Do I need an RE tax deduction if I have a deferred comp plan?

O

OC_Boston_Bay_IHB

New member
<p>Hello board. I have a question that directly addresses why many high income earners seek to purchase real estate: tax deductions</p>

<p>I am fortunate enough to have access to a deferred comp plan at the F500 company I work for. This plan is what is known as a "top hat" plan, or non-qualified. The money is not held in a trust like the regular 401K and thus is subject to forfeiture in the event of a corporate bankruptcy. These plans are the norm for execs at many large corporations. Many of you will remember reading about the plight of the former execs at New Century who forfeited millions of $$ in their bankruptcy from their exec deferred comp plan. Given the nature of my company's business I have no such concerns and thus am overjoyed at having this extraordinary benefit extended to me.</p>

<p>The plan allows me to tax defer 50% of my gross earnings, no $$ limit. An example would be if someone made $300K, they could defer $150K. This would be $134,500 more than they would be able to defer into a normal 401K. The investment choices are the same as the regular 401K.</p>

<p>Given the current RE market dynamics, we are renting for 30% of the mortgage cost for equivalent dwelling/location here in the Bay area. Having sold our house when we moved, my plan is to tweak the amount I contribute to this tax deferred savings plan to minimize my taxes, duplicating the effect of paying mortgage interest every month except to myself, and continue renting.</p>

<p>I'm basically stating I see little value in owning my primary dwelling until the mortgage service equals rent, and I am fortunate enough to not need to assume mortgage debt for the privilege of an extra tax deduction. I've seen many savvy individuals post here and as such decided to see what others though of my plan.</p>
 
OC_BB - I think you know that your plan is well thought out and you also know what is best for you and your family.<p><p>



That said, here is a bit more info. If someone is making $300,000 adjusted gross income per year, or even $150,000, chances are huge that their mortgage interest deduction will be limited by either the high income tresholds or AMT, (alternative minimum tax).<p><p>



When you are in the market for a home, you are bidding against others who are in the same tax situation, or close to the same tax situation as yourself. Therefore, the savings from the mortgage interest deduction are already discounted into the price of the home. In other words, when you purchase a home, you pay for the tax savings in the price of the home. And renting is no different, the supposed tax penalty is discounted into the rental amount since you are competing with others who pay taxes, including the landlords. There is no tax advantage to renting or buying. Yea, I know that seems outrageous. And it will make more than a few folks very angry. But just think about it for a few days, and you will see that it is fact, not theory. When you buy a home, you pay for the tax savings because you are competing against everyone else who is figuring the tax savings into their bid price.<p><p>



Oh yeah, one more thing; the interest paid on personal residence mortgage amounts over $1 mil are not deductible expenses.
 
<p>boston_bay</p>

<p>Isn't a deferred plan the following? Meaning you would have to pay taxes at a later date anyways? Could you give me more details on how you can make this work for you?</p>

<p>"A deferred compensation plan is an arrangement whereby an employee or owner defers some potion of their current income until a specified future date. Wages earned in one period are actually paid at a later date. "</p>

<p>P.S Great Idea.</p>
 
<p>liquid,</p>

<p>it functions just like a 401k except without the $15,500 limit on contributions. So yes I'l have to pay taxes eventually.</p>

<p> </p>
 
<p>awgee - "There is no tax advantage to renting or buying. Yea, I know that seems outrageous. And it will make more than a few folks very angry. But just think about it for a few days, and you will see that it is fact, not theory. When you buy a home, you pay for the tax savings because you are competing against everyone else who is figuring the tax savings into their bid price."</p>

<p>I would tend to disagree with this statement. Our present market situation, I think, would be a perfect example of this. In a highly illiquid market such as real estate, there could be no bids as we have today so the benefits (ie. tax savings) will not always be factored into the price.</p>

<p>But I do get what you are saying despite disagreeing with you and during other times and in many free markets this is true.</p>
 
OC_Boston_Bay.....when you final pull out some of your deferred income how is that taxed? Do you end up paying all the same taxes as you did before or just the capital gains tax?
 
<p>oc_con - It doesn't matter if there are actual bids on a specific property. As long as there is more than one person looking for a home at one time, the tax implications are discounted into the price of the homes for sale. Each prospective home buyer is competing against every other prospective home buyer, and the sales prices reflect that competition. Less competition will bring lower prices, but those prices still discount all tax implications.</p>

<p>mino - When paying federal income tax on amounts withdrawn from a tax-defered retirement account, the withdrawn funds are considered regular income and taxed as such. They are not considered capital gains, even if any or all of the amount withdrawn is gain on investment.</p>
 
<p>awgee - I can't agree with what you are saying. While it may be valid in theory, it breaks down in reality, and even more so in specific cases. The reason is because you are assuming that every buyer looking for a home has the same tax strategies. I don't believe this to be true. Or am I off on my thinking?</p>
 
<p>oc_con -<em> "</em>The reason is because you are assuming that every buyer looking for a home has the same tax strategies. I don't believe this to be true. Or am I off on my thinking?"</p>

<p>You hit the nail on the head. And you are right. The buyers do not have the exact same tax strategies, but, and here is the big BUT, the buyers within any particular price category have enough of the same tax strategy that they are essentially competing with one another for the same tax savings.</p>

<p> </p>
 
The big advantage of those sorts of plans if your employer does not go bankrupt is you can pay TX or FL income tax on the amount disbursed by the plan if your willing to move to a income tax advantaged state upon retirement. If your in a lower tax bracket on retirement that also would be a boon to you from taking a deferred compensation plan.





Make the decision to buy based on when it makes financial sense to do so. Bay Area prices seem very scary to me at the current moment. I'm sure most of us saw the $2650 rent for a $1.2M house per Zillow in Los Altos.
 
You must log in or register to reply here.
Back
Top