Real Estate investment

Real Estate Investing Benefits

Believe it or not, taxes are our biggest expense in our lifetime and it is better for us to choose our source of income wisely. In USA, real estate has some of the best tax break among other investments and probably in other countries as well.

Income tax is design to punish hard workers and to reward investors. The more you earn through your job, the more you get taxed. Please check at the bottom of your paycheck and see how much the government steals from you. It is a lot right? While real estate has so many tax advantages and wage income never got such privileges.

What are those advantages?

i. Low Capital Gains Rates
Capital gains in real estate requires that you hold that property for at least 12 months before selling and you may hold it for productive use (i.e., as a rental, no a long-term fix and flip). For every dollar gained in your own real estate, federal government only manage to tax maximum 15%, it is relatively low compared with wage income (around 35%). Anyway, there's state taxes too, but some states offer further discounts on capital gains income.

ii. Exemption for Principal Residence
Government is very generous to give tax exemption of the first USD250,000 gain on the property that you sell (or $500,000 if you are married). But it is comes with condition, it requires that the residence was used as such for two of the last five years.

iii. 1031 Exchanges
Under Sec 1031 of IRC, the profits from a rental property can be tranferred into buying more real estate. You could defer to pay tax but with condition the exchange must be completed within 180 days and the exchange property must be indentified within 45 days of the sale of the sold property. Still not clear? I found a very useful site to help you in this, please visit here for more information.

iv. Interest Rate Deduction
There will be interest deduction for the debt that you used to acquire a property. While, such privilege is not available to other purchased items such as car and so forth.

v. Tax Deduction in Depreciation
Government won't give any tax deduction on the depreciation of your car but it does in real estates. For rental properties, even if the property increases in value, you still get a tax deduction for the “wear and tear” on the structure.

vi. No FICA Tax
All wage income will be imposed FICA (Federal Insurance Contributions Act, introduced in 1930's) tax but not applicable to investment income (such as from real estate). Regular wage-earner income will be taxed 6.2% on the first $102,000 of the gross wage. While self employment income is subject to 15.3% tax.

The greatest disadvantage of being employee is your income is taxed even before you able to spend it (for business men, tax only will be imposed after you spend). What good as an investor then? The money is working for you, and you got tax advantages as well. Read carefully, government is never encourage people to become employee. Who influencing government the most? Sure they are business men and investors. Am I right? Think about it.