Medicare gotchas...

[Sawfish]

I've been on Medicare for about 10 years now, never really understood it before I was enrolled, and in truth, I only understand the parts that affect our particular situation.

Medicare premiums are based on a figure on your 1040 forms called adjusted gross income (AGI):
https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income

Making a long story short(er), if you file jointly, as we do, so long as your AGI is less than 194K (for 2023), you'll pay the lowest Part B premium, which will be $164.90 (call it 165) for each of the two spouses over 65.

Here's an important part: at the end of any given year they look back at your Fed returns for *two* years prior, to get the AGI to be used for the billing amount. For 2023's premium, they looked back to your AGI for 2021.

In 2017 I really stepped into it by taking a cap gain for that year, and this raised our AGI that year to ~$400K. Two years later, at the beginning of 2019, Medicare sent the expected rate announcement, and instead of it being in the $140 as it was then (2019), it went up to >$400 per mo. Fortunately, my wife was not yet 65 and so all I had to pay for that year was the $400+ per mo, but it surprised and shocked me.

And the following year, 2020 Medicare was supposed to look back twp years, to 2018, which had no big cap gain and the AGI would put us back into the minimum premium category, I was again informed that it would be $400+ per mo.

I had to work long and hard to get Medicare to recognize this and correct it; I wrote many letters, made many phone calls, and went to the local SS office for a personal meeting. Literally, I paid the higher premium ($400+) for all of 2020 before they agreed to correct the premium. They did, in fact, credit me with overpayment for 2020, so in 2021 I did not have to pay any premiums for a few months, then pay the minimum premium for the remainder of the year.

If you try to control expenses, this can come as a very unpleasant surprise.

 

[Muskrat]

Yep. Sold a house and payed cap gains. Dropped my ss take home by 400 per month…ouch

 

[Sawfish]

Yep. Sold a house and payed cap gains. Dropped my ss take home by 400 per month…ouch

But should be only for the year of the cap gain, according to their own website.

So if they do it the way they *say* they will, if you only have the high AGI for that one cap gain year, you should only have to pay the added Medicare premium for one year.

But they seemed to lack proper motivation to correct it. Finally they did, but I got old real fast that year.

 

[Muskrat]

That is what they say. So this year i suffer

 

[Sawfish]

That is what they say. So this year i suffer

Time to start into drankin'...

 

[Muskrat]

Maybe….i am just gearing up to the new financial me….

 

[leastlongprime]

Sold property in 2021.
Gave 80% of profits to DS to help him finance a house with GF whose parents also contributed same amount. Both are Only's so funds would be their's eventually. Also allowed both to keep their investments fully invested and not take a huge capital gains tax and IRA liquidation.

We retained 20% of profits, to account for the IRMAA (Income-Related Monthly Adjustment Amount) which will hit us in tax year 2023.
We will make further Income adjustments downwards via the tax accountant's filing, 2024 (?)

The rental property sold was a net cash flow loss each month. We gained in property value in the 4 years of ownership.

 

[Sawfish]

Very similar in some regards!

First, not sure what "DS" is in this context.

The stuff we sold were rentals. We had done this quite a few times before and used a 1031 to defer cap gains: maybe we have done 5 1031s.

Anyway, to be sure we had enough to cover the last two years of our daughter's college, we took 260K (so that we could take home about 160K after taxes to use for costs). I was at that point retired and my wife had just been laid off.

The rest of the profit we rolled into another, smaller rental using 1031.

Too, you raise an interesting point with the observation that you were either negative or breakeven in cashflow, but positive in equity appreciation. I noticed some time back that so long as I could choose properties that had a high likelihood of equity appreciation, I could use interest-only loans to increase annual cashflow.

You would maybe buy a 6 unit small apt and take a 7 year fixed, 5 year interest only loan, with whatever down you need to get the cashflow you want, but still not run afoul of 1031 requirements.

You rake in cash for 5 years, are OK for the next two (rents will have gone up too, most likely), and at that point either refi or sell. In the case of selling, you should find that the property has increased by 2-3 percent per year on average.

 

[Happy Heart]

Frustrating when so many get it for free.

 

[Sawfish]

Frustrating when so many get it for free.

Get what for free?

 

[Jean-Paul]

Medicare, Social Security has a form for the problem of fluctuations in income. You can send it each year, and can get the premiums lowered if the income decreases since the high income year.
Notice that the income is not AGI but MAGI, modified agusted gross income
Jon

 

[leastlongprime]

Sold property in 2021.
Gave 80% of profits to DS to help him finance a house with GF whose parents also contributed same amount. Both are Only's so funds would be their's eventually. snip...

Very similar in some regards!

First, not sure what "DS" is in this context.

The stuff we sold were rentals. We had done this quite a few times before and used a 1031 to defer cap gains: maybe we have done 5 1031s.

Anyway, to be sure we had enough to cover the last two years of our daughter's college, we took 260K (so that we could take home about 160K after taxes to use for costs). I was at that point retired and my wife had just been laid off.

The rest of the profit we rolled into another, smaller rental using 1031.

Too, you raise an interesting point with the observation that you were either negative or breakeven in cashflow, but positive in equity appreciation. I noticed some time back that so long as I could choose properties that had a high likelihood of equity appreciation, I could use interest-only loans to increase annual cashflow.

You would maybe buy a 6 unit small apt and take a 7 year fixed, 5 year interest only loan, with whatever down you need to get the cashflow you want, but still not run afoul of 1031 requirements.

You rake in cash for 5 years, are OK for the next two (rents will have gone up too, most likely), and at that point either refi or sell. In the case of selling, you should find that the property has increased by 2-3 percent per year on average.

DS= dear son.
Thought about a 1031 for the rental sale 2021. But in the Seattle area, home property prices increased 20%+, and doubted we could find an investment property within the prescribed time.
We did file form #709.

the IRMAA is a one time-one year hit.

We just noticed that our Long-term Care Insurance premiums will increase 80% (1.8x) if we keep same level of coverage. Last increase was 5(?) years ago. Spouse says to pay the increase. The IRMAA temporary increase pales in comparison to the LTCi permanent increase.

 

[Sawfish]

DS= dear son.
Thought about a 1031 for the rental sale 2021. But in the Seattle area, home property prices increased 20%+, and doubted we could find an investment property within the prescribed time.
We did file form #709.

the IRMAA is a one time-one year hit.

We just noticed that our Long-term Care Insurance premiums will increase 80% (1.8x) if we keep same level of coverage. Last increase was 5(?) years ago. Spouse says to pay the increase. The IRMAA temporary increase pales in comparison to the LTCi permanent increase.

The IRMAA is supposed to be a one year hit, assuming MAGI declines to previous levels, and I waited for them to note that in the letter they send each year in Dec, telling you what the next year's SS benefit and Medicare premium are, but they didn't make the adjustment. So I started right away to get them to correct it and it was *very* slow going.

Another person here, Jean-Paul, I think, mentioned a form one might file. If I had to do it again, I'd take the proactive approach, initiating a request to at least get their attention and look at the succeeding year's MAGI.

With 1031s, out of the 5, I think I only did three of them well; two were very scary, what with the 45 day window to identify replacement properties and the 180 day window to finalize the purchase. Of the three that worked smoothly, I sold in one inflated location and bought into a depressed location, and because of this there were a lot of properties that would work.

We sold in Portland in the 90s and bought back into LA during the post defense cut downturn. Lots of choices. Sold in PDX another time and bought into Hilo after the Japanese pull-back (late 90s?). Lots of choices.

But the last two in particular, LA back to PDX, and PDX to Elsewhere, were very nerve-wracking.

I think the next time I'll line up the replacement property first, and try to hold it in some fashion, then sell.

 

[Muskrat]

My tax gal tried to get me to do the 1031 thing each time I sold. I had bought several rental houses in 2010….and thru the years sold them. Took the tax hit and moved on. I was not on medicare and it did not cross my radar that this would be any different. Well!! I also did a 1031 this yeat….scary and I should of just kept the first rental. I had not raised rent in 8 years and the tenants had kittens when I raised it fifty dollars a month. I thought I would try that tax deferred thing….

 

[caroln]

I found this information on the TurboTax website regarding selling your home when you are on Social Security (NOT SSI):


It seems if you are on SSI, the rules are completely different and you may have to pay back benefits.

 

[Sawfish]

My tax gal tried to get me to do the 1031 thing each time I sold. I had bought several rental houses in 2010….and thru the years sold them. Took the tax hit and moved on. I was not on medicare and it did not cross my radar that this would be any different. Well!! I also did a 1031 this yeat….scary and I should of just kept the first rental. I had not raised rent in 8 years and the tenants had kittens when I raised it fifty dollars a month. I thought I would try that tax deferred thing….

How do you get single-family properties to pencil out?

Best I've ever done is breakeven on single-family units. It goes positive cashflow at duplexes, and increases at a scaled rate as you go up.

First single-family was my house that I rented out in SLO county when I moved to LA in the 80s. Broke even over 3 years. Then rented a house in Hilo, HI where we thought we were going to retire (and so would tolerate breakeven or small negatives). It was probably a total negative of about 2K over 6 years we owned it.

As you say, the payoff was at sales, in equity appreciation. Then roll it forward under 1031.

But you can get some pretty strong positive cashflows (5-12% cash-on-cash) for small multiples, like 6-12. I don't know about larger properties, it's beyond my entry point.

These types do not appreciate independent of income, except for a few properties that have architectural uniqueness. There is an exception for many well-selected duplexes, where you can sell to someone who intends to live in one unit, rent the other. The appreciation is more like a single family in that case. You can also find a rare 3-4 unit that works the same way.

I don't like doing 1031s, but what's the choice, really? If you don't do it and you want to leverage into another property, you will lose maybe 30-40% of your profit to cap gains. I don't have that much money and I have always felt I *had* to push all of it forward.

Ultimate plan is that when I die, my wife can get get the basis step-up. wiping out tax gains. I've counseled her to give very serious consideration to selling immediately, if the market is "normal" or better, or to wait for a normal/better market then sell ASAP.

Eventually I hope we can pass off a decent situation to our daughter, dodging taxes as much as possible.

See? This is my hobby... :^)

Yeah, I don't like raising rent one little bit. I remember having been a renter all too well.

 

[Muskrat]

How do you do single family? Easy if you have a meltdown like in 2008. I did not know what I was doing exactly…but I knew those houses were cheap cheap cheap.

 

[Sawfish]

How do you do single family? Easy if you have a meltdown like in 2008. I did not know what I was doing exactly…but I knew those houses were cheap cheap cheap.

 

[Sawfish]

Hah!

Really that's all you need to know.

My question about "pencil out" was about cashflow. I've never gotten positive cashflow from a single family that has a loan on it. Outright ownership or a very low cost of money (meaning an old loan or a very, very high downpayment with a low interest rate) can get you close.

But you are right: you see the biggest gain off of increase in value of the property.

So as to selling and giving over much of the profit to kids for housing, we are on exactly the same page. In some ways it's way way harder for them financially than it was for us. Two areas: cost of housing/cost of college, and not even comparable.

I made it my life's work to be sure that my daughter would not come out with a 50+K student debt--no debt at all, like with me, when Cal Poly SLO was about 175 per quarter (early 70s), or in 1965 when UC Berkley was also about 300 per semester. I went to JC first, for about 70 bux per semester. Then worked on and off until I could finally graduate in '75.

They can't do that now, and unless you want them to sign up to indentured servitude for maybe life, if you can help them out of this, you should.

I was lucky enough where I could, and when housing time comes I'll try to do the same.

Yep. DO NOT mess with your retirement money early, is exactly right. The reason we're shuckin'-n-jivin' on this forum instead of working til we drop, like my dad did, is keeping those accounts intact and growing.

end of sermon ;^)

 

[leastlongprime]

[...snip...]

Eventually I hope we can pass off a decent situation to our daughter, dodging taxes as much as possible.

See? This is my hobby... :^)

Yeah, I don't like raising rent one little bit. I remember having been a renter all too well.

JMO,
You need to rethink "raising rent" as being a nice guy; But as a way to keep competitive in the housing market, as a way to keep competitive in the investment market, and make the renter aware that your ownership expenses are rising too, and when it comes down to selling, you will be hit with depreciation recapture on top of property appreciation. The renter needs to also have some equity in the unit that is manifested in keeping the place in good condition but maintenance and depreciation of paint, flooring, appliances does happen and needs to be addressed.

 

[Sawfish]

JMO,
You need to rethink "raising rent" as being a nice guy; But as a way to keep competitive in the housing market, as a way to keep competitive in the investment market, and make the renter aware that your ownership expenses are rising too, and when it comes down to selling, you will be hit with depreciation recapture on top of property appreciation. The renter needs to also have some equity in the unit that is manifested in keeping the place in good condition but maintenance and depreciation of paint, flooring, appliances does happen and needs to be addressed.

As I understand it, depreciation recapture comes into play if you take boot. If you do a 1031, it pushes forward until you *do* take boot. This is independent of rent, and is determined on acquisition as a combination of depreciation brought forward from previous properties and depreciable basis of the acquired property.

Is this correct?

If so, I'm not sure that this applies to tenants in any way.

What we have done for the last 30 years in an expanding rental market is to hold steady on rents until either:

1) units go vacant, at which time we seek ~85% of average market rate for the area (as determined by our property management company);
2) or a unit has been occupied for the average length of tenancy for that building as calculated over the last 5 years (this is on a spreadsheet). At that time we raise to 75% current average market rent. This, too, is on a spreadsheet.

But I can see your point about staying competitive in the investment market, now that the state has rent control. It's not possible to sell a pro forma projection of expected on increased rents under a new owner. They are bound moving forward by the controls, and if the property is significantly under-rented, it could take the new owners 2-3 years of max allowed rent raises to come to market rates.

But I don't think that I've ever encountered tenants who take a rent increase as a gentle reminder that it costs you, the landlord, more money to keep the place in top condition. This would mean that hey'd be appreciative of the increase, and that's just kidding yourself. They just don't think like that.

And yes, I am a nice guy... :^)

 

[OneEyedDiva]

Here's an important part: at the end of any given year they look back at your Fed returns for *two* years prior, to get the AGI to be used for the billing amount. For 2023's premium, they looked back to your AGI for 2021.

I never knew this! I take next to no distributions and when I do, they are very small amounts from my Roth so as not to give Uncle Sam another cent. My traditional IRA's RMDs get donated to St. Jude; this is a non taxable QCD.

 

[Sawfish]

Here's an important part: at the end of any given year they look back at your Fed returns for *two* years prior, to get the AGI to be used for the billing amount. For 2023's premium, they looked back to your AGI for 2021.

I never knew this! I take next to no distributions and when I do, they are very small amounts from my Roth so as not to give Uncle Sam another cent. My traditional IRA's RMDs get donated to St. Jude; this is a non taxable QCD.

If it comes out of your Roth, does it get reported on your 1040 as non-taxable income?

We've not dipped into Roths. We are converting IRAs to Roths over a 5-10 period, about 6 years in now, I think.

Lessee...if Roth distribution is counted as income, even if not taxed it might show up under AGI, and hence drive up Medicare premiums.

Great discussion!

 

[OneEyedDiva]

If it comes out of your Roth, does it get reported on your 1040 as non-taxable income?

We've not dipped into Roths. We are converting IRAs to Roths over a 5-10 period, about 6 years in now, I think.

Lessee...if Roth distribution is counted as income, even if not taxed it might show up under AGI, and hence drive up Medicare premiums.

Great discussion!

I looked over my taxes for the last couple of years. In my 2019 tax documents, there were 1099-R's for my Roths with box 7 checked and the letter Q. But when I looked at the return itself, I didn't see a figure that matched the amount. I do my taxes using H & R Block Tax Cut, so I just enter the requested info and let it do it's thing. The 2020 and 2021 returns had no 1099s for the Roths. I remember American Century sending out and posting notices for the last couple of years stating that not all accounts would receive 1099 tax documents. When I reviewed my 2020 and 2021 tax documents at Schwab, there were no 1099s, only Gain/Loss reports for the Roth account which did not have the disclaimer that those figures were being reported to the IRS like the 1099s for non Roth accounts did.

 

[Sawfish]

I looked over my taxes for the last couple of years. In my 2019 tax documents, there were 1099-R's for my Roths with box 7 checked and the letter Q. But when I looked at the return itself, I didn't see a figure that matched the amount. I do my taxes using H & R Block Tax Cut, so I just enter the requested info and let it do it's thing. The 2020 and 2021 returns had no 1099s for the Roths. I remember American Century sending out and posting notices for the last couple of years stating that not all accounts would receive 1099 tax documents. When I reviewed my 2020 and 2021 tax documents at Schwab, there were no 1099s, only Gain/Loss reports for the Roth account which did not have the disclaimer that those figures were being reported to the IRS like the 1099s for non Roth accounts did.

So if I'm following this correctly, it sounds like there's no direct report of Roth distributions, and this implies that taking distributions out of a Roth does not raise your IRRMA for Medicare?