[hardtke]

One of the issues the article doesn't mention is that these houses are effectively cheaper to purchase for corporate owners. Generally they can borrow money at a lower rate, but the ability of corporate owners to use depreciation on a new purchase to offset profits from previous purchases is more significant. Effectively they are redirecting money that would be paid in taxes into the payments on the new purchase.

[zipy124]

This is not true at all. Corporate loan rates are generally pretty damn high, only exceptionally can they borrow for low rates. Mortages however are a special case since they are basically mandated to be low and safe by most governments in exchange for letting banks exist. Or in the US explicitily guaranteed through freddie mac and fannie may.

[CGMthrowaway]

You whiffed on the point (note the word "but" in parent comment). The depreciation strategies are where the real benefit is. PE buyers use 60% bonus depreciation and cost segregation studies to create a $70-80K writeoff on a $120K asset, which often larger than the check they cut for the property in the first place

The final phase is to exit via UPREIT for OP units rather than cash, with the REIT getting a step up in basis that can be depreciated again, while still not triggering any capital gains for you until you convert

[roboror]

>This is not true at all. Corporate loan rates are generally pretty damn high, only exceptionally can they borrow for low rates.

Are these companies going to banks and applying for a loan? I'd think they are privately backed and invested in.

[BeetleB]

As another commenter pointed out, buying a home to live in gets you lower interest rates than buying for any other reason.

> but the ability of corporate owners to use depreciation on a new purchase to offset profits from previous purchases is more significant.

If you're referring to cost segregation, this is probably less true now than in the past. It used to cost a lot of money to do a cost segregation analysis, and made sense only for apartment complexes (i.e. the cost to do the analysis vastly exceeded whatever savings you'd get on a single house). So only rich investors who owned 20+ unit complexes would do it.

I've heard that in the last few years, many accounting firms are providing it for relatively cheap, so ordinary investors can do it now.

RE people make a big deal about depreciation as a tax benefit, but it's minor in my experience. You're effectively reducing the cost basis, so when you ultimately sell, you have to pay a larger tax on the capital gains. Overall you gain, but not by a lot.

Perhaps if you combine with a 1031 exchange, you may get a greater benefit.

[the_sleaze_]

And what about if rent into the next 10 years fully servicing the debt, and the maintenance with a margin on top?

If I am blackrock? If I am smaller PE deploying 10 million a year?

[HexPhantom]

It's wild when you think about it: a family scrapes together a down payment and pays full freight on property taxes, while a corporate landlord can roll one property's paper losses into the next deal and keep building their portfolio, tax-deferred

[bpt3]

In many states, there's a homestead exemption on property taxes that doesn't apply to non-owner occupied properties, so the opposite is true.

Also, I don't know what you mean about rolling paper losses into the next deal, but I suspect it's not accurate either.

There's a reason this non-existent loophole wasn't mentioned in the article that was looking for reasons to hate on corporate landlords.

[rmah]

You can't use unrealized capital losses (property paper losses) or even realized losses to offset property tax, you can only offset realized losses against realized gains for income taxes.

[hippich]

Afaik, property taxes are due no matter what, at least in Texas.

[drivingmenuts]

Don't forget the sweetheart tax rebates they sometimes get for promises of development.

[triceratops]

What is this special depreciation corporate owners get? IIUC any landlord can use depreciation to lower their tax bill. Wouldn't the depreciation from a new purchase also apply to the rents from that new purchase?

Somewhat more outrageous is the 1031 exchange. Sell VTI at a profit to buy VOO and the government hits you with a capital gains tax. Sell your primary residence for $250k more than you bought it - same thing. But landlords are a special, privileged investor class to whom these rules don't apply. They can sell a house and pay no taxes on gains as long as they buy another property.

[CGMthrowaway]

It's not special, just requires scale for it to make sense. E.g. Cost segregation studies and UPREIT transactions are cheaper on a neighborhood level. And you need enough passive income to absorb the depreciation losses

[AnthonyMouse]

> IIUC any landlord can use depreciation to lower their tax bill.

This is also not really how depreciation works for assets that retain their value. If you buy a building to rent it out, the cost of the building essentially a cost of doing business, i.e. a tax deduction. You pay tax on the profit which is revenue (rents) minus costs (building, interest, maintenance, advertising, etc.) Depreciation is the building, they make you take it over time instead of all at once when you buy it.

But the depreciation lowers the book value of the building, which is your tax basis when you sell it. If you buy a building for a million dollars, depreciate it down to $500,000 and then sell it for $2M, you have a $1.5M capital gain from the sale. You basically have to give back all the depreciation unless the building actually lost that much value by the time you sold it, and in practice it usually goes up instead of down.

It's really the homeowners who have the advantage here because there is a large capital gains tax exemption from the sale of your primary residence, and that's actually a reduction in taxes instead of just a deferral.

[Projectiboga]

Depreciation is mandatory, your cost basis declines while inflation slowly pushes up the value, which leads to a type of phantom gain. There are abilities for individuals to lower their tax bill as there are breaks. But for a Mom & Pop small landlord the tax situation can be tough. 1031 exchanges are tricky for small investors as you have to exchange into a situation with the same mortgage. A big real estate corp can borrow against their total equity, rather than taking a mortgage on the new property. So they can roll their equity into the new deal tax free. This is especially lucurative to buying cheap, rennovating and then selling to another corp. And what isn't discussed is there is a huge amount of "carried interest" deferred profits. That tax break was intended for high risk venture capital investments but in the 80s and 90s it became used for speculative and even day trading. https://www.pgpf.org/article/what-is-the-carried-interest-lo...

[raw_anon_1111]

You can only deduct passive income losses for depreciation if you aren’t a real estate professional of up to $25000 and that’s only if you earn less than $100K. It starts phasing out between $100K and $150K

[BeetleB]

> They can sell a house and pay no taxes on gains as long as they buy another property.

As long as they buy another property at least as expensive or more, within a certain time period.

And it's not that they don't pay taxes, it's that the cost basis gets reset. That is the benefit.

[shadowpho]

> Generally they can borrow money at a lower rate

There is some tax tricks you can play, but in general homes for primary residence is lower then secondary/rent, which is a big proportion of cost.

[maxerickson]

Build enough housing and all of the sudden it isn't such a sure thing investment.

Not easy to do of course, but the problems that come with building more housing are better then the problems we have now.

[Teever]

That may be the case but it would still be a good idea to look at regulating these run away feedback loops writ large so that people can't just play a game of whack-a-mole where they play the same old tricks in different sectors or invent whole new mediums to play the same old games afresh

[api]

Our system is far more regressive than most people realize. The poor pay more for things, don't have access to all kinds of tax breaks and cheap money, and can't afford accountants and shell companies and all the other complicated tricks you can use if you are wealthier.

I wonder: if you added it all up, would a flat tax (which is nominally regressive) actually be more progressive than the regressive taxes we have?

[bpt3]

> I wonder: if you added it all up, would a flat tax (which is nominally regressive) actually be more progressive than the regressive taxes we have?

Absolutely not. The US has the most progressive federal tax code in the OECD, mainly because we don't have a VAT like most other countries.

Nearly all of the loopholes you mention are at the federal level, where half of the households in the nation pay <= $0 in income tax.

[AnthonyMouse]

> would a flat tax (which is nominally regressive) actually be more progressive than the regressive taxes we have?

That's an easy one to fix regardless. Use a flat tax with a large fixed refundable credit. Now everyone pays e.g. 30% but gets a $12,000 credit, so someone who makes $40,000 is effectively paying zero, someone who makes $80,000 is effectively paying 15% and the effective rate approaches 30% as the number goes up. But the marginal rate is the same for everyone so there aren't all these complexities and arbitrage games, and at lower incomes the credit stands in for a lot of assistance programs so you don't get all the marginal rate cliffs from overlapping phase outs.

[mx7zysuj4xew]

This^, this is how you end up with serfdom

[mx7zysuj4xew]

Ah yes, the down votes have started I forgot that this is a forum for the rent seeking class