NEWS RELEASE
Jason R. Mosley Receives Highest Peer Review Rating™ from LexisNexis® Martindale-Hubbell®
-- Legal Profession’s Most Prestigious Rating Service Recognizes Local Firm --
Pensacola, FL – June 16, 2011 – LexisNexis Martindale-Hubbell announced that attorney Jason R. Mosley, J.D./LL.M receives the highest Martindale-Hubbell Peer Review Rating.
Jason R. Mosley was given an "AV" rating from his peers, which means that he was deemed to have very high professional ethics and preeminent legal ability. Only lawyers with the highest ethical standards and professional ability receive a Martindale-Hubbell Peer Review Rating.
Jason R. Mosley began his law career in 2001 with a transactional emphasis on Taxation and Wills, Trusts & Estates. Soon thereafter, Jason expanded his practice to include the litigation and appellate aspects of these areas of practice. He has successfully litigated tax matters before the U.S. Tax Court and in the U.S. Bankruptcy Court. Jason has both successfully defended and challenged the probate of wills, and administered complex and contested estates.
Jason has also represented some of Northwest Florida’ major residential real estate developers and lending institutions in the closing of both residential and commercial loans. His practice has included the acquisition and development of residential properties with over one thousand residential units, as well as, beach condominium developments.
From Fall 2004 until Spring 2009, Jason served as an Assistant Professor of Legal Studies at the University of West Florida, teaching such classes as Constitutional Law and Estate Planning & Administration. He is also a regular speaker on the topics of taxation, entity selection, and estate administration.
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Friday, June 17, 2011
Friday, June 3, 2011
Estate Planning in 2011 and 2012
On December 17, 2010 the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act"). The Act significantly changes the federal estate tax, which impacts estate planning for many of our clients, and presents significant estate planning opportunities. This memorandum summarizes the Act's key changes and provides you with our observations about the Act's impact from an estate planning perspective. Please note that there are several important changes made by the Act that this memorandum does not summarize.
SUMMARY OF KEY ESTATE AND GIFT TAX PROVISIONS OF THE ACT
Estate Tax
Before the Act, the federal estate tax was gradually reduced over several years and then eliminated for decedents dying in 2010. Prior law provided that the estate tax, with a maximum tax rate of 55 percent and a $1 million applicable exclusion amount, would be reinstated after 2010. Additional changes scheduled for years after 2010 affected the gift and generation- skipping transfer ("GST") taxes.
The Act reinstates the estate tax for decedents dying during 2010, but at a significantly higher applicable exclusion amount of $5 million, and a lower maximum tax rate of 35 percent, than under prior law. This estate tax regime continues for decedents dying in 2011 and 2012. Unfortunately, this new regime is itself temporary and will sunset on December 31, 2012 and the prior estate tax regime, with a 55 percent maximum estate tax rate and a $1 million applicable exclusion amount, is reinstated at that time.
The Act also eliminates the modified carryover basis rules for 2010 and replaces them with the stepped-up basis rules that had applied before 2010. Property with a stepped-up basis generally receives a basis equal to the property's fair market value on the date of the decedent's death. Under the modified carryover basis rules that applied during 2010 before the Act, executors could increase the basis of estate property only by a total of $1.3 million (plus an additional $3 million for assets passing to a surviving spouse, for a total increase of $4.3 million), with other estate property taking a carryover basis equal to the lesser of the decedent's basis or the property's fair market value on the decedent's death.
The Act gives estates of decedents dying during 2010 the option to apply (1) the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped-up basis, or (2) no estate tax and modified carryover basis rules under prior law.
The Act also provides for "portability" between spouses of the estate tax applicable exclusion amount for estates of decedents dying in 2011 and 2012 if both spouses die before 2013. Generally, portability allows surviving spouses to elect to take advantage of the unused portion of the estate tax applicable exclusion amount (but not any unused GST tax exemption) of their predeceased spouses, thereby providing surviving spouses with a larger exclusion amount. Special limits apply to decedents with multiple predeceased spouses.
To preserve the first deceased spouse's unused applicable exclusion amount, the executor for such spouse must file an estate tax return and make an election on such return, even if such an estate tax return would otherwise not be required.
Gift Taxes
For gifts made in 2010, the maximum gift tax rate is 35 percent and the applicable exclusion amount is $1 million. For gifts made in 2011 and 2012, the Act limits the maximum gift tax rate to 35 percent and increases the applicable exclusion amount to $5 million. As discussed below, this change provides an opportunity to move significant amounts of wealth free of estate and gift taxes.
Donors continue to be able to use the annual gift tax exclusion before having to use any part of their applicable exclusion amount. For 2010 and 2011, the annual exclusion amount is $13,000 per donee (married couples may continue to "split" their gift and may make combined gifts of $26,000 to each donee).
Generation Skipping Transfer ("GST") Tax
The Act provides a $5 million GST exemption amount for 2010 (equal to the applicable exclusion amount for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under prior law affecting the GST tax.
OBSERVATIONS REGARDING THE ACT
Generally
Generally, the estate and gift tax provisions of the Act are very favorable to taxpayers because of the substantial increase in the applicable exclusion amount, to $5 million, and the lower maximum estate and gift tax rate of 35 percent. The Act also addresses several technical estate, gift and GST tax issues in a manner that is favorable to taxpayers (e.g., the impact of the lapse of the estate tax, including the application of basis rules, on decedents passing away during 2010).
Temporary Fix
The Act is a temporary fix, which sunsets on December 31, 2012, immediately after the next election cycle. It is impossible to predict whether it will be extended in either its current or some modified form, especially given the fact that it is a hot button issue with both major political parties. If Congress fails to act, the Act will lapse and the estate tax will revert to what it would have been under prior law (i.e., $1 million applicable exclusion amount and 55 percent maximum estate and gift tax rate).
Portability
One of the more notable provisions contained within the Act is the "portability" provision, which provides in general terms that if one spouse does not fully utilize his/her entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse's estate. This provision is intended to avoid the need for credit shelter trusts in estate planning documents. Unfortunately, both spouses must die before 2013 in order to benefit from the portability provision.
In addition, credit shelter trusts continue to provide significant additional benefits beyond just the use of each spouse's applicable exclusion amounts. These include the following:
• Ensuring that assets contained in the credit shelter trust pass to children of the couple and not to any new spouse of the surviving spouse.
• Ensuring that appreciation on the assets contained within the credit shelter trust, which may exceed the applicable exclusion amount at the surviving spouse's death, are not subject to estate tax at that time.
• Protection of assets in the credit shelter trust from creditors of the surviving spouse, including any marital claims of future spouses.
SUMMARY
To summarize, the Act makes significant estate and gift tax changes. The key points discussed above include the following:
• The estate tax exclusion amount increases to $5 million per person for 2010 through 2012.
• The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.
• A "portability" provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.
• The GST exemption amount is increased to $5 million for 2010 through 2012.
• The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.
As always, we recommend that clients review their estate plans periodically and/or whenever a significant life event occurs (e.g., birth of a child, death of a spouse, purchase of new home, etc.).
For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax applicable exclusion amount, which will expire absent further Congressional action at the end of 2012.
SUMMARY OF KEY ESTATE AND GIFT TAX PROVISIONS OF THE ACT
Estate Tax
Before the Act, the federal estate tax was gradually reduced over several years and then eliminated for decedents dying in 2010. Prior law provided that the estate tax, with a maximum tax rate of 55 percent and a $1 million applicable exclusion amount, would be reinstated after 2010. Additional changes scheduled for years after 2010 affected the gift and generation- skipping transfer ("GST") taxes.
The Act reinstates the estate tax for decedents dying during 2010, but at a significantly higher applicable exclusion amount of $5 million, and a lower maximum tax rate of 35 percent, than under prior law. This estate tax regime continues for decedents dying in 2011 and 2012. Unfortunately, this new regime is itself temporary and will sunset on December 31, 2012 and the prior estate tax regime, with a 55 percent maximum estate tax rate and a $1 million applicable exclusion amount, is reinstated at that time.
The Act also eliminates the modified carryover basis rules for 2010 and replaces them with the stepped-up basis rules that had applied before 2010. Property with a stepped-up basis generally receives a basis equal to the property's fair market value on the date of the decedent's death. Under the modified carryover basis rules that applied during 2010 before the Act, executors could increase the basis of estate property only by a total of $1.3 million (plus an additional $3 million for assets passing to a surviving spouse, for a total increase of $4.3 million), with other estate property taking a carryover basis equal to the lesser of the decedent's basis or the property's fair market value on the decedent's death.
The Act gives estates of decedents dying during 2010 the option to apply (1) the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped-up basis, or (2) no estate tax and modified carryover basis rules under prior law.
The Act also provides for "portability" between spouses of the estate tax applicable exclusion amount for estates of decedents dying in 2011 and 2012 if both spouses die before 2013. Generally, portability allows surviving spouses to elect to take advantage of the unused portion of the estate tax applicable exclusion amount (but not any unused GST tax exemption) of their predeceased spouses, thereby providing surviving spouses with a larger exclusion amount. Special limits apply to decedents with multiple predeceased spouses.
To preserve the first deceased spouse's unused applicable exclusion amount, the executor for such spouse must file an estate tax return and make an election on such return, even if such an estate tax return would otherwise not be required.
Gift Taxes
For gifts made in 2010, the maximum gift tax rate is 35 percent and the applicable exclusion amount is $1 million. For gifts made in 2011 and 2012, the Act limits the maximum gift tax rate to 35 percent and increases the applicable exclusion amount to $5 million. As discussed below, this change provides an opportunity to move significant amounts of wealth free of estate and gift taxes.
Donors continue to be able to use the annual gift tax exclusion before having to use any part of their applicable exclusion amount. For 2010 and 2011, the annual exclusion amount is $13,000 per donee (married couples may continue to "split" their gift and may make combined gifts of $26,000 to each donee).
Generation Skipping Transfer ("GST") Tax
The Act provides a $5 million GST exemption amount for 2010 (equal to the applicable exclusion amount for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under prior law affecting the GST tax.
OBSERVATIONS REGARDING THE ACT
Generally
Generally, the estate and gift tax provisions of the Act are very favorable to taxpayers because of the substantial increase in the applicable exclusion amount, to $5 million, and the lower maximum estate and gift tax rate of 35 percent. The Act also addresses several technical estate, gift and GST tax issues in a manner that is favorable to taxpayers (e.g., the impact of the lapse of the estate tax, including the application of basis rules, on decedents passing away during 2010).
Temporary Fix
The Act is a temporary fix, which sunsets on December 31, 2012, immediately after the next election cycle. It is impossible to predict whether it will be extended in either its current or some modified form, especially given the fact that it is a hot button issue with both major political parties. If Congress fails to act, the Act will lapse and the estate tax will revert to what it would have been under prior law (i.e., $1 million applicable exclusion amount and 55 percent maximum estate and gift tax rate).
Portability
One of the more notable provisions contained within the Act is the "portability" provision, which provides in general terms that if one spouse does not fully utilize his/her entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse's estate. This provision is intended to avoid the need for credit shelter trusts in estate planning documents. Unfortunately, both spouses must die before 2013 in order to benefit from the portability provision.
In addition, credit shelter trusts continue to provide significant additional benefits beyond just the use of each spouse's applicable exclusion amounts. These include the following:
• Ensuring that assets contained in the credit shelter trust pass to children of the couple and not to any new spouse of the surviving spouse.
• Ensuring that appreciation on the assets contained within the credit shelter trust, which may exceed the applicable exclusion amount at the surviving spouse's death, are not subject to estate tax at that time.
• Protection of assets in the credit shelter trust from creditors of the surviving spouse, including any marital claims of future spouses.
SUMMARY
To summarize, the Act makes significant estate and gift tax changes. The key points discussed above include the following:
• The estate tax exclusion amount increases to $5 million per person for 2010 through 2012.
• The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.
• A "portability" provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.
• The GST exemption amount is increased to $5 million for 2010 through 2012.
• The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.
As always, we recommend that clients review their estate plans periodically and/or whenever a significant life event occurs (e.g., birth of a child, death of a spouse, purchase of new home, etc.).
For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax applicable exclusion amount, which will expire absent further Congressional action at the end of 2012.
Wednesday, June 24, 2009
To Rent or Buy: To Hell with the Landlord or Does He Know Something I Don't?
A friend has asked me to talk about a decision that faces many people, especially in today's economy: renting vs. owning your own home. I'm going to completely ignore the intangible factors, i.e., the psychological satisfaction of being owned by a piece of property (oops, that was a Freudian slip - I swear - and not at all meant to foreshadow my take on the question). Since we have the current home ownership stimulus (TheAmerican Recovery and Reinvestment Act of 2009), I thought I'd use the absolute maximum eligible family (maximum before phase-out of the credit begins) to illustrate the decision-making process . . . at least from a tax/financial planning perspective.
So, let's first assess John and Jane Homebuyer. We will first assume that they have a modified adjusted gross income (MAGI - you just have to love that acronym) of $150,000.00: the precise level where the ARRA credit begins to phase out, and are otherwise qualified for the credit (they haven't owned a home within the last three years, yada, yada, yada). They have a very good income but are prudent about their purchases and willing to live well within their means. They are currently living in a two-bedroom home of some sorts that rents for $900.00. They can buy a comparable home for $150,000.00. Finally, they have the 20% down that is required for the current lending market.
The Homebuyers are going to get a loan at 6% for the balance of the purchase price, or $120,000.00 (we'll ignore closing costs - they complicate matters and ultimately skew the answer further towards the final result - but let's wait and see before we announce that). That $120,000 loan, amortized over thirty years will cost them $719.46 principal and interest per month for the next 360 months. Hey! That looks good, that's a savings of $180.54 per month and we haven't even accounted for the credit and the interest deduction. Oh wait, we forgot about the property taxes. Property taxes on that home in Florida (I'm in Florida so we'll have to use it as an example - I have no idea what property taxes are elsewhere), are likely to run approximately $125 per month (oh boy, most of our savings are already gone - don't worry, though: those real property taxes are tax deductible on your income taxes - whoopee!). You'll also have to have homeowner's insurance (and remember, I'm in Florida). Conservatively, we'll estimate that at $150 per month (this is not tax deductible on your income taxes. So our gross monthly cost for the joy of home ownership is $994.46 ($94.96 more than renting/that's a $1,139.52 annual increase over the cost of renting).
But hey, all that stuff is tax deductible, right? It can't be that bad. Let's add up our "deductions": mortgage interest is$7,159.91 after year one and property taxes are $1,500.00 for the year (I know it is very unlikely you move in on January 1, but bear with me and stop fighting the hypo!), for a grand year one total of $8,659.91. Hey, that's a pretty big deduction, right? There's only one problem. Everyone already gets a standard deduction: and John and Jane Homebuyer's standard deduction for the year will be $11,400 (John and Jane Homebuyer will get an additional standard deduction of $1,000 if they buy the home but don't itemize deductions). John and Jane Homebuyer could add a sales tax deduction of $1,469.00 to their itemized deductions; bringing them up to $10,129.00 in deductions, but that's still short of the standard deduction. It looks like we'll have to compare with the enhanced standard deduction (the extra $1,000 deduction they get for not itemizing if they buy the house).
So, if they buy the house, they incur extra costs in the first year of $1,139.52 but get an extra $1,000 in deductions. Under the 2009 tax brackets, the Homebuyers will pay taxes of $25,337.50 if they buy or $25,587.50 if they rent. Tax are lower with buying! That's good, right? But remember, they spent an extra $1,139.52 per year to own. So with buying the property, they LOST $889.52 on the year. The smart money here says RENT!
But wait, you say. They own the home and it's increasing in value. Let's assume there's a 3% annual increase in value on a home (that is, unless you bought circa 2004 and need to sell now, but let's not even think about that horror). That $150,000 home at the end of year one is now worth $154,500.00. That's worth something, right? You're right, and it's an excellent point. However, in order to recoup that gain, I have to sell, which means paying a real estate commission (probably at around 6% - and again, we'll ignore closing costs - Sellers have to pay them, too). That means I have approximately two years of growth before I can recoup the costs of the real estate agent's services. So, in the long run, the puchase might be a better option. If I have a 3% annual growth, after five years the net value of the home (after the real estate commission to sell it) is approximately $163,500.00. My note balance is approximately $111,500.00, so the net cash I get from the sale of the home is $52,000.00. Assuming the approximately $900 per year LOSS the Homebuyers experience on the purchase (It's $889.52 in Year One but it actually gets worse in subsequent years because mortgage interest, but not mortgage payment, goes down and property taxes go up), the net "gain" on the purchase is $17,500 (remember the Homebuyers already had $30,000 initially). None of this gain is taxable with the primary residential credit.
What happens if the Homebuyers simply put their $30,000 in CDs earning 4% (you can find 12 month CD's paying that with a simple Google search)? They earn $1,200the first year in interest that is taxable at 25%, so they net $900in Year One. By the end of Year Five, they have approximately $34,778.00 in post-tax savings - not exactly retirement-like income generation. They have "gained" $4,778 over the same five year time period. Home ownership wins in this scenario.
Let me introduce a wrinkle though: what if the Homebuyers decide to keep renting AND buy the home but rent it out to someone else? Let's assume they can only rent it for $900 (if I were advising someone, I would advise them to buy where the rent would at least cover the costs, but we'll keep everything equal for this illustration). They will experience that $95 per month "loss", but the great thing is that every expense associated with the property is deductible. Thus, all of the expenses are deductible for a total of $10,460.00. The "income" from the property is $10,800.00 for the year, for a net income of $340 (remember, the actual cashflow on the property is negative in Year One to the tune of approximately $1,140). But this is investment property, and the Homebuyers are required, by law, to depreciate (that's an inartful term, but most people understand it better than "amortize") the property over a 27.5 year period. This means that in addition to their actual expenses on the property, they get to deduct an additional $5,454 per year. This deduction would ultimately show a loss for them of $5,124 for Year One. This loss is going to be limited by certain passive activity rules, but it will be sufficient to zero out the income on the property. Furthermore, the Homebuyers will still get the enhanced standard deduction for the real estate taxes paid. Thus, they will be in exactly the same situation as if they had bought the home for themselves.
This situation improves dramatically if the Homebuyers can find an investment property that will produce a positive cashflow on a monthly basis but still provide no annual tax impact.
Here's the moral of the story: deductions aren't everything, but leverage on an investment is!
So, let's first assess John and Jane Homebuyer. We will first assume that they have a modified adjusted gross income (MAGI - you just have to love that acronym) of $150,000.00: the precise level where the ARRA credit begins to phase out, and are otherwise qualified for the credit (they haven't owned a home within the last three years, yada, yada, yada). They have a very good income but are prudent about their purchases and willing to live well within their means. They are currently living in a two-bedroom home of some sorts that rents for $900.00. They can buy a comparable home for $150,000.00. Finally, they have the 20% down that is required for the current lending market.
The Homebuyers are going to get a loan at 6% for the balance of the purchase price, or $120,000.00 (we'll ignore closing costs - they complicate matters and ultimately skew the answer further towards the final result - but let's wait and see before we announce that). That $120,000 loan, amortized over thirty years will cost them $719.46 principal and interest per month for the next 360 months. Hey! That looks good, that's a savings of $180.54 per month and we haven't even accounted for the credit and the interest deduction. Oh wait, we forgot about the property taxes. Property taxes on that home in Florida (I'm in Florida so we'll have to use it as an example - I have no idea what property taxes are elsewhere), are likely to run approximately $125 per month (oh boy, most of our savings are already gone - don't worry, though: those real property taxes are tax deductible on your income taxes - whoopee!). You'll also have to have homeowner's insurance (and remember, I'm in Florida). Conservatively, we'll estimate that at $150 per month (this is not tax deductible on your income taxes. So our gross monthly cost for the joy of home ownership is $994.46 ($94.96 more than renting/that's a $1,139.52 annual increase over the cost of renting).
But hey, all that stuff is tax deductible, right? It can't be that bad. Let's add up our "deductions": mortgage interest is$7,159.91 after year one and property taxes are $1,500.00 for the year (I know it is very unlikely you move in on January 1, but bear with me and stop fighting the hypo!), for a grand year one total of $8,659.91. Hey, that's a pretty big deduction, right? There's only one problem. Everyone already gets a standard deduction: and John and Jane Homebuyer's standard deduction for the year will be $11,400 (John and Jane Homebuyer will get an additional standard deduction of $1,000 if they buy the home but don't itemize deductions). John and Jane Homebuyer could add a sales tax deduction of $1,469.00 to their itemized deductions; bringing them up to $10,129.00 in deductions, but that's still short of the standard deduction. It looks like we'll have to compare with the enhanced standard deduction (the extra $1,000 deduction they get for not itemizing if they buy the house).
So, if they buy the house, they incur extra costs in the first year of $1,139.52 but get an extra $1,000 in deductions. Under the 2009 tax brackets, the Homebuyers will pay taxes of $25,337.50 if they buy or $25,587.50 if they rent. Tax are lower with buying! That's good, right? But remember, they spent an extra $1,139.52 per year to own. So with buying the property, they LOST $889.52 on the year. The smart money here says RENT!
But wait, you say. They own the home and it's increasing in value. Let's assume there's a 3% annual increase in value on a home (that is, unless you bought circa 2004 and need to sell now, but let's not even think about that horror). That $150,000 home at the end of year one is now worth $154,500.00. That's worth something, right? You're right, and it's an excellent point. However, in order to recoup that gain, I have to sell, which means paying a real estate commission (probably at around 6% - and again, we'll ignore closing costs - Sellers have to pay them, too). That means I have approximately two years of growth before I can recoup the costs of the real estate agent's services. So, in the long run, the puchase might be a better option. If I have a 3% annual growth, after five years the net value of the home (after the real estate commission to sell it) is approximately $163,500.00. My note balance is approximately $111,500.00, so the net cash I get from the sale of the home is $52,000.00. Assuming the approximately $900 per year LOSS the Homebuyers experience on the purchase (It's $889.52 in Year One but it actually gets worse in subsequent years because mortgage interest, but not mortgage payment, goes down and property taxes go up), the net "gain" on the purchase is $17,500 (remember the Homebuyers already had $30,000 initially). None of this gain is taxable with the primary residential credit.
What happens if the Homebuyers simply put their $30,000 in CDs earning 4% (you can find 12 month CD's paying that with a simple Google search)? They earn $1,200the first year in interest that is taxable at 25%, so they net $900in Year One. By the end of Year Five, they have approximately $34,778.00 in post-tax savings - not exactly retirement-like income generation. They have "gained" $4,778 over the same five year time period. Home ownership wins in this scenario.
Let me introduce a wrinkle though: what if the Homebuyers decide to keep renting AND buy the home but rent it out to someone else? Let's assume they can only rent it for $900 (if I were advising someone, I would advise them to buy where the rent would at least cover the costs, but we'll keep everything equal for this illustration). They will experience that $95 per month "loss", but the great thing is that every expense associated with the property is deductible. Thus, all of the expenses are deductible for a total of $10,460.00. The "income" from the property is $10,800.00 for the year, for a net income of $340 (remember, the actual cashflow on the property is negative in Year One to the tune of approximately $1,140). But this is investment property, and the Homebuyers are required, by law, to depreciate (that's an inartful term, but most people understand it better than "amortize") the property over a 27.5 year period. This means that in addition to their actual expenses on the property, they get to deduct an additional $5,454 per year. This deduction would ultimately show a loss for them of $5,124 for Year One. This loss is going to be limited by certain passive activity rules, but it will be sufficient to zero out the income on the property. Furthermore, the Homebuyers will still get the enhanced standard deduction for the real estate taxes paid. Thus, they will be in exactly the same situation as if they had bought the home for themselves.
This situation improves dramatically if the Homebuyers can find an investment property that will produce a positive cashflow on a monthly basis but still provide no annual tax impact.
Here's the moral of the story: deductions aren't everything, but leverage on an investment is!
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