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ALL ABOUT REAL ESTATE INVESTMENT STRATEGIES
Tax Planning opportunities in investment real estate Your primary purpose in investing is to accumulate wealth. And since your potential for accumulating wealth is significantly influenced by the taxes you pay, all of your 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 strategic planning. Tax shelter, contrary to popular belief, continues to offer significant advantages in the real estate investment. Tax Planning in the real estate investment portfolio is not an option. . . it's an absolute. Continued below
Tax laws, in effect, make Uncle Sam a partner in your real estate investments. He's a partner with no money invested, and is exposed to no risk. To make matters worse, unless you have a plan for tax strategies, his position keeps getting better each year. As your write-offs in the investment decrease each year, your taxable income increases. Uncle Sam's piece of the pie gets bigger each year...as his return goes up, your return goes down. Let's take a look at two major Tax Acts that significantly effected the value of real estate investments. The Economic Recovery Tax Act of 1981 provided unprecedented write off opportunities, and contained few negatives for real estate investors. It was designed to stimulate the economy, and it did just that. There has never been a tax climate more favorable to the real estate investor than the periods from 1981 through 1986. The write off opportunities were so liberal they brought about an era where the economics of the investment were seldom considered, tax shelter became foremost in the minds of real estate investors. The demand for income producing real estate became insatiable. This caused real estate values to sky rocket, providing fertile ground for unscrupulous syndicators to pray on poorly advised real estate investors. Along came the Tax Reform Act of 1986, which was also designed for a purpose. That purpose was to rein in some of the abusive investment structuring practices that caused the inflationary conditions in the real estate market. Once again, the goal was established, this act brought about an immediate halt to the golden tax shelter opportunities of the early eighties. However, the short sighted authors of the 1986 act failed to recognize the consequences of such an abrupt turn about. The 1986 Act contained new passive loss, cost recovery (depreciation), and capital gains rules that totally devastated investment real estate portfolios. . . ask Donald Trump. Many real estate investors were left with investment properties where their values plummeted substantially, often less than the mortgages owed on them. The investors walked away from the investments, the lenders foreclosed and had to liquidate the properties at values that cost the tax payers billions and billions $$$$$ in the Savings & Loan bail out. A complete reversal had taken place. This time our law makers erred on the side of failure, perhaps even poverty for the ill advised real estate investor. However, the well informed real estate investor survived, and continues to prosper today. Prior to the Tax Reform Act of 1986, the investor could elect to take accelerated write offs (cash now) and be taxed on them in the future (pay later) when they disposed of the investment. Under the 1986 act, the passive loss rules denied the investor many of the old up-front write off advantages. However, many of those write offs were not lost to the investor, they were simply deferred to a future time when the investment is liquidated. So you see in many respects Uncle Sam had decided to capitalize on the time value of money. In days gone by he would credit you now and tax you on it later. Today, he taxes you on it now and may credit you later. About the
author: Stewart L. Mac Donald, CCIM, is President of
Real Estate Assets, Inc., a consulting services company
focused on maximizing wealth through Asset Management in
the real estate portfolio. Mr. Mac Donald has counseled on and
has been an active participant in a wide range of investment
real estate projects. He has written and presented seminars on
"Strategic Planning in the Investment Real Estate
Portfolio" before bar associations, financial planning and
investment groups. | |
