This week’s Chairman’s Report is written by Jade Walle. A practicing CPA has been on the American For Fair Taxation board of directors.
The FAIRtax and rental property ownership
More Americans than ever have transformed themselves into property entrepreneurs, whether it be house flipping, development, or the subject of this week’s article, rental property acquisition. Financial advisors of almost every kind recommend owning rental property as a way to build or supplement existing wealth, and almost every streaming platform has some kind of real estate program that millions tune into every week.
Given the massive interest in owning rental property, it is worth examining how rental property owners would fare with the FAIRtax relative to the income tax.
The income tax has many advantages and opportunities for rental property owners, but it requires a high level of detail, diligence and knowledge of the tax code to take advantage of them. There is a great deal of recordkeeping involved, and there are other time related costs as well.
There are complex passive and active income rules and requirements to adhere to. For example, rental properties can be depreciated which creates a tax deduction that lowers taxable income and the rental business’ tax bill. You can even accelerate depreciation faster than the 27.5-year residential rental property depreciable life by commissioning depreciation studies for parts of the property that have shorter useful lives.
If this wasn’t enough, there are myriad other unique and special deductions available depending on how one sets up their rental property business. If the business is an LLC as opposed to a sole proprietorship or partnership, it is a separate legal entity and regulations such as the “Augusta Rule” come into play.
Here, section 280A of the Internal Revenue Code allows the LLC’s business owners to enter an official rental contract and have a rental property business retreat or meetings at their personal home residence, and exclude up to 14 days of fair market rental cost from their personal income, all while incurring an LLC “expense” for the rental. This is the classic “double dip” where you basically pay yourself and enjoy a potentially large tax deduction at the same time.
This brief recital was intended to cause some discomfort, so apologies for the brain trauma.
The rules, oddities, and exceptions could fill many more pages, but the aforementioned examples provide a glimpse into the complexity associated with minimizing your tax bill with rental properties under our income tax regime. However, what if the FAIRtax were the law of the land?
Assuming your rental properties were let out to individuals as opposed to business property rental, the time and cost associated with your recordkeeping would be drastically reduced.
First, your LLC would no longer have to worry about exclusions, exemptions, or deductions of any kind. You would simply rent your property out to your tenants and collect your rent including the FAIRtax. You would then provide a simple monthly remittance of FAIRtax collected to your state of residence.
For ROI (return on investment) measurement and other business management reasons, you still might want to monitor and track your business related expenses associated with your rental properties, but you wouldn’t have to for tax purposes. Even if you did, the expense tracking would be significantly simpler, because all of the odd tax deductions (e.g., the Augusta Rule) fall away, and you could follow a simpler accounting principles-based approach to your P&L.
The Bonafide expenses you incur for your rental property business would also be free of the FAIRtax, since the FAIRtax is only charged on final, retail sales.
When you purchase furniture, incur repair expenses or other rental property costs, these are business expenses where you could either avoid paying the tax at the time of purchase depending on your state’s sales tax license procedures, or have the tax you paid reimbursed via your monthly FAIRtax remittance to your state.
All in all, there is still some business management one would have to contend with as a rental property owner under the FAIRtax, but owning and operating a business of any kind has always required some level of diligence and management.
The change with the FAIRtax however, is that all the one-off income tax strategy, planning, and strange agreements with yourself or others would simply fall away. You could get back to focusing on what you’re really trying to do, and that is to own, operate, and hopefully turn a profit on your rental property business.
Oh, and the kicker is that the profit you do eventually turn on that incredible Hawaiian townhome you rent out for $1,000 a night is income tax free! No more tax returns or income tax on your hard-earned earnings you generate. Just pay the FAIRtax as you consume. It’s that simple. How about we all say “aloha” (the hello meaning) to the FAIRtax, and “aloha” (the goodbye meaning) to the income tax!
CONCLUSION
Jade clearly explains how the FAIRtax simplifies real estate investment. Simplifying and encouraging real estate investment will have an immediate impact in encouraging more real estate development and providing more housing which is desperately needed now.
The D.C. Elites and almost all politicians and their minions profit from the complexity of the income/payroll tax while the rest of us pay for their greed. They will oppose this simplification unless we the people demand it.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@fairtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.
THE SOLUTION—PASS THE FAIRTAX!
Why would D.C. pass the FAIRtax and give up this almost unlimited source of donations? The only way that they will is if the rest of us demand it!
Isn’t it time to end this ludicrous tax collection system and the IRS?
HELP BRING ABOUT REAL TAX REFORM AND STOP FUTURE IRS ABUSES
By contributing (investing) $10.40 per month, you help provide a financial base to AFFT. If you can make larger contributions (investments), these will be used not for salaries, as we are all volunteers, but for the needed updates to our economic studies which will be vital for all future years.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.