15% income tax? How is that possible?

[Bern80]

If you want to kill the economy, go for it. Taxing a business based on its gross receipts is the dumbest thing I've ever heard.

Again why? I'm not trying to be argumentative (you actually might be on to something). But why is it so absurd for a business (which the law actually treats like a person) to taxes on its gross income, when it's so NOT absurd for you to pay taxes on your gross income.

we as individuals pay taxes on our supposed profit, just like businesses....why do you think there are so many deductions available to use or the standard and personal deductions if filing short form or a gross income and a ''taxable income''?

Oh come on Care. It's not even close to the same thing. Profits are gross revenue less expenses. Now I didn't see anywhere on my tax form where I got to deduct my grocery bill, utilites, gas, car payment, etc. The first thing that happens when you get paid is having your taxes taken out of your GROSS pay. The fed doesn't care about what your expenses were over that pay period. Whereas paying taxes is the last thing a business has to do AFTER it has deducted its operating expenses.

 

[OohPooPahDoo]

All this back and forth doesn't change the fact that Warren Buffet was dishonest and Obama sat there ran with Buffet's his dishonesty when Buffet claimed to pay less than his secretary in income taxes.

Yes his capital gains tax rate is lower than his secretary's personal tax rate, before deductions, but his personal income tax rate is higher than his secretaries.

Hence the point of the thread, you guys are on some wild tangent now but its nice reading .

Capital gains income is personal income, stupid head. His ORDINARY income tax rate is higher than his secretary's, but Warren Buffet makes most of his money as capital gains income.

 

[Dragon]

A lot of spinning, deception, and silliness in this thread. Where to start?

First off, the OP's argument is that even if an investor gains all of his income in the form of capital gains and so pays a personal tax of 15%, the corporation in which he invests pays corporate income taxes at a higher rate. That makes even bad sense as an argument only if the investor owns the corporation completely, which is rarely the case. Even then, the corporate tax is still not applied to his money but to the corporation's money. Not all capital gains even touch corporations along the way; for example, if one invests in real estate and that appreciates (not reality at present but it usually is), the gains from that investment are taxed at capital gains rates.

Secondly, there's the old saw about how 40% (or whatever the current figure is) of the people pay "no taxes." Of course, everyone pays federal taxes except the unemployed poor who don't even get UI (which is taxable). Confronted with this fact, those who trotted out the statistic retreat to saying they meant income tax "of course," which also means, of course, that they were making a meaningless claim. Federal taxes other than income tax are still federal taxes, and everyone pays them.

The bottom line is that our tax structure has been skewed to benefit the rich, as have other aspects of our economy, in ways that are not only unfair but also damaging to the economy itself. History shows that an economy performs better when income gaps are narrower. Businesses don't hire people because money burns a hole in their pockets, they hire people because they can't satisfy all the demand for their products with the work force they have now (or of course to replace people they lose). Demand, in turn, comes from customers, which must have money in order to be customers. Businesses hire because money is burning a hole in their customers' pockets, not their own.

What's more, a steeply graduated tax system with appropriate deductions steers investments into the production of real wealth (i.e., goods and services) instead of financial shell games such as the ones whose collapse triggered our current economic mess. It's a much better way to arrange things.

Again, the bottom line is that our tax system taxes the rich too little and everyone else too much. Any arguments to the contrary, such as the two arguments mentioned above from the OP and a respondent, amount to deception, deliberate or otherwise.

EDIT: I forgot to mention that the idea of taxing businesses on their gross receipts also makes no sense. Individuals get taxed on gross income because they generally don't have anything in the way of business expenses; some of their income is deducted either as standard deduction or as itemized deductions. A business has to spend money to make money and should not be taxed on the money it's spending rather than making.

 

[OohPooPahDoo]

=
The bottom line is that our tax structure has been skewed to benefit the rich

And not only that - but amongst the rich, skewed to benefit those who don't actually produce anything. The tax code favors the rich who merely push paper around - it favors investment of funds in assets that someone else has already produced rather than investment of funds in a new business.

For instance, if I inherit $10,000,000 and invest it all in stocks, all I've done is bought part of a company that someone else has already produced - I get taxed at 15%. On the other hand, if I take the $10 million and open a widget factory, and actually produce something and make new jobs - I'll pay the higher 35% tax.


So we see - the tax code favors the unproductive rich over the productive rich. This is probably because the productive rich are too damn busy working to pay attention to how much the unproductive rich are fleecing them.

 

[MikeK]

I've been hearing more and more of this nonsense that "the rich" only pay 15% of their income due to the low capital gains tax rates. Barring specific rare loopholes, how does someone who earns the bulk of their money through investing pay only this rate?

I think the talking point is bullshit, but I'll gladly admit I'm wrong if someone has some actual facts.

It's not bullshit. The Capital Gains tax is 15%. Period. That's why the tax rate of people like Warren Buffet is lower than his secretary's -- and why the super-rich should be subjected to a significant confiscatory tax to restore balance to our collapsing economy.

 

[code1211]

If you want to kill the economy, go for it. Taxing a business based on its gross receipts is the dumbest thing I've ever heard.

Again why? I'm not trying to be argumentative (you actually might be on to something). But why is it so absurd for a business (which the law actually treats like a person) to taxes on its gross income, when it's so NOT absurd for you to pay taxes on your gross income.

we as individuals pay taxes on our supposed profit, just like businesses....why do you think there are so many deductions available to use or the standard and personal deductions if filing short form or a gross income and a ''taxable income''?

Deductions are put in place to induce particular behaviors. Taxes are placed for the same things. So smoking is "bad". Tax the crap out of it. Owing a home is "good". Deduct the mortgage interest.

Businesses are subject to the same inducements.

As a (former) business owner you know the difference between a normal expense and a deduction. Payroll is an expense. Credits for hiring a particular race is a deduction.

Any expense is a reduction in Gross Revenue and any indirect expense is a reduction from gross contribution margin. If you are forced by the act of doing business to expend cash, that expense reduces your net profit. You might collect a million dollars and spend a million and one dollars to do it.

Your tax would be zero since you net less than nothing.

Expenses are not deductions.

 

[OohPooPahDoo]

Credits for hiring a particular race is a deduction.

No, those are credits. How much credit do you get per darkie?

Any expense is a reduction in Gross Revenue and any indirect expense is a reduction from gross contribution margin. If you are forced by the act of doing business to expend cash, that expense reduces your net profit. You might collect a million dollars and spend a million and one dollars to do it.

What is and is not an expense of business is not always black and white. For instance, if you go to lunch with your business partner, and talk about business for 30 seconds and football for an hour, you can deduct 50% of the meal - but is that really an expense of business? You could argue either way. Same is true of depreciation - what is the true life of a capital asset? 27.5 years for rental property - yet most houses last considerably longer than that. Up for debate and dependent on the particulars - and what should be a capital expense and what should be an operating expense?

 

[Care4all]

Again why? I'm not trying to be argumentative (you actually might be on to something). But why is it so absurd for a business (which the law actually treats like a person) to taxes on its gross income, when it's so NOT absurd for you to pay taxes on your gross income.

we as individuals pay taxes on our supposed profit, just like businesses....why do you think there are so many deductions available to use or the standard and personal deductions if filing short form or a gross income and a ''taxable income''?

Deductions are put in place to induce particular behaviors. Taxes are placed for the same things. So smoking is "bad". Tax the crap out of it. Owing a home is "good". Deduct the mortgage interest.

Businesses are subject to the same inducements.

As a (former) business owner you know the difference between a normal expense and a deduction. Payroll is an expense. Credits for hiring a particular race is a deduction.

Any expense is a reduction in Gross Revenue and any indirect expense is a reduction from gross contribution margin. If you are forced by the act of doing business to expend cash, that expense reduces your net profit. You might collect a million dollars and spend a million and one dollars to do it.

Your tax would be zero since you net less than nothing.

Expenses are not deductions.

correct.

but regardless, we can not be taxed on our gross income....only our taxable income...and even if there were no incentive deductions to lower our gross income, we still would have the standard deduction etc that accounts for normal necessities before the gvt can tax our income....because according to the law and Supreme Court ruling/case....income for the purposes of income tax is profit.

 

[asterism]

Maybe I'm not understanding your question, if an investor such as Warren Buffett makes 100 million bucks in a year and 90% of his/her income is from capital gains, then their tax rate is not going to be too far above the 15% cg rate.

Now if you want to propose that the cg rate be raised, then you have to understand that some investment capital will flow out of the country to places where it'll be taxed less. That tax rate is perhaps the most damaging to the economy if you raise it.

If an investor such as Warren Buffett makes $100 Million through a corporation then the corporation is subject to corporate income tax first, which is 35% at that level. Then he as an investor can take that money for himself and pay a personal capital gains rate of 15%. So if the venture makes $100 Million in a year the actual after tax result is $55.25 Million, for a total federal tax rate of 44.75%.

No. The capital gains tax is only paid on realized gains - whereas corporate income tax is paid on net profit, realized or not. And it doesn't apply just to corporations. For instance - you can buy real estate for $10000, sell it for $20000 - and get taxed only 15% on your $10000 profit.

Correct that it's only realized gains. Incorrect on real estate.

Capital Gains: At What Rate Will Your Sale Be Taxed? - SmartMoney.com

 

[asterism]

I've been hearing more and more of this nonsense that "the rich" only pay 15% of their income due to the low capital gains tax rates. Barring specific rare loopholes, how does someone who earns the bulk of their money through investing pay only this rate?

I think the talking point is bullshit, but I'll gladly admit I'm wrong if someone has some actual facts.

It's not bullshit. The Capital Gains tax is 15%. Period. That's why the tax rate of people like Warren Buffet is lower than his secretary's -- and why the super-rich should be subjected to a significant confiscatory tax to restore balance to our collapsing economy.

You stopped reading at the first post didn't you?

Buffett didn't count the taxes paid by the corporations he controls.

 

[domonkoz]

But the investor doesn't pay the corporate taxes, they only pay taxes on the income that is distributed to them via a realized gain.

True, but as has been shown there's more to the story (and much more in taxes) than just the money that Buffett or the Koch brothers collect as dividends. Warren Buffett never mentioned that besides his personal income tax rate of 17% there were all the corporate tax rates he paid through the various corporations that he owns.

The money paid in taxes by the corporation isn't his money. The corporation is a separate entity.

and that's the problem. Declare a untangible thing a legal person, then absolve the people who decide what that legal person does of any responsibility to themselves. Just get three people together, file the paper work, and you can rob everyone blind with no consequences. Capatalism at its finest.

Besides where would we be if we didnt have UGLY fast food chains cranking out disgusting plastic food on every sqaure foot of this country. Oh yeah, somewhere nice.

 

[Care4all]

I've been hearing more and more of this nonsense that "the rich" only pay 15% of their income due to the low capital gains tax rates. Barring specific rare loopholes, how does someone who earns the bulk of their money through investing pay only this rate?

I think the talking point is bullshit, but I'll gladly admit I'm wrong if someone has some actual facts.

It's not bullshit. The Capital Gains tax is 15%. Period. That's why the tax rate of people like Warren Buffet is lower than his secretary's -- and why the super-rich should be subjected to a significant confiscatory tax to restore balance to our collapsing economy.

You stopped reading at the first post didn't you?

Buffett didn't count the taxes paid by the corporations he controls.

he didn't count what taxes the corporations that he owns stock in pays because it is NOT taxes that he paid individually. He is NOT the sole owner of these corporations, there are many holders of stock in those corporations that he owns stock in....AND in addition to this, as many many many many republicans have stated many many many times, most of the corporate taxes are paid for by the consumer when they purchase the corporation's products....(ala...don't raise corporate taxes on Exxon/Mobile because they will only raise the price of heating oil or gasoline on to us)

In addition to all of this asterism, if you insist on taking other taxes paid for by other entities and adding them to what individual federal taxes that Buffet is obligated to pay WHILE NOT doing the same for his secretary and what taxes she has to pay outside of her federal taxes and what percentage those taxes are to her income is SIMPLY WRONG....and NOT a SOUND comparison.....it's apples to oranges.

Can't you see that....?

Care

 

[asterism]

It's not bullshit. The Capital Gains tax is 15%. Period. That's why the tax rate of people like Warren Buffet is lower than his secretary's -- and why the super-rich should be subjected to a significant confiscatory tax to restore balance to our collapsing economy.

You stopped reading at the first post didn't you?

Buffett didn't count the taxes paid by the corporations he controls.

he didn't count what taxes the corporations that he owns stock in pays because it is NOT taxes that he paid individually. He is NOT the sole owner of these corporations, there are many holders of stock in those corporations that he owns stock in....AND in addition to this, as many many many many republicans have stated many many many times, most of the corporate taxes are paid for by the consumer when they purchase the corporation's products....(ala...don't raise corporate taxes on Exxon/Mobile because they will only raise the price of heating oil or gasoline on to us)

In addition to all of this asterism, if you insist on taking other taxes paid for by other entities and adding them to what individual federal taxes that Buffet is obligated to pay WHILE NOT doing the same for his secretary and what taxes she has to pay outside of her federal taxes and what percentage those taxes are to her income is SIMPLY WRONG....and NOT a SOUND comparison.....it's apples to oranges.

Can't you see that....?

Care

The only reason I'm taking into account the taxes paid by the corporations that Buffett controls is because that's part of the equation. HE directs the creation of wealth by leveraging his money and the money of other investors. The taxes that are paid by that endeavor are substantially higher than the 17% he claims to have paid.

I own an S-Corp. so all of my corporation's income is passed through to my personal tax return. I pay about 30% of AGI. If I were to reorganize into a C-Corp. then I would only have to pay 15% of the income above my salary, but the corporation that I control would have to pay 35%. I'd have less money available to me. The same economic activity at the same level would be substantially less profitable and the taxes paid would be substantially higher.

Buffett's secretary does not control a corporation and does not have any of her compensation affected by corporate tax rates. Buffett does and his income does.

Get it?

 

[Care4all]

You stopped reading at the first post didn't you?

Buffett didn't count the taxes paid by the corporations he controls.

he didn't count what taxes the corporations that he owns stock in pays because it is NOT taxes that he paid individually. He is NOT the sole owner of these corporations, there are many holders of stock in those corporations that he owns stock in....AND in addition to this, as many many many many republicans have stated many many many times, most of the corporate taxes are paid for by the consumer when they purchase the corporation's products....(ala...don't raise corporate taxes on Exxon/Mobile because they will only raise the price of heating oil or gasoline on to us)

In addition to all of this asterism, if you insist on taking other taxes paid for by other entities and adding them to what individual federal taxes that Buffet is obligated to pay WHILE NOT doing the same for his secretary and what taxes she has to pay outside of her federal taxes and what percentage those taxes are to her income is SIMPLY WRONG....and NOT a SOUND comparison.....it's apples to oranges.

Can't you see that....?

Care

The only reason I'm taking into account the taxes paid by the corporations that Buffett controls is because that's part of the equation. HE directs the creation of wealth by leveraging his money and the money of other investors. The taxes that are paid by that endeavor are substantially higher than the 17% he claims to have paid.

I own an S-Corp. so all of my corporation's income is passed through to my personal tax return. I pay about 30% of AGI. If I were to reorganize into a C-Corp. then I would only have to pay 15% of the income above my salary, but the corporation that I control would have to pay 35%. I'd have less money available to me. The same economic activity at the same level would be substantially less profitable and the taxes paid would be substantially higher.

Buffett's secretary does not control a corporation and does not have any of her compensation affected by corporate tax rates. Buffett does and his income does.

Get it?

How do you know she does not own stock in a corporation? Do you know that she does not own stocks just as buffet owns stock?

do you count the taxes the corporation pays as a percentage of taxes that you pay for the corporations you own stock in? I own lots of different stocks, and NEVER EVER have I considered the corporation's tax as MY TAX....and you doing so is simply wrong.

In addition to this....can you please show us where this 35% corporate taxes that Buffet gets credit for as his own individual obligation of federal taxes comes from....?

do the corporations he owns stock in ALL pay 35% tax? they get no deductions to bring their tax obligation down?

how come when individuals figure the taxes they pay at the end of the year it is figured on to their total gross income....as example, If i were in a 35% tax bracket with my income, after deductions and personal exemptions, I pay that 35% on this taxable income.....but in the end, on my gross income, it ends up being 19% that i paid in taxes. my end result in taxes paid, gets measured on my GROSS income.

While with businesses, you guys always quote the 35% they are paying in corporate taxes and you don't calculate what percentage of taxes they ended up paying on their GROSS income.....which could be as little as 5% for them compared to my example of 19% for me.....?

I don't think s-corps can compare with c-corps.

Buffet does not individually own any of the corporations....he is a stock holder, just like you and me.....and i don't get to count the taxes paid by the corporations as my taxes, and neither should he.

 

[OohPooPahDoo]

If an investor such as Warren Buffett makes $100 Million through a corporation then the corporation is subject to corporate income tax first, which is 35% at that level. Then he as an investor can take that money for himself and pay a personal capital gains rate of 15%. So if the venture makes $100 Million in a year the actual after tax result is $55.25 Million, for a total federal tax rate of 44.75%.

No. The capital gains tax is only paid on realized gains - whereas corporate income tax is paid on net profit, realized or not. And it doesn't apply just to corporations. For instance - you can buy real estate for $10000, sell it for $20000 - and get taxed only 15% on your $10000 profit.

Correct that it's only realized gains. Incorrect on real estate.

Capital Gains: At What Rate Will Your Sale Be Taxed? - SmartMoney.com

It is the depreciation recapture that is taxed at 25%. The profit above that is taxed at 15%.

Depreciation recapture fails to recapture all the tax benefits gained by those above the 25% bracket. E.g - you claim the depreciation expense, get 35% of it back if you are in the 35% tax bracket - but then when you sell and have to pay the recapture tax, you only pay 25%. So those in the 35% income bracket get a net tax benefit of 10% on their property's depreciation!

So say you buy a house for 100k. Depreciate 50k over the years. You sell it for 100k. If you are in the 35% bracket - you got back 0.35 * 50k in expenses, but when you sell you have to pay back on 0.25 * 50k - so your net tax benefit is 5k! If you sell for more the 100k, the rest is taxed at 15% - you'd have to have 33.3k in profit at 15% to make 5k in taxes - so you can get as high as 133.33k without having to pay net taxes - a 33k profit tax free!

 

[OohPooPahDoo]

I've been hearing more and more of this nonsense that "the rich" only pay 15% of their income due to the low capital gains tax rates. Barring specific rare loopholes, how does someone who earns the bulk of their money through investing pay only this rate?

I think the talking point is bullshit, but I'll gladly admit I'm wrong if someone has some actual facts.

It's not bullshit. The Capital Gains tax is 15%. Period. That's why the tax rate of people like Warren Buffet is lower than his secretary's -- and why the super-rich should be subjected to a significant confiscatory tax to restore balance to our collapsing economy.

You stopped reading at the first post didn't you?

Buffett didn't count the taxes paid by the corporations he controls.

Why would he? Those are taxes on the corporation's income.

 

[asterism]

he didn't count what taxes the corporations that he owns stock in pays because it is NOT taxes that he paid individually. He is NOT the sole owner of these corporations, there are many holders of stock in those corporations that he owns stock in....AND in addition to this, as many many many many republicans have stated many many many times, most of the corporate taxes are paid for by the consumer when they purchase the corporation's products....(ala...don't raise corporate taxes on Exxon/Mobile because they will only raise the price of heating oil or gasoline on to us)

In addition to all of this asterism, if you insist on taking other taxes paid for by other entities and adding them to what individual federal taxes that Buffet is obligated to pay WHILE NOT doing the same for his secretary and what taxes she has to pay outside of her federal taxes and what percentage those taxes are to her income is SIMPLY WRONG....and NOT a SOUND comparison.....it's apples to oranges.

Can't you see that....?

Care

The only reason I'm taking into account the taxes paid by the corporations that Buffett controls is because that's part of the equation. HE directs the creation of wealth by leveraging his money and the money of other investors. The taxes that are paid by that endeavor are substantially higher than the 17% he claims to have paid.

I own an S-Corp. so all of my corporation's income is passed through to my personal tax return. I pay about 30% of AGI. If I were to reorganize into a C-Corp. then I would only have to pay 15% of the income above my salary, but the corporation that I control would have to pay 35%. I'd have less money available to me. The same economic activity at the same level would be substantially less profitable and the taxes paid would be substantially higher.

Buffett's secretary does not control a corporation and does not have any of her compensation affected by corporate tax rates. Buffett does and his income does.

Get it?

How do you know she does not own stock in a corporation? Do you know that she does not own stocks just as buffet owns stock?

do you count the taxes the corporation pays as a percentage of taxes that you pay for the corporations you own stock in? I own lots of different stocks, and NEVER EVER have I considered the corporation's tax as MY TAX....and you doing so is simply wrong.

In addition to this....can you please show us where this 35% corporate taxes that Buffet gets credit for as his own individual obligation of federal taxes comes from....?

do the corporations he owns stock in ALL pay 35% tax? they get no deductions to bring their tax obligation down?

how come when individuals figure the taxes they pay at the end of the year it is figured on to their total gross income....as example, If i were in a 35% tax bracket with my income, after deductions and personal exemptions, I pay that 35% on this taxable income.....but in the end, on my gross income, it ends up being 19% that i paid in taxes. my end result in taxes paid, gets measured on my GROSS income.

While with businesses, you guys always quote the 35% they are paying in corporate taxes and you don't calculate what percentage of taxes they ended up paying on their GROSS income.....which could be as little as 5% for them compared to my example of 19% for me.....?

I don't think s-corps can compare with c-corps.

Buffet does not individually own any of the corporations....he is a stock holder, just like you and me.....and i don't get to count the taxes paid by the corporations as my taxes, and neither should he.

Read my post again. I know she does not CONTROL a corporation. I am counting the corporate taxes paid by companies Buffett CONTROLS. Buffett is able to affect his personal financial situation by manipulating the activities of corporations he controls. As someone who controls those corporations, his economic activities encompass much more than just his salary and capital gains and the taxes paid are more than just his personal tax bills.

Buffett is not an ordinary stockholder. He is the majority voter. He CONTROLS the corporations.

This is why his talking point is bullshit. He's able to manipulate things to appear that his tax liability is lower percentage wise than his secretary (or you, or me). But the reality is that it's not true. HE directs activities that earn money through corporations he controls (just like me).

 

[asterism]

No. The capital gains tax is only paid on realized gains - whereas corporate income tax is paid on net profit, realized or not. And it doesn't apply just to corporations. For instance - you can buy real estate for $10000, sell it for $20000 - and get taxed only 15% on your $10000 profit.

Correct that it's only realized gains. Incorrect on real estate.

Capital Gains: At What Rate Will Your Sale Be Taxed? - SmartMoney.com

It is the depreciation recapture that is taxed at 25%. The profit above that is taxed at 15%.

Depreciation recapture fails to recapture all the tax benefits gained by those above the 25% bracket. E.g - you claim the depreciation expense, get 35% of it back if you are in the 35% tax bracket - but then when you sell and have to pay the recapture tax, you only pay 25%. So those in the 35% income bracket get a net tax benefit of 10% on their property's depreciation!

So say you buy a house for 100k. Depreciate 50k over the years. You sell it for 100k. If you are in the 35% bracket - you got back 0.35 * 50k in expenses, but when you sell you have to pay back on 0.25 * 50k - so your net tax benefit is 5k! If you sell for more the 100k, the rest is taxed at 15% - you'd have to have 33.3k in profit at 15% to make 5k in taxes - so you can get as high as 133.33k without having to pay net taxes - a 33k profit tax free!

That is absolutely false. There is no tax free profit in selling investment properties. If you sell the property for a zero net gain (buy for 100K, sell for 100K) you still owe 5K in taxes assuming you depreciate 50K. If you sell for $133K you first have to pay the 5K in depreciation recovery PLUS the 15% on the actual gain.

 

[OohPooPahDoo]

That is absolutely false. There is no tax free profit in selling investment properties. If you sell the property for a zero net gain (buy for 100K, sell for 100K) you still owe 5K in taxes assuming you depreciate 50K. If you sell for $133K you first have to pay the 5K in depreciation recovery PLUS the 15% on the actual gain.

If you've depreciated 50k you've gotten back your marginal tax rate on that 50k. If you pay taxes at the 25% rate then over the term that you've owned the property you've paid $12,500 LESS in taxes. The depreciation recapture merely regains those taxes - that's why its called a RECAPTURE.

Do I have to spell it out for you in greater detail?

Buy property for 100k.

If you're wealthy - your marginal tax rate is 35%. If you depreciate 50k as expenses, you're net tax benefit is 0.35 * 50k = $17.5k

Then you sell property for 133.33k.

50k is depreciation recapature taxed at 25% - you owe 12.5k for that.
33.33k is a long term cap gain taxed at 15%. You owe 5k for that.

17.5k in tax BENEFITS + (12.5k + 5k) in tax LIABILITY = ZERO

Not to mention that the 17.5k in tax benefit comes years before the tax liabilities - so even if invested in low interest treasuries, your net result would be slightly POSITIVE.

 

[asterism]

That is absolutely false. There is no tax free profit in selling investment properties. If you sell the property for a zero net gain (buy for 100K, sell for 100K) you still owe 5K in taxes assuming you depreciate 50K. If you sell for $133K you first have to pay the 5K in depreciation recovery PLUS the 15% on the actual gain.

If you've depreciated 50k you've gotten back your marginal tax rate on that 50k.

No, nothing has been "gotten back." There's a difference between paying less and getting something back.

If you pay taxes at the 25% rate then over the term that you've owned the property you've paid $12,500 LESS in taxes. The depreciation recapture merely regains those taxes - that's why its called a RECAPTURE.

Do I have to spell it out for you in greater detail?

Buy property for 100k.

If you're wealthy - your marginal tax rate is 35%. If you depreciate 50k as expenses, you're net tax benefit is 0.35 * 50k = $17.5k

Then you sell property for 133.33k.

50k is depreciation recapature taxed at 25% - you owe 12.5k for that.
33.33k is a long term cap gain taxed at 15%. You owe 5k for that.

17.5k in tax BENEFITS + (12.5k + 5k) in tax LIABILITY = ZERO

Not to mention that the 17.5k in tax benefit comes years before the tax liabilities - so even if invested in low interest treasuries, your net result would be slightly POSITIVE.

Ah, I see your errors here.

1. Tax rate is determined by income, not wealth. 35% marginal tax rate is for a high income earner, not someone who is "wealthy."

2. You're adding up over 10 years of tax savings and treating them as if they are realized immediately.

3. You're comparing a long term depreciation history in a vacuum, as if that's the net effect on tax returns for investment property. There are all sorts of other intricacies. Someone in the 35% marginal tax bracket will not ever fully realize all tax savings from depreciation. AMT will wipe them out (on a 22 year recovery period the max is less than $5K per year) or other non-deductible expenses.