Investing in Real Estate: 4 Incredible Things You Need to Know
Real Estate Tax Shelters
As Benjamin Franklin so accurately said,
“In this world nothing can be said to be certain, except death and taxes.”
Death is not something enjoyable to talk about. So let’s focus on taxes, and more importantly, how much we all dislike paying them.
What would you say if I told you there is an investment asset class out there that, when done properly, can reduce your taxes, or even allow your earnings to be tax free? Yes, that’s right. Tax free!! If you are interested in making money tax free then keep reading about the advantages of investing in real estate.
Please keep in mind that the information provided herein is for educational purposes only. It is not to be considered as accounting advice.
So, let’s get back to investing in real estate and how to make money through tax advantages.
There are 4 Great Tax Advantages of Investing in Real Estate
1) Tax Deferral
The disposition of a property is taxable in the year it is sold. There is a tax deferral technique known as a 1031 Exchange. It allows the taxes to be deferred when capital is reinvested into a like-kind property. This defers the taxes from not only the income generated from the property but also from capital gains and depreciation.
Most syndicators will try to utilize 1031 exchanges on properties as part of their strategy. It can be a great option when investors want to keep their funds in play and continue to receive passive income.
2) Refinancing
With real estate you are able to cash out a portion of the profits without taxes being applied. What allows you to do this is refinancing the property with a new mortgage. Then the tax-free profits can be re-invested. Investing in real estate through refinancing is a smart strategy.
Most syndicators will refinancing a property after it has been stabilized, which is typically around year two or 1/2 through a 5 year expected hold. When properties are acquired well below market value and steps are taken to perform improvements and improve occupancy, the syndicator is able to force appreciation to the property. This in turn increases its value and (NOI) net operating income. Through refinancing, the goal is then to be able to return a significant portion of the investors original investment whil e still providing them the cash flow from the income generating property. This takes much of the risk off the table and makes investors happy as they are getting their capital back much sooner, allowing them to reinvest in additional deals.
3) Depreciation
Depreciation is the holy grail of all investment deductions. Because it is taken even though it is a non-cash expense (meaning we didn’t spend any money), it is simply calculated from the value of the portions of the property that are deemed to be dropping over time. For example, the physical structure on your land, brick and mortar are being used up. Hence they are worth less each and every year. So the type of property it is (i.e. Commercial, residential, industrial) and the length of time you are allowed to depreciate those parts of the property, will determine the amount you’re allowed to apply against the income generated. Often times this eliminates the entire amount of taxes owed. McKenna Capital invests in deals that structure its partnerships in such a way that all partners get to share not only in the profits, the appreciation, but also the depreciation making your investment that much more appealing.
4) Tax Deductions
The financial (mortgage & interest) and operational costs (property management fees, maintenance, property tax, etc.) and insurance premiums on a rental income property can all be claimed as deductions from the revenue generated.
As you can see there are many tax advantages of investing in real estate that other investment options do not offer. That is why diversifying your investment portfolio to include real estate might be a great idea for you. Talk to your accountant and see if it would work for you!
