject property, assuming it is incorporated as a business: Negligible Remember, our investor placed $2,400 CASH into his pocket and STILL DOESN’T HAVE TO PAY ANY SGNIFICANT TAX. Simply put, he doesn’t have to pay taxes the way our ditch digger will on a $7800 gain reported as a 1099, which would be essentially a taxable event of $3,120 assuming a 40% tax rate, broken up as 25% in federal income tax and 15% in self employment tax. So friends, what is the moral of the story? In a world facing ever increasing taxes and hyperinflation of the US Dollar, perhaps there is a way we can get ahead legally and generate revenue passively without having to sacrifice ourselves at the altar of the Internal Revenue Service. Do your best not to be in a situation where you receive a 1099 or W – 2. Because if you do, the tax man cometh – for you, and there is nowhere you can hide L. Investors like my CPA Jimmy Luke, on the other hand, put it this way -he gets to spend his day ‘at the swimming pool having drinks with the ladies’ and not fret as much about the IRS destroying him financially, because he has chosen to invest in real estate and use the sheltering effects of real estate to offset income from his CPA practice. Truly, he has the best of both worlds and this is something all individuals would be smart to pay attention to. Working with Jimmy has taught me to do the same thing. This year I didn’t have to pay any federal income tax because of my real estate holdings, which was the good news. The bad news is my consulting business received 1099’s which were subject to social security tax. So buy some real estate and learn about taxes. AS a final parting gift for you, know that Jimmy Luke is accepting new clients by the way, and if you want some real tax advice you should call him at (901) 432 – 8888. Email him if that is easier: Jimmy@. Tell him Robert Feol sent you. Final Note From Jimmy: A person’s personal deductions: charity, personal home mortgage interest, personal home real estate tax, sales tax, state income tax, medical expenses, are deductible against INCOME TAX not Social Security Tax. Thus, if you have $50k of capital gain income and $50k of personal deductions you pay zero tax. If you are the ditch digger you can not deduct the $50k for purposes of social security tax.