Using real estate to build wealth

How Trump used the Tax Code to build wealth and How You Should Too

Did you know that real estate is the only investment in the US that can be expensed? You can’t expense the purchase of stocks, bonds, or investments, however, you can expense your investment in real estate; and often times… do most of that expensing upfront. Note in the article, how The New York Times mentions how Trump used cost segregation to generate non-cash Federal tax losses.

Real Estate is also the only investment class where the government will give you part of the equity to buy it through historical tax credits, facade easements, air rights, TIFFS, energy tax credits, and affordable tax credits. The government gives the investor the equity free and the investor then gets to write off the cost of the building to minimize taxes and preserve wealth.

Let’s review an example of this:

A real estate investor buys a $1,000,000 property. The investor receives $300,000 in federal tax credits that he uses as his equity, with no money out of pocket, and secures 70% debt. The investor now does a cost segregation study and (through that study) the investor is able to capture a $400,000 tax deduction in the first year alone. At a hypothetical 40% tax rate, that is a $160,000 cash benefit. The investor also probably qualified for a much lower interest rate since the property was energy efficient which also qualified for another tax deduction of $50,000 which is a $20,000 cash benefit.

In summary, the investor has a $1,000,000 building. No equity needed, provided by the government. The same property allowed him to take $450,000 in tax deductions (tax loss) to preserve $180,000 in cash and offset other taxes. It is easy for anyone to do this. Many simply don’t have the awareness to do so otherwise they would. Who wouldn’t? How many real estate investors have tax advisors that would miss this? It comes down to a lack of awareness and real life application.

Furthermore, the above investor also took a conservation easement on the land, promising the federal government he would conserve some of the acreage for wildlife. This netted the investor another $54,000 in cash.

What we learned from the Presidential debate was that most people don’t understand these tax benefits. The IRS did not have a problem with the loss because they understand cost segregation and that our tax code is structured to help people and businesses reduce tax liability so that they retain funds for proper business operations, driving revenue into markets through spending. How many investors have any knowledge of these tax benefits?

If you would like to learn more about how you can preserve cash, find tax deductions, and offset other taxes (in relation to property investments), please feel free to reach out to us regarding this or any of this applicable topics to your real estate investment. 

  • Importance of LLC’s and applicable tax structures
  • Properly placing property into service – deprecation and land allocation
  • Minimum rental use in order to claim deductions on rental property
  • Passive activity loss limitations
  • Cost segregation
  • Conservation easements

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