First of all… what is a tax shelter? A tax shelter is a legal and safe place to put your money where it is kept from being taxed (1. Josephson). A tax shelter is not to be confused with a tax haven. A tax haven is where money is moved out of the United States to avoid paying taxes and is illegal. In a 401k plan you may be exempt from paying the taxes while the plan is active but you do pay taxes on it when you retire.
Reason number one for using real estate as a tax shelter is that the IRS exempts the first $250,000 ($500,000 if you have a spouse) from personal home sale profits from the capital gains taxes. You read that correctly – you and your spouse could make $500,000 off of home sale profits and pay no taxes (1. Josephson). To be clear, the home sale profits need to be from a home you have been living in for at least five years (please double check with your accountant). That doesn’t make this a practical short term investment, even though you could do it every five years.
Reason number two is that you can build up personal equity. In short, if you purchase a house in a desirable location using a standard mortgage, you are increasing your personal equity. Then if you fix it up, and rent it for more than costs (or even at cost) it would be paying for itself. Now, if you flip the house you get a short-term profit, but if you get a nice renter who stays there for the length of the mortgage, you have a house that is paid for and you can sell for a full profit. This is a bit more complicated and I would highly recommend speaking with a financial planner (for example, Merrill Lynch). There are other tax benefits to renting a house but my editor told me to keep it short (2. Carson).
Reason number three would have to be appreciation. Real estate goes up at about the same rate as inflation, 3-4% annually. If you put your money into real estate, your money should increase at the same rate as inflation (2. Carson). With that in mind, one might wonder about what happened to the real estate market in 2007. There are no guarantees, but smart investing is always best. When the market turned upside down in many places, properties by water or other really desirable locations didn’t take much of a hit. I know of a beach town in Texas where the real estate market was booming and hasn’t stopped. When my family bought a house there , the lots were going for $40,000. Even during the worst of the real estate decline, those same lots were going for $80,000. My advice to anyone interested in having their retirement funds appreciate over time is to speak with a professional agent or a financial advisor (example Merrill Lynch).
Reason number four: It will diversify your portfolio (Harris). The old saying “don’t have all your eggs in the same basket” still applies to your retirement. No one wants to get to their glory days and have their stock portfolio take a dive. To be clear, I am not a stock broker but I have seen people lose a considerable amount of money from their portfolio just before they retire and it is not fun. I would highly recommend speaking with a money manager before liquidating any of your stocks to putting them in the real estate market. However, a healthy dose of common sense can do wonders for your portfolio. Blue chip stocks fluctuate with the market as does real estate, but diversity is the key in a successful retirement portfolio (Harris).
Reason number five is that it is a tangible investment (Harris). When you buy a stock, the best you can have that is tangible is a piece of paper showing you are a share-holder in a company. When you invest in real estate you have actually acquired a piece of land that you can see and visit. It is a location that you own exclusively. The opportunities for your tangible investment are only limited by the imagination. I did an article a while back on ways to make money off land in Michigan and it illustrated how anyone could use trees as a crop/ revenue source. One section of the article specifically mentions working with the World Tree Organization and how you can simply plant, maintain, and work with their team to earn up to 500k over a 10-year span. That plan depends on the market value of the tree, but the investment is something tangible. Other opportunities for investment include flipping houses, development of personal property, owning rental properties, farming a variety of crops (trees), and on and on. In each area, there are sub-areas. For example, some institutions acquire several houses (typically 4) as cheaply as possible, then sell them individually for a profit to people who flip houses.
As a real estate agent, caring human being, and educator, I encourage my clients to do their research. When it comes to a retirement plan I would not only urge research but would also ask they speak with their money manager and a licensed real estate agent before diversifying their portfolio. The opportunity created by investing in real estate is only limited by your imagination.
“Imagination is everything” ~Einstein
Thanks for taking the time to read my blog.
Sincerely,
Ben Anderson
- Josephson, Amelia, published 9-14-18, found on 1-18-19, https://smartasset.com/taxes/what-is-a-tax-shelter
- Carson, Chad, Found on 1-18-19, https://www.madfientist.com/tax-benefits-of-real-estate-investing/
3. Harris, James, found on 2-11-19, published on 11-16-17 https://www.entrepreneur.com/article/304860
Full description of reason number two (these are some of the tax benefits I alluded to in the article above):
Reason number two is that you can build up personal equity. Let’s use an example of a residential rental property to illustrate this. If you bought a house as an investment and rented it out for just for the cost (monthly mtg payment utilities etc), over time you would gain more equity in the home as it gets paid off. Now, if you were to make $5,000 profit off the home you would be subject to a 25% federal income tax and would owe $1,250. Now if you took off the depreciation value off the profit ( -$3,000) you would only get taxed on the $2,000 remaining. Then you would only owe $500 in taxes and save $750. Depreciation on an asset means that the government agrees things get old over time. The rate at which something depreciates is 27.5 years. You can divide cost by the 27.5 and you would get the yearly rate (2. Carson).
Ben & Jamie Anderson Realtors 