Tax benefits of real estate without the work?

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afoolwithmoney
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Tax benefits of real estate without the work?

Post by afoolwithmoney »

Basic question here. I hear a lot about the tax benefits of investing in real estate - 1031 exchanges and depreciation? I have no interest in becoming a landlord though - are there ways of investing with others to get these benefits? At what net worth and investible cash does it make sense to consider these sorts of arrangements?
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Sandtrap
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Re: Tax benefits of real estate without the work?

Post by Sandtrap »

How much do you have to invest compared to the property values of what are you thinking of investing in?

Examples:
Small condo with a small down payment using a property management company and wanting Total hands off?

Mega High income earner needing tax shelters, high net rental income not needed?

j🌺
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arcticpineapplecorp.
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Re: Tax benefits of real estate without the work?

Post by arcticpineapplecorp. »

afoolwithmoney wrote: ↑Mon Sep 07, 2020 11:15 pm Basic question here. I hear a lot about the tax benefits of investing in real estate - 1031 exchanges and depreciation? I have no interest in becoming a landlord though - are there ways of investing with others to get these benefits? At what net worth and investible cash does it make sense to consider these sorts of arrangements?
the 1031 if i understand it correctly only allows for no capital gains taxes...if you exchange the gains into another rental property. So are you really cashing out gains or just reinvesting them? i.e., what's the goals? Most people invest to sell later on and spend the gains. Once you do that with real estate, you've got to pay the taxes. The 1031 only delays the taxes, unless you plan on leaving the investment properties to children in which case they'd get a step up in basis (at this time).

the depreciation lets you reduce income on your investment. But the depreciation may not be enough in and of itself to write off all income. In other words, unless you have expenses to offset income (mortgage, repairs, taxes, etc) you may wind up paying tax if your only reduction of income is from depreciation.

finally, if you buy in with others you may be increasing risk or reducing profit right? how increase risk? what if you think the others are supposed to perform functions you don't want to and they don't perform those functions? Will you have to pay them for things they're willing to do that you're not? And so on.

why not just invest in a REIT index fund if you want greater real estate exposure:
https://investor.vanguard.com/mutual-fu ... view/vgslx

if you buy a REIT, do it in a retirement, not a taxable account.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
GMT-8
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Re: Tax benefits of real estate without the work?

Post by GMT-8 »

Liquidity is also an issue to consider with Real Estate. As is balancing value in multiple holdings - say you want to leave a property or two to each child -- how do you even things up if they vary in value?

You can sell your stocks and bonds rapidly if you need to.

But having handled some estates, I have learned that unwinding real estate investments (esp. partnerships) can be troublesome and take quite a bit of time.

Likewise with collectibles, art, etc.

GMT
Katietsu
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Re: Tax benefits of real estate without the work?

Post by Katietsu »

You can also research crowdfunding and real estate. I do not think there is a generic answer to your question. I also would never get involved in any of the real estate options just because of the somewhat beneficial tax treatment. Learn exactly what those tax benefits really mean. Some people seem shocked when the eventually face depreciation recapture or paying taxes on accumulated capital gains when they want to sell to spend their equity on their life.
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arcticpineapplecorp.
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Re: Tax benefits of real estate without the work?

Post by arcticpineapplecorp. »

check out this recent post (to see how there can be other factors you may not have thought of that are involved with investing in real estate with others):

viewtopic.php?p=5474300#p5474300
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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abuss368
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Re: Tax benefits of real estate without the work?

Post by abuss368 »

Sandtrap wrote: ↑Tue Sep 08, 2020 8:40 am How much do you have to invest compared to the property values of what are you thinking of investing in?

Examples:
Small condo with a small down payment using a property management company and wanting Total hands off?

Mega High income earner needing tax shelters, high net rental income not needed?

j🌺
As an alternative one could also invest in US and International REITs. REITs are even more aligned with direct investment since the 2017 tax act. REITs are eligible for the QBI 20% deduction - same as direct investment.
John C. Bogle: “Simplicity is the master key to financial success."
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abuss368
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Re: Tax benefits of real estate without the work?

Post by abuss368 »

One other investment that is increasingly growing is private placement such as CrownStreet and FundRise. I have read up a little on these vehicles, which often allow the investor to select the individual property to invest in.
John C. Bogle: “Simplicity is the master key to financial success."
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abuss368
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Re: Tax benefits of real estate without the work?

Post by abuss368 »

arcticpineapplecorp. wrote: ↑Tue Sep 08, 2020 1:37 pm
afoolwithmoney wrote: ↑Mon Sep 07, 2020 11:15 pm Basic question here. I hear a lot about the tax benefits of investing in real estate - 1031 exchanges and depreciation? I have no interest in becoming a landlord though - are there ways of investing with others to get these benefits? At what net worth and investible cash does it make sense to consider these sorts of arrangements?
the 1031 if i understand it correctly only allows for no capital gains taxes...if you exchange the gains into another rental property. So are you really cashing out gains or just reinvesting them? i.e., what's the goals? Most people invest to sell later on and spend the gains. Once you do that with real estate, you've got to pay the taxes. The 1031 only delays the taxes, unless you plan on leaving the investment properties to children in which case they'd get a step up in basis (at this time).

the depreciation lets you reduce income on your investment. But the depreciation may not be enough in and of itself to write off all income. In other words, unless you have expenses to offset income (mortgage, repairs, taxes, etc) you may wind up paying tax if your only reduction of income is from depreciation.

finally, if you buy in with others you may be increasing risk or reducing profit right? how increase risk? what if you think the others are supposed to perform functions you don't want to and they don't perform those functions? Will you have to pay them for things they're willing to do that you're not? And so on.

why not just invest in a REIT index fund if you want greater real estate exposure:
https://investor.vanguard.com/mutual-fu ... view/vgslx

if you buy a REIT, do it in a retirement, not a taxable account.
Good summary. Additionally REITs are more tax favorable since the 2017 tax act. They now have the QBI deduction against income.
John C. Bogle: “Simplicity is the master key to financial success."
av111
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Re: Tax benefits of real estate without the work?

Post by av111 »

GMT-8 wrote: ↑Tue Sep 08, 2020 1:42 pm Liquidity is also an issue to consider with Real Estate. As is balancing value in multiple holdings - say you want to leave a property or two to each child -- how do you even things up if they vary in value?

You can sell your stocks and bonds rapidly if you need to.

But having handled some estates, I have learned that unwinding real estate investments (esp. partnerships) can be troublesome and take quite a bit of time.

Likewise with collectibles, art, etc.

GMT
+1

OP

Self managed real estate is a business. It has risks and it works for savvy people. There are a few lucrative benefits that GMT has talked about.

In addition many owners qualify for QBI breaks. QBI and depreciation reduce the taxes on the income annually and 1031 protects tax on sale as long as you buy a new property. Step up to the inheritors makes sure that taxes are never paid on appreciated property

You specifically asked if there is a way to get these benefits without being in this business. You can get some of the goodies like depreciation from limited partnerships in which you are passive but most useful benefits are not achieved

Liquidity during the ownership period is the primary issue faced by small landlords. That and your taxes are complex, refinance takes inordinate effort and sometimes you can have suboptimal situations but these situations occur significantly less than other businesses
AV111
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