[seadan83]

A CPA friend of mine stated that software engineers are pretty screwed when it comes to taxes, they pay the highest effective rate. In effect, when you are in the $125k to $250k ballpark, you're at a high tax bracket but not making enough to take advantage of the things that allow (for example) Warren Buffet to have an effective tax rate of 11% [1]. So, in the shoes of a typical software engineer, their effective tax rate is ballpark 30~35% and their deductions are pretty minimal.

One example my CPA friend gave was landlords getting it good. They can both deduct depreciation and also repair costs - double dipping! Further, any interest on real estate loans they have are also tax deductible. I don't know of more specifics personally, the impression my friend gave me was that those examples are just the beginning.

[1] https://www.forbes.com/sites/janetnovack/2011/10/12/warren-b...

[PopAlongKid]

>They can both deduct depreciation and also repair costs - double dipping! Further, any interest on real estate loans they have are also tax deductible.

Either your CPA friend is ignorant (since after all not all CPAs specialize in income tax) or you misunderstood.

Depreciation is how the cost of placing a new asset in service is spread over time to match the income generated by the asset (roughly speaking). Repairs are the cost of keeping existing in-service assets in normal operating condition. There is no double dipping.

As for mortgage interest, only interest on the loans used to acquire or improve the property are deductible, not cash-out equity loans. This is basically the same rule that owners of their own principal residence get to use, although there are some temporary limits that can reduce the full deduction, especially for those in areas with expensive houses for sale.

[seadan83]

> Either your CPA friend is ignorant (since after all not all CPAs specialize in income tax) or you misunderstood.

I might have misunderstood, but he was keeping it simple for me. I'm 100% positive that he was correct though, to what angle - I'm not exactly sure.

After doing some more research on my own, I think the double-dipping stands. In essence it comes down to a statement like this: "my property is worth less year over year - look, the shingles are starting to come off! Oh, by the way, I spent $2000 fixing the shingles."

So, first, let's tackle depreciation. For rental, the entire property value depreciates and this is tax deductible. It's about 3% of the property value every year [2], regardless of any repairs. If there is an improvement made, that changes the cost basis [2, 4] which then changes the size of the pie where 3% is then taken out of that [2]. In essence, the IRS, per the tax code, essentially thinks that a rental property after 25 years will be worth nothing. To some extent, this makes some sense, appliances wear out, buildings do need maintenance and eventually they are re-modeled and re-done.

But, repairs & depreciation are mutually exclusive for the tax code, so long as that repair does not enter the 'improvement' territory. So, if you fix all of things that are depreciating, you still get to claim the depreciation overall, and you get to claim the repair costs of those depreciating items.

These are the resources I used:

[1] https://www.irs.gov/businesses/small-businesses-self-employe...

[2] https://www.investopedia.com/articles/investing/060815/how-r...

[3] https://www.nolo.com/legal-encyclopedia/tips-maximizing-repa...

[4] https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductio...

[1] is interesting and has this key quote:

> You can deduct the costs of certain materials, supplies, repairs, and maintenance that you make to your rental property to keep your property in good operating condition

Note, it does not say "or" repairs, and that list does not include improvements. Basically this is to say, a $100,000 property after one year of renting, to the IRS is worth $97,000 - whether or not there was actually $3000 worth of wear and tear is immaterial, and if you spent $3000 to fix that wear and tear is also immaterial, you get to claim the depreciation and repairs both.

The [4] reference really emphasizes why land lords do not want to replace things, and instead will focus on repairs:

> Landlord Tax Deduction #3: Repairs A significant tax break for landlords can arise when they make repairs to their properties: The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

For some completeness, resource #4 addresses depreciation as the 2nd bullet point right before repairs:

> Landlord Tax Deduction #2: Depreciation for Rental Real Property The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years (27.5 years for residential real property). Landlords can reap the benefits of depreciation even if the property increases in value.

Thus, my conclusion - if a person is fixing everything that is breaking and wearing out in a rental property - I don't see how exactly that property is depreciating by 3% every year. The depreciating things are getting fixed! I would call that double dipping. Reasonable people might still disagree.

Though, to the larger point, resource [4] has a section "Other Important Tax Tips for Landlords", reading through that list is a whole slew of things not available to W2 employees, eg: "A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much." Taken in aggregate, tax-wise, it seems FAR better to be a landlord than a W2 employee. (A peer comment noted that 1099 get really great tax treatment, and that's basically the gist of it. If you can claim you are own your own boss - the tax breaks are huge, otherwise for the run-of-the-mill W2 - there are lot less tax breaks).

[PopAlongKid]

I assume by "double dipping" you mean, deducting the same expenditure twice.

There still is no double dipping. If you buy a $100K asset, and over its depreciable life you also spend $15K on repairs, then you have spent $115K in total and you only deducted $115K, not a penny more -- so no double dipping. Also, FWIW, if you later sell the fully depreciated asset, the entire sale price is taxable income.

>A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.

Yes, if one qualifies as a "real estate professional" (not easy for anyone who is not a full-time landlord). However, a successful real estate professional is not going to stay in business long if they have large losses every year.

[seadan83]

Thank you for the response. It is good context, and if I understand right it sounds like things even out if and when there is a sale.

I'm certainly somewhat cynical, IMO it is the rich that write the tax codes and laws... [1] I do wonder if the sale can be readily gamed. For example, do the sale after retirement, in a year where you have lots of stock losses from a recession or something.

Regardless, I appreciate the added context!

[1] https://www.thenation.com/article/society/cbo-american-wealt...

[creer]

You seem to be taking this all from the angle of a possible loophole. That's fine and all. But another way to look at it is:

Renting is a business. You can say let's tax gross income (and some places do that) but in general in the US only net income is taxed. That is income after costs. For renting there is the cost of the property, there is interest on various loans, there is the cost of maintenance and repairs, there is the cost of upgrades, there is utilities and local taxes, etc. For income there is the rent, and there is the proceeds from the sale of the property at the end, etc.

The cost of the property is a cost - that's hard to argue. The question would be how to take it into account. It's currently taken into account with depreciation (of the building, not the land for that matter.) A certain percentage every year goes against the income until it's fully depreciated. And then when the building is sold, the part of the cost that was depreciated is taxed (there is yet another calculation to decide at what rate it's taxed - depreciation reduced basis but "sale minus basis" does not necessarily get taxed at capital gains rate.)

The hows can get complicated but the general principle of "how to take into account the business costs" is pretty simple? And the building cost and maintenance are both costs. Doesn't really matter in there how long the building is supposed to last. It's a fairly arbitrary number in the calculation.

[If you do want to look at preferential treatment, you can look at "like kind exchange"]

[seadan83]

Thanks for the reply & pointers. My impression is that real estate simply has some of the best tax treatments. My assertion - the best tax treatments are for those that do not make wage income. For that to be true, there just needs to be far better tax breaks for someone who rents many properties compared to someone like me that has a single W2 job & a mortgage.

Yet, you do raise a good point, a building for a landlord is akin to a server for an IT company - both are tax write-offs. The world is full of nuance though.. I really appreciate the dialog.

[yieldcrv]

correction: W-2 software engineers that don’t do anything else are pretty screwed

1099 software engineers have some of the best tax deductions, and that earnings range is the sweet spot

one of my favorite things to do is contribute $66,000 to a 401k for that tax deduction (thats how high the employer match limit really is), immediately borrow $50,000 from the 401k and donate that same money to a donor advised fund for a charitable donation. $116,000 tax deduction before looking at actual expenses. its not advice, its one of my favorite things to do, you have to pay back the 401k over time

off $265,000 in earnings (number chosen because thats the minimum to max out a self directed 401k) the AGI would be $199,000 and the MAGI would be $149,000. keep going and get it as low as possible. I would typically try to do a FMV charitable deduction from my existing portfolio. Combined cash+asset charitable deductions can lower that year’s earnings by 60%. if you achieve that the government is only looking for taxes on $106,000 and again this is before you look for expenses. But if there are pre-existing externalities like a mortgage and home depreciation, then you’re pushing your AGI (and subsequently MAGI) down further and further.

you can get to Warren Buffett %’s pretty easily even without having long term capital gains tax treatment.

[PopAlongKid]

>you have to pay back the 401k over time

And you are also permanently out $50K of charitable contribution in just a single year. Pretty hard to justify if you have young kids who might go to college some day, or if your spouse doesn't wish to contribute to charity at that level.

And somewhere in your example you seem to forget that charitable contributions reduce taxable income, but not AGI.

Lastly, you forgot to take into account the deductions for self employed health insurance, and the deduction for half of self-employment (SUTA) tax, both of which reduce the amount available for retirement plan contributions.

[yieldcrv]

money not really out of your control if you have a donor advised fund or private foundation or both

my comment mentions MAGI specifically for someone like you, I’m aware this thread started off with being able to use the IRS’ free filing software and now is talking about not paying the government much or anything in taxes

[PopAlongKid]

>money not really out of your control if you have a donor advised fund or private foundation or both

Not sure what you mean by "control", but you are not getting it back. In one year, you have blown a $50K hole in your budget that you will never be able to spend on anything else.

[ndriscoll]

Presumably the idea is that you can use that "donated" money to buy influence, e.g. buying your kids' way into fancy schools. I don't know whether $50k/year is enough to do that though.

[yieldcrv]

now you’re talking, the other side of this is that this is just year 1

years 2 - n the tax exempt nonprofit account grows tax free, after its balance is large enough it can independently be an investor in VC/PE/Hedge Funds and have an infinite time horizon. just keep funding it until the homerun.

the same goes for the tax deferred retirement accounts, they are separate entities and can eventually become investors for higher risk higher growth things

they can be generational wealth things as well that allow for influence from your family, without the complications around ex-spouses, inheritance tax, cost basis adjustments, liability. just everything at your discretion while remaining judgement proof.

[yieldcrv]

it really depends on how you get value out of it. tax deferred and tax exempt are still ammunition. and its important to load them up with as much money as possible, and then they grow tax free from there on.

by your hyperbolic word choice, I understand its important for you to be right about your view. don't do it then.

[gamblor956]

I always find it amusing that people will give up tens of thousands or hundreds of thousands of dollars so they can save a few thousand in taxes.

[yieldcrv]

populating tax deferred and tax exempt accounts is more important for me

if its not for you then employ a different strategy

[gamblor956]

I'm not referring to your use of your retirement accounts.

I'm referring to your choice to donate hundreds of thousands to charity so you can save a few thousand on your taxes.

[yieldcrv]

donor advised funds are under your control

your own private foundation would be under your control as well and can pay a salary - taxed as normal ordinary income - whenever that becomes important to you

[coldpie]

Oofda. I just pay my taxes and live my life. Whatever makes you happy, I guess.

[yieldcrv]

any system design question has a harder solution

gov gets zero, gov agrees, gov helps