Real Estate Timing and Avoiding Taxes
Real Estate Timing is all about growing your wealth in real estate. As we all know though when we sell real estate investment property it’s subject to capital gains tax. Income taxes are a quick way to substantially reduce the amount of money we can make in real estate. They chew up a big part of our profits. This is especially the case with quick flip properties.
Properties that you hold for less than 1 year are subject to your regular tax rate. This can easily chew up about 1/3 of your profits. Quick flip real estate deals are things like wholesaling, rehabbing, short sales,and probate. Don’t get me wrong. I’m not knocking any of these real estate investing techniques. They can be great ways to make money in real estate.
Longer term properties that are held for more than 1 year are subject to long term capital gains instead of short term. This can substantially reduce the amount of income tax you are paying on your real estate investment. Lease options, land contracts, emerging market investing, and rentals would fall under this category.
Real estate timing can fall under either category, depending on how you are using it. If you are using it to decide what investment strategy you should use in your own real estate market then it will be either one or the other tax category. For example if you use real estate timing and determine that you are in a declining market, you aren’t going to want to hold properties very long because they’ll lose value. This is a good market for short sales and wholesaling, both are subject to short term capital gains. However, if you use real estate timing and determine that you are in a market that is about to go up then you’ll want to hold for a while and capture appreciation. You might want to buy a cash flowing rental property and hold it until the real estate timing market indicators tell you it’s time to sell. In this case you would be subject to long term capital gains.
The other approach is the national investing approach where you use the real estate timing charts to select the best markets in the country for investing. When you do that you are going to be holding longer term. This strategy will make you more money on your deals because you are investing in the best markets instead of just in your own back yard. Plus it gives you the advantage of paying less in taxes because your investments will be subject to long term capital gains. So you get to keep more of that money too.
Obviously the less we have to pay in taxes the better. We love our Uncle Sam but we work hard for our money, so we’d like to keep as much of it as possible in our pockets. Tomorrow I’m going to talk about a strategy that allows us to pay NO TAXES at all so be sure to check back.