THE THIRD INSTALLMENT OF A LESSON ON APARTMENT BUILDINGS...

A way to Survive!!!

Why Apartment Buildings should be in your financial plan!!!

Let’s say you buy a house for $600,000 with a combined tax and Mello Roos rate of 2%, you have to add $1,000 a month to your mortgage payment.  And to round things out you have to pay homeowners insurance.  And if something breaks you don’t just call maintenance from your apartment complex, you have to find someone to fix it and pay for it, and the landscaping costs more money.  So, houses are expensive.  Yes, you have appreciation and ownership, but nothing is guaranteed.  

And, under the new tax law you can only deduct $10,000 in total State and Local Income Taxes on your Federal Income Tax Return..  If you live in California and own a home where your real estate taxes are $1,000 per month you already are losing deductions.  When you add State Income Tax and Sales Tax you are losing deductions left and right.  Your real estate taxes and mortgage interest used to reduce your income tax obligation making your house “pay for itself”.  But that's gone now.  And, don’t even let me get started with mortgages over $750,000 and refinancing but not using the money for home improvements.  You can’t deduct home mortgage interest on mortgages over $750,000 and, if you refinance, you must use the money to improve your property or else it is not deductible at all.

But if you own an apartment building you are charging rent to offset those expenses, there is no limitation on Real Estate Taxes and Mortgage Interest.  So, you can deduct all expenses against your rental income and then you can deduct DEPRECIATION!  I was an Associate Professor of accounting at California State University Los Angeles for six and a half years.  By textbook definition, depreciation is the systematic allocation of cost of a fixed or non-monetary asset over the period of benefit.  In English that means that you get to reduce your taxable income every year for 39 years by taking a percentage of the cost of the building (not land) against your income thereby reducing your taxes without paying one penny.  With taking depreciation as a deduction you can end up with a loss on your tax return on your rental property to offset other income like wages, interest, dividends, etc. in the early years.  So, your tax is less tax which results in paying the government less or getting back a larger refund.  And, you might just have a positive cash flow.

(TO BE CONTINUED)