One of the unique features of real estate investing is its awesome tax advantages.
Real Estate Passive Income vs. Ordinary Income
Real estate income is not taxed the same as ordinary income. Whereas ordinary income is taxed at the income tax rate, easily upwards of 20% depending on your annual income and filing status, passive income earned from real estate offers very unique tax advantages.
Real Estate Depreciation
Because properties wear out and their useful life declines over time, the IRS allows for investors to depreciate the value of the asset over time. In doing so, after having calculated income earned, investors are able to add depreciation expense to their net income, allowing them to reduce their tax liability and often even take a paper loss.
Capital Gains and Stocks
This situation is much different when income is earned from stocks. In stocks, money can be made in a few ways, capital gains and dividends. Capital gains in stocks will be taxed at the capital gains rate, similar to real estate capital gains, and most dividends are taxed as ordinary income. Unlike in real estate, investors do not enjoy the benefits of depreciation because in equities, also known as paper assets, there is no hard asset to depreciate.
Real estate also offers a special advantage of tax deferment on assets when an investor sells and asset and buys another “like kind” asset. Pertaining to the section of the tax code, this process is usually referred to as the 1031 exchange. It is a unique benefit of real estate that the government uses to incentivize and reward continuous investment to stimulate the economy.
Why The Wealthy Favor Real Estate
Between the burden of income tax for high earners, capital gains tax and ordinary income tax for equity investors, there are incentives for the wealthy to move into real estate. Between its wealth-building power and tax advantages, real estate attracts capital from the worlds wealthiest for the reasons above. As you may have heard it said, the wealthy either make their money in real estate or move it to real estate. This is why I think everyone should have real estate in their wealth portfolio.
Now that there is familiarization with just a few of the tax advantages of real estate, maybe it is time to consider your options. Are you a high earner and tired of paying so much of your income in taxes? Do you consistently pay capital gains or higher ordinary income taxes on your investments? Maybe it is time to consider your options in real estate.
Schedule a call with us to understand what Robinson Capital offers for wealth building solutions and decide whether real estate investing is right for you.
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Rodney Robinson II