From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for November 14th, 2019

Real Estate as a Tax Hedge

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There is a fair amount of speculation about the future of the U.S. tax code.  I don’t want to get into politics here, but if and as the tax rates change going forward, many serious investors will look backwards and say, “Gosh, I wish I’d done _____ when I had a chance.”

Well selected and well managed real estate has, for generations, been recognized as a hedge against taxes, inflation, recessions, market instability, and all manner of economic fluctuations.  Looking at the economic history of the past 100 years or so, we can only point to one real estate-related bubble, and in reality that was, at the core, a finance problem and not a real estate problem.  Even before, during, and after the most recent recession, well-selected and properly priced real estate performed well.

A few tips and notes, and as usual please bear in mind this is neither tax, legal, accounting, nor investment advice —

  • Current income from real estate can be sheltered by depreciation.  Indeed, for most income-producing properties, the current income will be nearly tax free, both for state and Federal taxation.
  • Unlike municipal bonds, the income is usually tax sheltered regardless of which state the property is located.  For example, in New York, a muni bond is state-tax exempt only if it is a New York bond.  However, the real estate can be located anywhere and benefit from depreciation sheltering.
  • For family-run businesses, real estate can be an excellent way to bifurcate the returns on the business between participating family members and non-participating ones.  The property can be separately held in a trust, with rents paid from the business and enjoyed — with tax sheltering — by all family members.  This also helps insulate the family wealth from any potential business problems that may arise.
  • Intergenerational transfers of real estate can be accomplished in a simplified, and often tax-advantaged manner.
  • Personal residences are usually sheltered in part from bankruptcy, and in some states (Florida, for example) the entire residence may be used as a bankruptcy shelter.

There is more, of course.  As a reminder, I have a book coming out in January from McGraw Hill — Real Estate Valuation and Strategy.  I’ll expand on these and many other real estate investment topics between now and then.

3D Kilpatrick (002)

Written by johnkilpatrick

November 14, 2019 at 8:24 am

Posted in Uncategorized

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