Home Buying in Chandler>Question Details

Jenny Zhong, Home Buyer in Glendale, AZ

I want to buy rental properties around chandler area. And I would like to know if I pay 40-50% down payment and 50% of mortgage, can I get up to 25

Asked by Jenny Zhong, Glendale, AZ Fri Oct 14, 2011

yrs rental income taxes free?

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Hi Jenny:

As I understand it, you are considering putting down 50% of the purchase price and then getting a mortgage for the other 50%, but are wondering if this will allow you to receive the rental income from those properties tax-free for the next 25 years. Based on these assumptions:

As others have hinted, with interest rates so low, you might be better off only putting 25% down on each property, leaving you with the saved monies to buy other properties, or have in reserve for maintenance, etc. As far as I know, there is no magic or major advantages gained by putting such a large percentage down.

As to the tax-free question: As others have mentioned, there is no tax law which says the rental income will be tax free. You will take in rent and the tax laws allow you to offset that rental income with certain expenses you incur (such as depreciation, repairs and maintenance, taxes, etc.--versus major improvements, which must be depreciated over time). If the expenses are greater than the rental income, one might think of this as "tax free" income, though I would suggest true tax-free income is more like untaxed portion of Social Security, or tax-free municipal bonds, etc.

Feel free to call me to help with any further questions and to help you get on the road to being a landlord.
0 votes Thank Flag Link Fri Oct 14, 2011
Thanks for all those helpful advices.

Basically my friend is from China and she just wants to get some cash flow for her retirement life from rental properties in AZ. She has cash now, so she would like to pay cash and no any burden in future & just get cash for retirement life. 50% mortgage meant financing half of house payment and another half is paid by cash, then she could get up to 25 yrs tax free for rental incomes.

Jenny
0 votes Thank Flag Link Tue Nov 8, 2011
Jenny,

You have an interesting question which can apply to many who are getting into investment real estate for the first time. It is a good idea to consult with a CPA and attorney before purchasing real estate. They can assist you in running numbers and achieving your long term goals. I notice you did not say what your profession is or whether this is an investment for yourself or a group/partnership. That might make a difference in the answer you recieve from one of the above professionals, a mortgage lender, or a real estate professional. One other thing, because the market and real estate is changing so fast, getting up to date information is essential.
0 votes Thank Flag Link Sat Oct 15, 2011
Great question(s) for a CPA and perhaps a tax attorney!

And as Don said, what does your paying "50% of mortgage mean"??

Price range and cap rate are also major factors in attempting to answer your question.

Bottom line --> consult with appropriate accounting and tax professionals.
0 votes Thank Flag Link Fri Oct 14, 2011
You will have to create an excel spreadsheet to plug in all those numbers (rental income vs rental expenses+deduction+taxes+interests etc..). When the NET is = 0 -> I guess you can call it tax free ? your major variable numbers would be down payment and rent but have you ever heard of a straight line rent for 25years ?? And you also have to factor in major repairs and appliance replacement every so often for a 25 years time frame that you specified ... bottom line is -> futile attempt even for a CPA
0 votes Thank Flag Link Fri Oct 14, 2011
Check with an accountant.

But why would you then get rental income taxe free?

Note: It's usually a bad strategy to put that much down on investment properties. Check with an accountant.

And while I understand 40%-50% down, what do you then mean by "50% of mortgage"?

Bottom line: You need professional advice.
0 votes Thank Flag Link Fri Oct 14, 2011
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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