Never Pay Taxes On Investments If You Dont Sell?
My wife and I are paying cash for a fixer upper thats worth several times what we are getting it for and we are going to rehab it ourselves and it will be owned free and clear, we will have that to start our investment career. NOW OUR QUESTION: Is it theoretically possible to buy a fixer upper, rehab it, rent it out and continue owning it, THEN find someone to loan money on the new value, go buy another fixer upper and do it over and over by paying off each new investment as we go so one after another is owned free and clear EXCEPT the latest one that we borrow money to rehab? We dont have good credit but we know how to do all the repairs ourselves and we have a free and clear title to start with, is that a possible sinario or am I misleading myself? If its done this way is it possible to not pay taxes on the appreciated value as long as we dont sell and theres legally no profit since we arent technically flipping? Just collect one rental after another and keep borrowing money to do our next one based on our equity? It seems possible but Im sure others have tried it before, anyone out there have experience with this strategy? Thx.[ Edited by dreamscape on Date 02/26/2005 ]
Appreciation is not taxed until it is realized (when you sell). And you can defer taxes through 1031 exchanges indefinitely.
However, the rent you receive IS taxable as ordinary income, after deducting the costs of business--insurance, taxes, mortgage interest, advertising, repair, etc. So, there is a trade off in owning investment property free and clear--no mortgage deduction and the possibility of putting yourself in a higher tax bracket with the increased income.
The borrowed money is not taxed (generally) when secured by a mortgage to your home (up to $100,000) or investment property.
Quote:The borrowed money is not taxed (generally) when secured by a mortgage to your home (up to $100,000) or investment property.Maddog56,
I think you are confusing the mortgage interest deduction with taxable income. Borrowed money that is repaid is never taxable income. However, there may be limits on your ability to deduct the mortgage interest paid on the loan.
On what tax rules are you basing your question? Do you have a specific citation in the state tax code for us to review? CA does have some unique laws but I would be surprised if CA had any claim to taxes on the sale of your AZ property.
From your location, are correct to assume that you are a full time resident of AZ? Are we also correct to assume that you were a full time AZ resident at the time the AZ property was sold?
If this is the case, the sale profit of your AZ property should only be taxable by the state of AZ and the federal government. I would not expect CA to have any claim if you are not a resident of CA at the time the AZ property was sold.
I was an Arizona resident for all parts of this current sale. However, the money used to purchase this AZ property was qualified 1031 exchange money (untaxed) from the State of CA where the original gain was made. I assumed when the exchange property was sold, CA would still have claim to the portion of the gain generated solely in the State of CA.
CA publication 1100 covers like kind exchanges of non-residents. You should be able to report it on a current year form 540NR.
Blueford, thanks for the reference.
It does appear that the state of CA does rely on the taxpayer to track successive exchanges (forever?) and then tell CA when exchange property is sold in a taxable transaction when any deferred gain from the exchange can be sourced back to CA.
Yep, that is correct. California has always taken a very aggressive position in taxes due to it.
The California Franchise Tax Board has offices in all 50 states, just so you know how serious they are about collected taxes.
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