Want to Make Millions and Pay No Taxes? Try Real Estate

srinir

srinir

https://www.bloomberg.com/news/arti...ake-millions-and-pay-no-taxes-try-real-estate

Real estate is a cyclical business. Markets crash. Deals sour. But hard landings are rare for a savvy property mogul, thanks to the U.S. tax code.

Take Harry Macklowe, a New York City developer. Macklowe, 81, hasn’t paid income tax since the 1980s, according to a court opinion in his divorce proceedings issued in December.
..
doesn’t suggest the couple did anything wrong to avoid paying income taxes. Rather, it highlights the special perks available to property investors in the U.S.—advantages that have expanded under the tax law signed in 2017 by Donald Trump, America’s real estate developer president. “The real estate industry is notorious for throwing off lots of deductions, and real estate developers are notorious for paying very few taxes,” says Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center. “As Leona Helmsley said, ‘Only the little people pay taxes.’ ”

...
Those trappings might not have been available if Macklowe had made his fortune in another industry. The U.S. tax code is designed to measure profitability over time, allowing businesses to write off losses in one year against income in the next. For most companies, that provision is limited to losses on their own capital as opposed to losses on borrowed money. “There’s a general rule that you’re not supposed to be able to claim losses for more than you put into a deal,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, a left-leaning think tank. “Real estate is the exception.”
 
I gotta figure out how this stuff works. I met a few people in my town at a family event who are doing it and earning enough that this becomes their job.
 
newwurldmn said:
I gotta figure out how this stuff works. I met a few people in my town at a family event who are doing it and earning enough that this becomes their job.
More...

As i understand it, Investors take depreciation immediately which reduces taxable income. Depreciation is recaptured only when the building is sold. But investor can defer this by doing 1031 exchange with other similar property. There is no limit how many times this can be done. I think it is even stepped up to the market value, so even heirs don't even pay taxes.
 
srinir said:
https://www.bloomberg.com/news/arti...ake-millions-and-pay-no-taxes-try-real-estate

Real estate is a cyclical business. Markets crash. Deals sour. But hard landings are rare for a savvy property mogul, thanks to the U.S. tax code.

Take Harry Macklowe, a New York City developer. Macklowe, 81, hasn’t paid income tax since the 1980s, according to a court opinion in his divorce proceedings issued in December.
..
doesn’t suggest the couple did anything wrong to avoid paying income taxes. Rather, it highlights the special perks available to property investors in the U.S.—advantages that have expanded under the tax law signed in 2017 by Donald Trump, America’s real estate developer president. “The real estate industry is notorious for throwing off lots of deductions, and real estate developers are notorious for paying very few taxes,” says Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center. “As Leona Helmsley said, ‘Only the little people pay taxes.’ ”

...
Those trappings might not have been available if Macklowe had made his fortune in another industry. The U.S. tax code is designed to measure profitability over time, allowing businesses to write off losses in one year against income in the next. For most companies, that provision is limited to losses on their own capital as opposed to losses on borrowed money. “There’s a general rule that you’re not supposed to be able to claim losses for more than you put into a deal,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, a left-leaning think tank. “Real estate is the exception.”
More...
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For many who don'n know the above is misleading
real estate depreciation is recaptured and paid at ordinary along with capital gains to the feds the state and locale municipalities at the time of the sale
In the meantime RE taxes are paid annually and upkeep daily
Much RE is over priced and purchased foolishly ....both residential and commercial.
When this occurs it takes years to rectify sometimes never.
There's and old saying....PROFIT IS MADE AT THE TIME OF THE PURCHASE.
Having said this real estate is a good investment but buyer beware
cheers



.
 
srinir said:
As i understand it, Investors take depreciation immediately which reduces taxable income. Depreciation is recaptured only when the building is sold. But investor can defer this by doing 1031 exchange with other similar property. There is no limit how many times this can be done. I think it is even stepped up to the market value, so even heirs don't even pay taxes.
More...
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All states do not recognize 1031
illust.....Pennsylvania

cheers
 
Instead of selling properties and incurring a taxable liability, you find someone who would trade with you and continue to not have to pay taxes on capital appreciation. I have done this couple times in past, once traded 3 nice homes I had with a bank who had a dozen properties that needed much work, was a win win for me as new properties increased in value quickly and rented them out. I had them in my 401k LLC, best deal around as your can have businesses in your 401k and direct it yourself without having a trustee.

https://www.crainscleveland.com/art...liability-when-selling-commercial-real-estate
 
Handle123 said:
Instead of selling properties and incurring a taxable liability, you find someone who would trade with you and continue to not have to pay taxes on capital appreciation. I have done this couple times in past, once traded 3 nice homes I had with a bank who had a dozen properties that needed much work, was a win win for me as new properties increased in value quickly and rented them out. I had them in my 401k LLC, best deal around as your can have businesses in your 401k and direct it yourself without having a trustee.

https://www.crainscleveland.com/art...liability-when-selling-commercial-real-estate
More...

Never heard of this, nice call
 
+1 for real estate as an investment vehicle. You get a fairly consistent stream of cash profits for operating the property, increasing equity gains from paying down debt, and over a long enough time frame its likely you’ll capture some decent appreciation. All with very favorable tax treatment.

RE is stable enough to lever pretty high to 3x or 4x equity, so even if you average 2%/yr appreciation on asset value, that’s 6-8% on your equity. With rents on the right places doing about that after clearing the cost of debt as well unless you’re in specific markets on the coasts with severely crushed capitalization rates.

Now properties do de-lever as equity accumulates, but either through an additional stream of acquisitions or aggressively refinancing periodically when balloons come due you can keep portfolio LTV pretty competitive.

It takes some active management and basic business savvy, but on a return vs. ($ volatility + time required) I haven’t hit upon any portfolio or strategy in the markets anywhere near as attractive as RE.

People obviously still find ways to fail but for reasonably intelligent individuals that can model decently.. buy at reasonable prices and keep enough capital on hand to absorb volatility, this is a great asset class to build wealth with in the right circumstances. The lack of liquidity, higher costs to exit, and some active oversight being required are cons but I still have a longer time horizon and I stayed away from mega-demanding career fields so RE fits like a glove for me.

Sure, I see deals frequently going for prices that make me wonder why investors are going through the trouble for lackluster yield, but market deals still come through that can hit double digit total returns here and there in less pristine cities, with smaller buildings.

The days of 20%+ IRR are probably gone unless you’re doing some heavy lifting but I see RE not as being in a price bubble but rather stabilizing in a more realistic spot. Although I wish I was around to shoot the fish in the barrel post GFC. Bought up just shy of $3MM in asset value over a handful of buildings in the Midwest in the past 2.5 years, mostly with personal capital and some investors and I’m quite happy with how things are going so far.
 
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