What Real Estate Tax Strategy Reveals About Serious Wealth Building

When you’re looking to build serious wealth within your lifetime, investment is crucial, and there are many ways in which you can improve your efforts in investment to reach big financial goals.

A strategy is important when it comes to serious wealth building. A real estate tax strategy for those investing heavily in real estate will often rely on opportunities like tax deferral and depreciation to grow their portfolio indefinitely.

In this guide, we’ll look at how you can grow your wealth seriously this year and why a real estate strategy is important to have this year.

How to grow serious wealth in life

When you’re looking to grow serious wealth in your life, there are several efforts and focus points to hone in on to help create that financial success. Before diving into your real estate tax strategy, here are some pointers when you’re looking to grow serious wealth in life.

Maximize income and minimize expenses

Strive to earn as much as possible, whether it’s through career advancements or side hustles and business ventures. Minimize your expenses to maximize your income and investment potential.

Practice aggressive saving and investing

Aggressive saving and investing are worth practicing. Aim to save a significant portion of your income and not just 10-15% of it. Regularly put this into diversified investments where possible.

Leverage the power of compounding

Compounding is useful to explore, and it’s worth starting early in your investment journey, maintaining consistency throughout.

The longer your money is invested, the more powerful compounding becomes.

Always learn and adapt

The financial landscape is forever changing, which is why it’s important to gain knowledge and always look to continuously learn and adapt.

It’s good to dedicate time to improving your financial literacy and acquiring those skills that increase your earning potential as an investor.

Diversify your income and investments

Be aware of diversifying your income and investments where possible. Avoid relying on a single source of income or a single type of investment. Diversification helps to mitigate risk and provides many avenues for wealth building.

What tactics should you be using in your real estate tax strategy?

The real estate tax strategy is helpful to implement in your wealth-building efforts and involves a number of tactics. Let’s go through these to help ensure every effort you make is helping to build wealth this year.

Depreciation and accelerated deductions

Investors can make use of depreciation in order to offset rental income. This is a non-cash ‘paper expense’ that reduces taxable income. Even if the property is increasing in market value, this method can still be utilized.

Sophisticated investors can conduct a cost segregation study that helps to identify specific property components that depreciate over time. It’s these front-load deductions that create substantial paper losses and therefore free up cash flow for reinvestment.

Tax deferral via 1031 exchanges

When property is sold, investors will often be able to defer capital gains tax and depreciation recapture by using a 1031 exchange. This helps to reinvest the proceeds into another, typically larger investment property similar to the one you had.

However, it’s important to know these have strict time frames with 45 days to identify potential properties and 180 days to close. This process can be repeated indefinitely, allowing your wealth to compound without being eroded by immediate taxes.

Buy, borrow, die strategy

The buy, borrow, die strategy works by borrowing against the accumulated equity in properties to access capital. instead of selling appreciated assets and therefore triggering capital gains tax.

This can be used for living expenses or new investments, for example. Loan proceeds are not usually considered as taxable income, so it’s certainly something to consider as an option.

Step-up in basis at inheritance

This is something that often occurs upon the investor’s death. Heirs who inherit the real estate will receive a ‘step-up in basis’ to the property’s current fair market value. This legally erases all the deferred capital gains and accumulated depreciation recapture. It allows the heirs to then sell the property tax-free.

Strategic entity structuring and estate planning

Wealthy individuals use a combination of legal structures, from LLCs to FLPs or various trusts, to protect their assets and facilitate wealth transfer to future generations. This further minimizes estate and gift taxes.

By strategically stacking the tactics and techniques above, many wealth builders can minimize tax friction and keep hold of more capital that will hopefully lead to more growth in their investments going forward.