One of the greatest tax breaks in America is the ability to own income-producing property and deduct the mortgage payments as well as depreciation to offset the income and reduce income taxes. This is why real estate still is one of the best investments.
Imagine if you could depreciate stock, which is not allowed. Imagine if the stock went up in value and you could pretend that it was depreciating in value. That is how powerful this tax break is for owning real estate.
Prior to 2008, real estate, especially single family homes, rarely went down in value. For decades before that, the value of single-family homes continued to rise year after year. Those were the glory days, yet the real estate market in Houston has now rebounded back to the levels that are higher than those before the crash. The value of homes in Houston is now, once again, appreciating each year in a more normal, regular pattern. This is why it is a good time to invest in real estate and build up your portfolio for the benefits of long-term appreciation in value.
We posted information about 1031 Tax Exchanges before. If you want to avoid capital gains when selling a property, it is possible to buy another property that is like-kind and trade up without having to pay capital gains taxes on the sale. Let’s say, for example, you bought a property for $200,000 and when you sell it five years later it is worth $300,000. If you take the proceeds from the sale and do not re-invest them in a like-kind property then you have to pay the capital gains tax on the difference. Roughly that means about 15% of the $100,000 profit or $15,000.
This capital gains tax can be completely avoided if you trade up and use the new equity to buy a bigger and better property. As long as you invest the same value or higher in the new property, you avoid the capital gains tax. This is called a 1031 exchange. It is a great way to build your real estate portfolio with a tax-deferral strategy that maximizes all the benefits.
At some point, later in your real estate career, you might want to consider getting rid of landlord headaches by selling your rental property and then investing in commercial properties that have triple-net leases. In a triple-net lease arrangement, the tenant has to take care of all the property taxes, insurance, utilities, and upkeep of the property. All you do as the owner is collect the monthly lease checks. Usually, the leases for these properties are made to very creditworthy companies that are national brands and the leases last for 10, 20, or even 30 years.
Start with a single investment property that you can easily rent out and that you can afford without negatively impacting your lifestyle. Then, trade up to more valuable properties when you can and eventually swap the rental properties for net-lease properties to get rid of landlord headaches. This is a solid strategy to use in order to build a substantial real estate portfolio on a tax-deferral basis.