Tax Planning in the real
estate investment portfolio is no longer an option, it's an absolute.
Our primary purpose in investing is to accumulate wealth. And since
our potential for accumulating wealth is significantly influenced by the taxes
we pay, all of our investments should be analyzed on an
after tax basis.
Unlike most investments, real estate affords investors the opportunity
to utilize tax planning strategies that minimize the negative effects of tax
laws and maximize after tax returns and wealth accumulation. However,
far too many real estate investors continue in that "do nothing" mode
of years gone by when rapidly appreciating real estate values compensated for
bad investment decisions . . . little or no investment planning.
There was a time (prior to the 1986 tax law changes) when an investor in real estate could prosper with little or no concern for "managing the asset". . . a sound business plan for each individual real estate holding. In many cases the 1986 tax law changes brought about a silent erosion of equity for the poorly advised real estate investor, while the well counseled real estate investor continued to prosper. Prior to the 1986 tax law changes an investor could write off any losses generated by a real estate investment against ordinary income. However, losses from income producing real estate are now considered "passive losses" and are no longer permitted to be written off against ordinary income. With some exceptions; an investor with an adjusted gross income below $100,000 can deduct up to $25,000 in passive losses against ordinary income, that $25,000 write off phases out between $100,000 and $150,000 adjusted gross income.
Passive income as well as passive losses can be netted (offsetting income/losses) among real estate holdings in your portfolio. In a situation where an investment property generates passive losses that cannot be written off , a solution might be to acquire a property that generates passive income utilizing passive losses from the first property to offset passive income from the second property. The reverse might be the case where property "A" generates passive income. A solution might be to acquire a second property that generates passive losses to offset passive income from the first property.
Investment real estate can no longer be expected to perform on it's own, as it has in the past,
with little or no consideration for "managing the asset." Real estate provides unrivaled financial structuring as well as tax planning opportunities to enhance your wealth accumulation at retirement. Take advantage of these opportunities, maintain a policy of periodic in-depth analysis of your real estate holdings. Seek the counsel of a CCIM prior to acquiring or disposing of an income producing property. Any change, or proposed change in tax legislation should be the real
estate investor's cue to evaluate alternative planning strategies that will
impact yield positions positively rather that negatively. Especially with the
thought of a "Flat Tax" looming on the horizon.
Real estate stands alone as an investment vehicle that provides the
opportunity for financial structuring as well as tax planning
strategies over the life of the investment. . . in the acquisition, the holding,
as well as disposition phases of a real estate investment.