Reinvesting profit from rental

[element926]

Hello,

I currently have a rental property that I anticipate will pay for itself (mortgage) and all extra expenses as well (utilities, property management fees, cleaning fees, maintenance etc.) and probably have another 3-5k in profit thereafter.

Fortunately/unfortunately, I make more than 150k a year. That means I can't write off passive losses. However, I've been told by my accountant that I won't have to pay any taxes as long as all of the profit goes back into the house in the form of some sort of way (repainting the house, installing a fence etc.)

The question: Would you keep the extra money / pay it's taxes and then invest in the market? OR should I take that money and reinvest it in the house, but not pay taxes (assuming that's true). I could make enhancements that might increase it's value (bathroom fixtures, kitchen backsplash etc.)

Thoughts?

[bjl584]

Have you thought about taking the cash flow and using it to buy another property?

I know that if you sell a rental you can move the money into a new property tax free. I think it's called a 1031. Not sure about the rules for NOI from a rental though.

[LivingAlmostLarge]

buy another property or pay down the mortgage faster?

[element926]

Already putting an extra $550 per month, but extra payments are considered taxed (given that it wasn't "required").

I'll have to check on the 1031---that's interesting.

[breathemusic]

I don't think I'd put all the money back into the rental, but if you happened to be between renters and could use that time to fix the place up in such a way that you could increase the rent at some point, that might make the investment worth it for a given year.

[~bs]

my take - dumping money into the property for the sake of generating depreciation expense to offset your income is idiotic. If you're generating an extra return that justifies the extra expense, go for it.

It's akin to saying, I make too much money right now and pay too much taxes. Therefore, I'll quit my job and work at starbucks. Or I don't want savings because it generates too much investment income that I'll have to pay taxes on, so I'll dump all my investments and spend the money at las vegas.

A property that shows income after all expenses is a GOOD thing.

[TexasHusker]

I'm not sure your accountant is correct. To my understanding, rental income is ordinary income regardless of what your income is.

On the other question, I have used my rental profit to finance other rentals purchases.

[element926]

Good deal. Sounds like everyone is in agreement to just make the repairs (maybe even proactively), but keep the profit and don't reinvest all of it back into the property.

[Fishindude77]

Sounds like you have a real good rental, so I would definitely take care of any upkeep and keep the place in very good repair so it keeps spinning off cash. Whatever cash is leftover beyond that, just enjoy it or do whatever you see fit.