Build Wealth – Page 2 – Hustle Income Man

When it comes to building wealth, you need to invest in assets that will increase over time. But there’s also one other essential part to the equation that many people forget: taxes. After all, if you buy something that creates significant gains but then also creates a huge tax bill, you may not be making much progress. It’s Not What You Make; it’s What You Keep That’s why your bottom line should always factor in the impact of taxes. That’s where real estate excels. We're not talking about your home, however. Owning investment real estate (property purchased to generate income) offers you unique tax advantages. This effectively can turbo-charge your wealth-building efforts over long-term time frames. Meet the Real Estate Investor’s Best Friend: Depreciation You have likely heard the term “depreciation.” If you’ve ever tried to resell something you bought new, you've probably seen the wealth-destroying power of depreciation first-hand. Whether it's a television, a couch or a car, most goods tend to rapidly lose value over time. But fortunately, depreciation can work the other way, too, if you stay on the right side of it. The U.S. tax code lets investment property owners take annual depreciation expenses against their property. Sometimes called "phantom losses," these yearly expenses are intended to allow you to save up to later make needed improvements to maintain the buildings as they age. [i] What does it mean to you? Income generated on investment real estate is reduced by depreciation. So the IRS allows you to take that annual deduction whether you've spent anything or not. And, in many cases, while the IRS says your building is going down in value, in reality, there's a good chance your property value is continuing to increase. This often means that you have a property generating positive cash flow, but for tax purposes, you show a loss. There's really no other part of the tax code that offers this unique tax benefit. Now, there is a bit of a catch here. Any depreciation you take in the property reduces your tax basis. That means that your capital gains will increase when you go to sell. But fortunately, there’s good news on this front too. Another Investment Real Estate Perk: The 1031 Exchange The U.S. tax code favors long-term capital gains by providing a lower tax rate for assets held for more than one year. But there’s something even better available to real estate investors. It’s called the “1031 Exchange.” A 1031 Exchange lets you postpone your capital gains on an investment property. The regulation is complex, so you'll want to engage your tax professional to ensure you do it right. But basically, you can defer your gains when you sell by using the sale proceeds to buy a similar property. Many investors have used these 1031 exchanges to step up to increasingly valuable properties. What’s unique is that you can use this strategy repeatedly as long as you and your tax professional follow all the rules. People also use this as an estate planning strategy, where you can leave the property to your heirs. Then, when you die, your heirs will receive a "stepped-up basis." That means the tax bill will be less when they eventually take the gain. Possible Future Threats to 1031 Exchanges Unfortunately, the 1031 exchange provision is on the government’s radar. Fortunately, this portion of the code enjoys bipartisan support. Still, it also has recently received changes and threats from both parties. Recent tax law changes under the Trump administration limited 1031 exchanges to real property. Previously you could shelter other investment types in this unique arrangement as well. Then, more recently, the Biden administration was pushing to lower the amount of gains that could be shielded. Their proposal involved limiting gains to $500,000 per person or $1,000,000 for a married couple. While this proposal did not pass this time, that may not be the end of the attempt to limit 1031 exchanges. But in the meantime, the power of depreciation combined with the 1031 offers a unique way to maximize the wealth-building power of real estate while enjoying some fantastic tax perks. No Time? You Do Have Other Options If you’re extremely busy, the idea of becoming a landlord may not be that appealing. After all, owning property often comes with its share of unavoidable headaches: tenant issues, overdue rent, emergency repairs, and more. Or you can hire property managers, but that means lower returns for you. Fortunately, today there are even more ways to participate. One easy way is to buy REITs (Real Estate Investment Trusts). These are traded online like any stock, and there are no minimums. Your other option is a Real Estate Limited Partnership. These usually are limited to accredited investors and require significant minimums but allow you to participate passively in one specific project. Both of these offer professional management, which of course, can usually be a good thing. On the flip side, you have no control over the project. Final Takeaway For decades, real estate has offered a time-tested, practical way to build wealth. These unique tax benefits simply offer an additional cherry on the top, helping make sure your hard-earned gains stay in your pocket, not Uncle Sam’s.