Tax Strategies – Real Estate Investing – Part 14A
This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:
This is the part no one wants to think about TAXES! Yikes, no one wants to pay Taxes and much of our investment Strategies is about avoiding Taxes. I am going to discuss some ideas about Taxes. I will not address property taxes as in California they are a fairly predictable amount and should be seen as an on going expense.
Making Long Term decisions based on Tax is important as we all want to lower the amount of Taxes we paid, but is also hard as Tax are not static. Taxes change at the Federal and State level with almost every budget and election cycle. Your personal Tax situation may not be static with a change in your top Tax Rate if your income goes up or down.
There are two types of Taxes we need to be aware of; Income Tax and Capital Gains Tax.
Income Taxes Directly impact the Rate of Return on the Property. Depreciation on the property might even allow a person to have a positive return on an otherwise negative investment. A person in a high Tax Bracket may even be OK with a Negative Cash Flow as long as they can take the Passive Losses.
The other Tax issue is Capital Gains Taxes. This is where the government gets back all the depreciation they have allowed you to take on the property over all those years (assuming of course you sell for a profit) and Tax you on any appreciation of the property over the time you have owned the property.
There are ways to avoid or minimize the Capital Gains which we will look at in the next installments.