Comments on Math for Landlords

John Friedman commented on 'Math for Landlords'

2012-01-30T20:46:20Z

Yeah, the deduction is off the gross income, not off the tax bill itself (is it ever otherwise?). And of course you do need offsetting earnings against any deduction in order to realize the latter. That's why it doesn't really apply to casual landlords but only pros. The other thing that pros do that casual LLs don't (can't as far as I know), is monetize a lease by essentially mortgaging it to a willing lender. So holding out for a lease that you can leverage like that is worth it for many pro commercial LLs. And I'm just observing this as a rational explanation for a LL's otherwise seemingly nuts behavior.

Hudson commented on 'Math for Landlords'

2012-01-29T21:14:06Z

Yes, I left out a number of factors -- for example, the added cost of insuring a vacant space, maintenance previously handled by the tenant, and (now that you mention it) new accounting costs...

Still, your point is well taken. But how much of a break are we really talking here?

Unless our tax code is even more skewed to help the 1% than I knew, it seems to me a landlord would not likely get to deduct the full amount of the lost income directly from their final tax due. More usually, such deductions come out of pre-tax income, not off the final bill. Which means you might recoup only a small percentage of the loss when all the final tax computations are done.

It's true, as you note, I've only been a casual landlord. But in my limited experience such types of deductions are made from the latter (pre-tax income). So you have to both (A) have enough other income from which to deduct the loss to make it meaningful, and (B) be in a high enough tax bracket that the deduction actually amounts to more than a small fraction of the loss. In which case you're probably one of those described in my article as having enough money to absorb the loss in the first place...

(To clarify: Is this like a charitable deduction? If you donate $500 to a charity, you don't get to take $500 off the total amount you owe to the gummint. You get to take $500 off the amount the gummint taxes. Huge difference.)

Any more detailed info about the extent of the deduction would be most interesting, though I suspect my point still stands -- deductions might soften the blow somewhat, shaving a month or two off the time to recoup, but not ultimately change the fundamental calculus much. Let me know if you have details.

John Friedman commented on 'Math for Landlords'

2012-01-29T18:08:51Z

Your missing one factor, Sam: commercial landlords which warehouse their available stock get a tax loss for each month of lost income from not renting. In some jurisdictions, resi landlords get the same break (assuming they're in the biz and not a "casual" landlord as you were with the first floor of your house. I believe they have to show a profit at least 1x in each 5 years so they have time to warehouse, and hold out for the rent they want.