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How to defer US taxes

taylor.town

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Re: How to defer US taxes

#131

Post by jcdavis »

kccqzy wrote: post #108
jeffreyrogers wrote: post #9

Pretty good overview of how/why these deductions reduce your taxable income. Couple of things to note. Depreciation is recaptured if you sell an asset for more than its depreciated basis. People sometimes get into trouble with this if they rapidly depreciate real estate and then sell it. Even if you sell for less than your purchase price it is possible to owe taxes. You also aren't going to be able to pay no taxes si…

This is exactly why many people became landlords, but changed their mind and found that there is no way out. You might decide one day to buy some investment property, but after a few years when you lost interest in the pursuit, quitting would actually give you a huge tax headache in the form of unrecaptured section 1250 gain. This is unfair. You can quit a W-2 job or a hobby without tax consequences.

Hard to sympathize with the landlord class too much on this one. Everyone knows how depreciation schedule works and gets in to it in no small part because of that deduction benefit + the hopes that via 1031 exchanges etc they can delay it until death.

Re: How to defer US taxes

#132

Post by fer »

3rodents wrote: post #119
fer wrote: post #99

Earlier quoted context omitted.

Funny pick, because Italy is very strict on this. To stop being considered a tax resident in Italy you need to deregister from your municipality and register in the AIRE (Anagrafe degli Italiani Residenti all'Estero). But for the AIRE to accept your application on the Italian consulate in any of those countries you need to provide proof of permanent residence (address, work contract, company ownership, etc). If you d…

Let's pretend my random country generator didn't pick the worst possible example. I should have chosen a country I am familiar with. Let's take Germany. A German tax resident can de-register at any time, so long as they are leaving the country, without first establishing tax residency elsewhere.

In Germany, unregistering doesn't require registration elsewhere, but it doesn't mean you stop being tax resident.

If you regularly return to Germany and generally to the same place there (i.e. family, friends), and you're not tax resident elsewhere, the tax administration will consider it your habitual abode. And, you guessed it, under the German Fiscal Code (Abgabenordnung), you are a tax resident if you have a domicile or habitual abode in Germany.

Plus, under Extended Limited Tax Liability (Erweiterte beschränkte Steuerpflicht), any significant economic presence in Germany (assets, German clients, participation in a company, bank accounts) will pull you into the tax jurisdiciton for 10 years, not only as permanent traveler but also if you move to a low-tax country.

So while different, it's similarly difficult. It's technically possible but you have to leave Germany and basically cut all ties, difficult if you're German.

If you're not German, you can completely escape the claws of the German fisc with relative ease. But if you're say Spanish, Hacienda will consider you tax resident in Spain even if you never ever lived in Spain (i.e. born abroad). There's all sort of sticky tax rules in numerous countries: you're tax resident until you prove you're tax resident elsewhere, the aforementioned nationality fallback, essential ties rules, the "domicile" concept (i.e. where you intend to live until you die).

Plus, and I reiterate, the difficulty in obtaining a simple bank account without a TIN and proof of address in most countries.

I'm sure there are corner cases with exotic nationalities and carefully selected tax jurisdictions with lax "tax residency" tests to rotate along, and numerous nomads fly under the radar for various reasons (illegally of course), but I assure you it's way more complicated than "lol just don't be American/Eritrean and travel all the time", plus tax laws constantly change, and not to leave you more loopholes.

Re: How to defer US taxes

#133

Post by jedberg »

Tiktaalik wrote: post #129
jedberg wrote: post #122

Earlier quoted context omitted.

It's two sides of the same coin. Imagine a simple example: Mom and dad buy a house for $100,000. When they die it's worth $1,000,000. In Canada, you'd pay gains on the $900,000 difference. In America, you'd pay inheritance tax on the full $1,000,000 (but no capital gains). So in America you're paying tax on a little bit more (I'm of course ignoring the cap gains baseline exception). But the reason America does it the…

Easier than you'd think. The value of homes is very well known and assessed annually in many provinces (some have weirdly become laggards). So no real problem there. Any piece of art that is of any real value would have a provenance and it would be very well known what the value it was at any given time and at sale. If no one knows the artist or can determine the value it is very safe to say its value is nil.

It's really not that easy at all. Especially with art or jewelry. We can know the current value. It could even be a very famous piece of art.

But these types of things are found all the time in attics and basements. Art especially is moved around without sales records all the time, and jewelry even more-so.

Heck, I have things I bought myself that I have no idea what I paid for them.

But I'd sure be upset if I had to pay cap gains taxes on these things assume their prior value was zero.

Re: How to defer US taxes

#134

Post by [deleted] »

jeffreyrogers wrote: post #53
claythearc wrote: post #44

Earlier quoted context omitted.

There are a bunch of strategies here, but one people oft repeat is the "buy, borrow, die" approach. Where, they are kicking the can down the road, but the magic happens at the die step. When the borrower dies: Your heirs inherit your stocks, with their cost basis reset to the current price. This means that they have zero appreciation of your purchase of $RIVN at $67, despite it being at $420. They can then sell the s…

Minor nitpick. The step up in basis actually happens when you die (not when your heirs receive the assets), and your estate has to pay off creditors before distributing assets. So the debt is paid off first, then your heirs get whatever is left over. Net result is the same though.

[deleted]

Re: How to defer US taxes

#135

Post by HWR_14 »

anon291 wrote: post #22
hirako2000 wrote: post #3

I'm not sure to understand how deferring taxes is a better deal than paying it here and now. Since I'm not a financial adviser, someone asked me take on which 4k projector to buy last Xmas. I explained that the tech has improved so much lately, they've become somewhat affordable, I recommended a model and pointed ou that he would certainly get a better device next Xmas, for half the price. I thought he would follow s…

Suppose I defer $1 million in taxes until after I'm dead, and my estate conveniently does not have $1 million in assets left. What happens? In the meantime, I gave all the assets to my children while I was alive The answer is nothing. The government eats the loss.

The government looks at your transactions as designed to produce that outcome and claws back the money from your children.

Re: How to defer US taxes

#136

Post by kccqzy »

jcdavis wrote: post #131
kccqzy wrote: post #108

Earlier quoted context omitted.

This is exactly why many people became landlords, but changed their mind and found that there is no way out. You might decide one day to buy some investment property, but after a few years when you lost interest in the pursuit, quitting would actually give you a huge tax headache in the form of unrecaptured section 1250 gain. This is unfair. You can quit a W-2 job or a hobby without tax consequences.

Hard to sympathize with the landlord class too much on this one. Everyone knows how depreciation schedule works and gets in to it in no small part because of that deduction benefit + the hopes that via 1031 exchanges etc they can delay it until death.

> Everyone knows how depreciation schedule works

Everyone is way too strong a word. Unlike a regular job, there is no course or qualification needed to become a landlord. In the Bay Area I know lots of people in tech who bought a house, couldn’t afford mortgage payments (perhaps after a layoff) and decided to rent out parts of their house. Or perhaps just a particularly smooth talking real estate convinced someone to sell their stocks and buy investment property.

You might say that not knowing about all housing related costs upfront is evidence of financial illiteracy. You might also say not knowing about depreciation before buying a house is also evidence of financial illiteracy. You might even say committing to a mortgage payment while your own job prospects disappear is evidence of bad risk management. But in real life many people make bad financial decisions, landlords included. Landlords do not inherently have more financial aptitude.

Re: How to defer US taxes

#137

Post by KennyBlanken »

kccqzy wrote: post #108
jeffreyrogers wrote: post #9

Pretty good overview of how/why these deductions reduce your taxable income. Couple of things to note. Depreciation is recaptured if you sell an asset for more than its depreciated basis. People sometimes get into trouble with this if they rapidly depreciate real estate and then sell it. Even if you sell for less than your purchase price it is possible to owe taxes. You also aren't going to be able to pay no taxes si…

This is exactly why many people became landlords, but changed their mind and found that there is no way out. You might decide one day to buy some investment property, but after a few years when you lost interest in the pursuit, quitting would actually give you a huge tax headache in the form of unrecaptured section 1250 gain. This is unfair. You can quit a W-2 job or a hobby without tax consequences.

Buying an investment property isn't a job. It's an asset, that possibly generates income. That is not a job. That's an investment.

A W-2 job isn't an investment. It's a job.

A hobby isn't a job or investment, it's a hobby.

You absolutely do have tax consequences if quitting the hobby involves selling equipment, particularly if that equipment was something that has to be registered, like a boat, car, ATV, etc.

Re: How to defer US taxes

#138

Post by MichaelFeldman »

jeffreyrogers wrote: post #95
PopAlongKid wrote: post #87

Earlier quoted context omitted.

>People sometimes get into trouble with this if they rapidly depreciate real estate and then sell it. Even if you sell for less than your purchase price it is possible to owe taxes. But in the U.S. you can't rapidly depreciate real estate, it is generally straight-line over 27.5 or 39 years (residential vs. non-residential). The gain on real estate due to depreciation is technically referred to as Section 1250 gain,…

No, you can do cost segregation to classify some of the real property as Section 1245 (which is accelerated vs Section 1250). People doing this and then selling is how they get unexpected tax bills.

The “unexpected tax bill” usually comes from people not realizing they pulled those deductions forward earlier.

Also worth noting, if you don’t sell (or you 1031), that recapture can be deferred, which is why a lot of investors still use cost segregation aggressively.

This is a pretty clear breakdown of how 1245 vs 1250 recapture actually works on sale if anyone wants the full picture:

https://notaxcompromise.com/cost-segregation/depreciation-re...

Re: How to defer US taxes

#139

Post by dwallin »

jedberg wrote: post #122
nayuki wrote: post #72

> Loaned money isn't taxable income, so you can save/spend it without affecting your tax rate. > Death is a popular escape from deferred taxes. When you die, your obligations to the government vanish. Your heirs inherit assets/property at market value. Their assets depreciate from new cost bases. The article talks about taxes in the USA, and I think the treatment of taxes at death is unfair by giving a significant ta…

It's two sides of the same coin. Imagine a simple example: Mom and dad buy a house for $100,000. When they die it's worth $1,000,000. In Canada, you'd pay gains on the $900,000 difference. In America, you'd pay inheritance tax on the full $1,000,000 (but no capital gains). So in America you're paying tax on a little bit more (I'm of course ignoring the cap gains baseline exception). But the reason America does it the…

The question is not whether the alternative is perfect, the question is can it be made better than the status quo. It’s not that hard to come up with potential mitigations for the problems you state.

- A taxable threshold, so people who can’t afford lawyers and accountants don’t need to deal with it. Works well for family gifting.

- You don’t need to tax immediately, tax it when it the profit is realized, eg. When you sell that art.

- Taking out a loan against an asset at an increased valuation should trigger a taxable event. (Eg. Stocks go from 1b to 2b valuation and you take out a 500m loan. You are realizing 250k of gains and should pay tax on that gain.)

- Eliminate stepped up cost basis. This is a ridiculous give away.

Re: How to defer US taxes

#140

Post by MagnumOpus »

richwater wrote: post #110
nayuki wrote: post #72

> Loaned money isn't taxable income, so you can save/spend it without affecting your tax rate. > Death is a popular escape from deferred taxes. When you die, your obligations to the government vanish. Your heirs inherit assets/property at market value. Their assets depreciate from new cost bases. The article talks about taxes in the USA, and I think the treatment of taxes at death is unfair by giving a significant ta…

Why should the government collect taxes on jewelery I pass down to my children? I already paid income taxes on the money I used to buy it and sales tax at the point of purchase. Why the hell are they entitled to more?

Why should your children not pay tax on the valuables that they acquired without any work, when everyone else has to earn money and both pay income tax and then pay sales tax to acquire the same jewellery?

(And you don’t enter into the equation. You are dead by the time the taxation happens.)

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