More and more people are buying real estate, especially single-family homes and condos, as investments. Real estate can be not only a great investment, but also a great tax shelter. And the more your clients save in taxes, the more real estate they can purchase.
To help you advise your clients how to invest in real estate tax-free, here are four success strategies, including how to use tax-free loans, like-kind exchanges, depreciation and tax elimination.
1. Borrow cash with tax-free loans
Remind your clients that the beauty of real estate is that it’s the easiest asset to borrow against. An investor can always borrow from a bank through a refinance and pay no tax on this debt. The cash is a tax-free loan, plus the investor can keep the real estate asset and tax deductions that go along with it.
2. Shelter cash flow using like-kind exchanges
To shelter real estate investment cash flow from taxes, emphasize to investors that they can buy like-kind properties through tax-free exchanges, also referred to as a Section 1031 exchange. In this case, an investor can buy a second property without paying tax on the sale of the first property.
3. Use like-kind exchanges plus depreciation plus debt to never pay taxes on real estate
By combining a 1031 like-kind exchange with depreciation deductions, an investor can avoid taxes on both the cash flow and gain from a real estate sale.
Through a tax-free exchange, the investor not only avoids tax on the gain from the real estate, but he or she also gets to use the bank’s money to purchase the property and gets all the tax basis and depreciation. The bank does not get any of it. To ensure success with these more complex transactions, we highly encourage you to refer clients to an excellent tax adviser.
4. Eliminate tax on real estate gains completely
You can also advise clients that they can avoid real estate taxes completely. An investor can benefit from depreciation deductions while alive, hold the property until death, and then the heirs will not have to pay any tax.
The next time you work with a client, you’ll be a hero for sharing these real estate tax-free investment strategies. Simply by mentioning this information, you’ll increase their trust and loyalty because it shows you are thinking about their financial success way after the sale closes.
Tax-free loans, like-kind exchanges, depreciation and tax elimination are all valuable options that can save your clients millions over a lifetime.
This power of real estate investing is emphasized in my book, “Tax-Free Wealth”: “Real estate is such a good tax shelter that a serious real estate investor should never have to pay taxes on their cash flow or on the gain from the sale of their real estate … With proper planning, rental real estate can create huge tax reductions for your business and salary income.”
Tom Wheelwright is the author of “Tax-Free Wealth,” CPA and CEO of ProVision Wealth. You can follow him on Facebook or Twitter.