The Strange Case of the Disappearing Residence
"Counselor Realty & Exchange. Greedy Poet speaking. Can I help you?"
"I certainly hope so," said a voice at the other end of the phone. "I think you're the only one who can. This is Sally Johnson."
Sally Johnson. Fingers of thought poked through the Greedy Poet's mental filing cabinet.
"Oh, yes," he said, "you had that house on Landfill Boulevard that I tried to sell 6 months ago."
"Right," said Sally. "You brought 3 or 4 different buyers in, remember, but--" Her tone grew sad, "--none of them wanted it."
"I think that last one would have bought it," said the Greedy Poet, "the little elderly lady--but her husband vetoed it. Did you ever sell the house?"
"No," said Sally angrily. "We had it listed for 6 months, and you are the only agent who ever showed it."
"Not even your own agent?" asked the Greedy Poet incredulously.
"Not even our own agent," said Sally. "Can you help us?"
"You came to the best place in town," said the Greedy Poet.
That afternoon found the Greedy Poet cruising the neighborhood of Landfill Boulevard, videotaping the various homes for later analysis. Occasionally he stopped to talk to residents, garnering information and attitudes. At the site of a new duplex, he drew out his pocket magnifying glass and inspected the slump block minutely. "Hmmmm," he said to himself. He took out his 35mm camera and shot several closeups from different angles.
Armed with these and other details, he rang the doorbell of an attractive newly-painted house set in a large, well-kept yard. Sally's husband Jeff opened the door.
"Come in," he said. "We've been expecting you."
"The problem is," said Jeff, when they were all seated around the dining-room table, "we want to move to the other side of town, but we can't sell this house."
"We should never have bought it," said Sally. "We didn't realize then how important a neighborhood is--we just liked the house."
"It is a good home," said the Greedy Poet, looking around appreciatively, "and you've decorated it nicely--but I know what you mean--this is a marginal neighborhood." He recalled their immediate block, well-kept properties, but all smaller than theirs, the new duplexes two blocks away, the derelict house on the lot right behind theirs, and the man chasing a boy chasing a cow down an adjacent city street.
"What can we do to make it more saleable?" asked Sally desperately.
"You have a fine property here," said the Greedy Poet approvingly, "but it's a $50,000 house in a $30,000 area. It has a large loan on it--$45,000, if I remember correctly--at a high rate of interest--13.5%--and the payments are high--$500 a month. Most of the people who live in this neighborhood couldn't afford the payments."
"Sounds discouraging," said Jeff.
"But," said the Greedy Poet confidently, "that will change. It is changing. This neighborhood is on the way up. The new duplexes being built, the new school, the projected shopping plaza, a number of houses being renovated--all these will increase your property values within the next few years."
"But that doesn't help us now," said Sally down-heartedly. "I'd be willing almost to give it away--just to get out from under. Then we could get financing on that new house we want."
"Did you ever," asked the Greedy Poet dramatically, "consider not selling this house?"
"You mean buying the new one first?" said Jeff. "No way--we couldn't afford $850 a month on that if we still had to pay $500 on this one."
"I don't mean just keeping it," said the Greedy Poet. "I'm talking about keeping it as income property. There are a number of possible tax deductions you can take."
"Oh, I wouldn't want the hassle of renting," said Sally impatiently. Besides I'm so sick of this house, all I want is to be rid of it. I don't want--"
"Quiet a minute," said Jeff gruffly. "I want to hear more of this. Tell me about tax deductions, Greedy."
"You both have good jobs," said the Greedy Poet. "How much do you make--together?"
Sally thought a minute. "About--somewhere between $31,000 and--well, about $31,000," she said.
"You must be paying close to $7000 in income tax then," said the Greedy Poet calculatingly.
Jeff ran through some figures in his head. "I'm not sure," he said, "because Sally wasn't working full-time until this year, but I suspect you're right."
"Well, then," said the Greedy Poet deliberately, "what you need is a tax shelter, and you have a perfect one right here. I advise all my clients in your income range and higher to invest in income property, but you don't even have to do that."
"How would it work?" ask Jeff inquiringly.
The Greedy Poet took out a big felt-tip pen from his briefcase and began making a list.'
"First of all, there's depreciation," he said authoritatively. "You can set up a schedule for 20 years based on the value of your house--$50,000. That's $2,500 a year you can deduct."
"You mean we subtract that from the tax we pay?" asked Sally.
"Not exactly," said the Greedy Poet wryly. "The government would never do anything as simple as that. When you fill out your tax return, there's a form called Supplemental Income Schedule. On it you enter the rent you collect minus the expenses of renting the property. Expenses include depreciation (which I've already mentioned), interest paid, taxes, insurance, cost of maintenance and repairs, and cost of property management (if you hire someone else to do it). Remember, though, that labor you do yourself is not deductible."
"But with our payments being higher than the rent we could get," said Jeff, "we would show a loss, not a profit."
"That's right," said the Greedy Poet crisply. "It's known as negative cash flow. And that loss is subtracted from your income on Form 1040, so it's that much less you have to pay tax on."
"That sounds good," said Sally excitedly..
"Here, I'll draw up a chart," said the Greedy Poet demonstratively, brandishing his felt-tip pen. Click
With this loss you'll be paying tax on only $24,500 instead of $31,000. You'll also be in a lower tax bracket, and that will save you money. (Don't forget, by the way, most of that $850 payment on your new house will be interest--which is deductible.) Instead of losing $5,000 by giving the property away, you keep the $5,000, add $5,000 a year for appreciation, and pay taxes on $6,500 less. That will save you about $2,300 a year, or almost $200 a month. So it's equivalent to your getting $500 a month in rent--just enough to pay your payment. Best of all, you'll be rid of a problem.
"But this is only the beginning of your investment program. As you acquire more income property, you'll create more tax shelter. Eventually, like most millionaires, you won't pay any tax at all."
"Jeff," said Sally unequivocally, "let's do it. We can borrow on our life insurance for the down payment on the new house."
"Another thing," said the Greedy Poet assuredly, "you can now use the income from this house to help you qualify for the payments on the new house. This property is no longer a residence--a liability; it's an asset that's appreciating, producing income in a number of ways."
"Greedy," said Jeff, "can you go with us tomorrow to pick out the new house?"
"Of course--that's elementary," said the Greedy Poet deductively.
September 1981