Taxes are your biggest expense in your lifetime, so choose your source of income wisely! Real estate has some of the best tax breaks of any investment in America!
The more you earn through your job, the more you get taxed, and the system is setup that way to punish hard workers and reward investors. Have you looked at the bottom stub of your paycheck lately and seen how much the government steals from you?
Wage income not only requires work, it gets taxed at a very high rate, plus the government takes FICA, which is put into a system that may be bankrupt when you retire. Real estate has so many tax advantages over wage income:
Capital Gains Rates
The maximum federal tax rate on capital gains is 15%, whereas wage income is taxed at 35%. There’s state taxes, too, and some states offer further discounts on capital gains income.
Remember, capital gains requires that you hold a property for 12 months or more before selling and that it was held for productive use (i.e., as a rental, not a long-term fix and flip).
Exemption for Principal Residence
If you sell your residence, the first $250,000 is exempt from gain or $500,000 if you are married. Remember, this requires that the residence was used as such for two of the last five years.
1031 Exchanges
Under IRC Sec 1031, you can roll your profits from a rental property into more real estate and defer paying taxes altogether. Your tax basis rolls into the next property.
The rules are rather stringent, in that the exchange must be completed with 180 days, and the exchange property must be indentified with 45 days of the sale of the relinquished property (more info at www.1031x.com).
Interest Deduction
You get to deduct interest you pay on debt you have used to acquire your real estate.
Depreciation
For rental properties, you get a tax deduction for the “wear and tear” on the structure, even if the property increases in value! Thus, you can actually break even or make money, but on paper show a loss to offset other income.
No FICA Tax
Your income from real estate is generally NOT subject to FICA tax withholding. Regular self-employment income is subject to 15.3% tax on the first $97,000, and thereafter your earned income is subject to medicare withholding (which you may never get back in your lifetime, the way things are going!).
It’s not just what you make; it’s what you keep–Plan wisely where your income comes from, and you will keep a lot more.
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