As an investor, you should be consistently on the lookout for issues that might cut into your wealth, as well as those that could increase your tax burden. One such issue that could have an affect on both of these things is known as phantom income.
Clay Schmidt
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In previous articles, we discussed risk and its impact on investment decisions. A return on a particular investment might look really great on paper. But, if you can’t deal with the possibility of losing part, or all, of your entire principal, that investment might be better off avoided.
On paper, relying on the Internal Revenue Code (IRC) section 1031 to defer capital gain taxes on a real estate sale seems straightforward. You target the replacement property within 45 days, then close on that property within 180 days. Your Qualified Intermediary handles the exchange, resulting in a new property and a sweet tax deferral.
There is a lot to consider before diving into real estate as an investment. You need to understand your own investment goals, and risk tolerance. You also should have an understanding of the market in which you want to invest, type of property you are eyeing, how much it is valued for – and the asset grade. Much like papers and school work are graded based on quality, real estate assets also come with grades, based on many factors.
In a previous blog, we focused on various types of real estate we dubbed “recession-resistant.” Property types such as student housing are considered to be insulated against recessions, as it succeeds or fails based on fundamentals such as college enrollment rather than economic cycles.
Investing in real estate for wealth management and estate planning could potentially be a savvy move. If you make intelligent decisions concerning your real estate purchase, you could end up with a decent income flow. And, by the time you die, your heirs might not be penalized with extra taxes on your real estate investments, thanks to a concept known as “step-up in basis.”
Multifamily homes are being touted as great opportunities for investments, and for good reason. Real estate market trends point to an increase in renting over home ownership1, meaning that multifamily assets can provide steady income flow as occupancy rates increase. As a result, investors are looking to make multifamily ownership a part of their portfolio. According to Real Capital Analytics, apartment sales through the first half of 2018 totaled $69.9 billion, a 7.9 percent increase compared to the first of 2017.2
Partnerships can be an ideal legal structure for investors interested in acquiring, owning and operating real estate. A partnership consisting of two or more people can help boost capital availability and operational experience, while providing liability protection and tax pass-through treatment on your income tax return.
When it comes to a commercial property acquisition, the typical investor generally spends time performing due diligence. He or she will study the property’s tenants, net operating income, age, location and other information, to make the best investment decision possible.
