While most DA readers are laser-focused on CDs, it might be time to consider alternative investments. Herewith, real estate.
Rental real estate properties can generate both profit and angst. As a general rule, rental real estate generates angst in the first decade of ownership, since it usually takes ten years or so for any rental to throw off positive cash-flow.
That said, once a rental is generating positive cash flow, it is hardly axiomatic that the cash is taxable. Most often, it is not. Welcome to the world of depreciation, booked loss, and IRS Form 8582.
Example: Jack buys a rental condo in his early 40's. He's making a nice living, and can afford to carry the negative on the condo. The negative and depreciation go into a "bank" of booked losses Jack can tap down the road. After a decade or so, Jack's rentals exceed his carrying costs; he is now "cash-flow-positive". Despite that, Jack pays no state or federal income tax, as Jack can use all those booked losses to offset any income tax. This goes on for twenty more years or so, and then Jack hits retirement. He's still getting his rent check, essentially tax-free, and starts collecting Social Security.
Bang. Enter the magic of IRS Form 8582. With an MAGI of less than $150,000 (S/S doesn't count; look it up), Jack can now also use his booked loss over those many years to offset ordinary income. It's what one might call a "two-fer". The booked loss not only cancels out any taxable income on the rental, it also reduces other taxable income per line 17 on IRS Form 1040. The "sweet spot" is with a MAGI of $100,000. The "negative" on line 17 is $25,000. Trust me, been there, done that.
To make matters more interesting, Jack intends to keep the condo in his estate until he dies. All that depreciation he took, which would be subject to recapture if he sold the condo (at a rate of 25%), just disappears. It goes poof. Literally. His heirs get a step-up in basis. So, Jack gets the benefit of the depreciation, and Jack's heirs can avoid the recapture.
