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Why Real Estate is Such a Good (Great) Investment: Part 6-Tax Benefits

This is the next installment of a 7 part series exploring ideas of why real estate is such a good investment. The focus will be on single family and multifamily real estate, but a good idea is a good idea, enjoy. 

Today we will cover some of the most common tax reasons to have real estate. This article is not intended as tax advice, please do not make tax decisions based solely on the content here.

The biggest tax reason to hold real estate is because it shelters income. The asset produces expenses, most of which are tax deductible, while the gains can be deferred or offset, a common way is by a 1031 exchange, but even if one did not pay it, their long-term 'capital gains' rate is either 15% or 20%, versus up to 37% for federal.

When deferring with a 1031 exchange, the goal is to 'defer until death', at which point the real estate will 'step up' by about either $11.4M (single) or $22.8M (married). This means that only equity above this amount is subject to federal estate tax. In fact, it has been estimated that only 1,890 estates in 2018 across the country would be subject to this tax.

A second way income is sheltered is by 'phantom depreciation', depreciation being a 'paper loss' while you still have cash in your pocket, it is what you 'would have' lost because your building is becoming worth less money due to age. This depreciation would oftentimes offset in part, the rental income. This is also the reason people want to buy a bigger building for a bigger 'tax base' to offset income. This leads into the exchanging we mentioned above.

If you were to receive $1 from real estate, it can be depreciated, exchanged, then exempted away. If you receive $1 from literally any other source, you are paying 15% to 37% for it.

As a homeowner, one would get to deduct interest and part of local taxes (up to $10,000) and would be able to have a capital gains exclusion, $250,000 for single filers, $500,000 for joint filers. There is no other asset class than is able to exclude this much in gains. It is one of the 'sacred cows' of tax policy.

Clearly, there are other tax advantages to real estate, this just touches on some of the most widely used and accessible. Let me know if there are any points you feel I missed. 

Feel free to #askGene about real estate, it is a little bit of a focused topic for him. 

 Yorba Linda, CA-TRREG DRE#01843673-RP100 DRE#02059058-P:714-831-1800-E:info@theresultsrealestategroup.com-W:www.theresultsrealestategroup.com-Facebook - Twitter - Instagram - LinkedIn
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Location: Brea, CA, USA

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