Let’s review the tax benefits of real estate investing and how to optimize your real estate investment tax strategies. You might’ve heard me mention before that I’m a passionate believer that owning real estate makes a lot of sense for most folks with respect to their net worth. There are so many tax benefits.
First off, you get to deduct your mortgage interest. You get to deduct your property taxes, your repairs, your maintenance, larger renovations and capital expense deductions. Typically, I’m a big believer that you should own it regardless, but most people don’t know how.
It’s not easy for everyone to just start buying up duplexes and condos. The really neat thing about investing nowadays is that you’re able to do it directly through your portfolio. You can invest in real estate through your portfolio and you can do it in a bunch of different ways. You could do it through publicly traded REITs, private REITs, limited partnerships and there’s other options as well, but these are predominantly the most popular avenues to invest in real estate through an investment portfolio.
The neat thing about real estate investments is that they’re generally a lower correlation or smaller correlation to the stock market.
To be clear, the publicly traded REITs will drop if there’s a crash. Even if you own the best quality real estate investment trust, it will fall if there’s a stock market correction. Generally, the other real estate investment vehicles have little correlation to the market and they’re extremely tax efficient.
The income that’s being generated is generally classified as either return of capital (ROC) or it’s a deferred capital gain. Your adjusted cost base (ACB) gets reduced and over time you’re converting your income to a future cap gain. This allows you to pick a time (a future date) to crystallize your gain on your real estate, for whatever reason it may be. Also, capital gains are way more tax efficient than income.
Normally, income generated is fully added to your tax bill at the end of the year and it’s added to your income. However, this is not the case with real estate.
The advantage of having the alternatives or the real estate in your portfolio is that the income distribution is ultra tax efficient. The investments pay taxable dividends or sometimes even ROC. They’re much better in retirement accounts. If you have a corporate account or a non-registered account, it is extremely tax efficient for you to own.
If you have a small business and you’re worried about the passive income grind (which is $50,000 of passive income) that starts grinding away at your small business tax rate, an easy way to alleviate that stress is to do it through real estate. Reason being is that it’s not going to show up as income in that year on your tax return. It’s something that you need to consider because that passive income grind can be quite expensive.
If you lose the tax rate, the preferable tax rate of 10%, give or take, you now must pay the top tax bracket in your corporation. That’s not the way to do it. You don’t want to have to pay that tax. You want to save on it.
If there’s a way to do it, we strongly encourage you to look at owning real estate in your portfolio because of the remarkable tax efficiency. It’s extremely beneficial for real estate investing and for risk adjusted returns.
By owning real estate, you get a cashflow. Generally, you get a positive cashflow owning real estate, you’re paying down your debt over time through the mortgage, and if you believe in the value of the real estate, then it most likely will grow and appreciate.
Those are the three different ways you can make money owning real estate. I’m an extreme believer and I think the future of asset allocation is going towards a direction where people will own more real estate in their portfolio than they ever have because of the availability for people to do it.
The ultra-high net worth investors used to be the only people who could do this, and now everyone is able to do this. Every single investor out there is able to get a piece of real estate in their portfolio. It’s wonderful. It’s dramatically more tax efficient and less volatile if that’s a concern for you.