Why half of my investments are in real estate

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I realized recently that it’s been a minute since I last talked about the largest piece of my portfolio… REAL ESTATE! I recently joined a team that works with a group of investors in both stocks and real estate. This Thursday we are hosting a free call going over How to Create Wealth with Real Estate Investing. It’s at 7pm EST and will not be recorded, find more details here.

I first got into it in 2011 when I bought my first property for $100k using only $3,500 down. This happened because my tax guy gave me some advice and said I should invest in real estate to help with my taxes. I listened, and thankfully, he was right.

This was over a decade ago and you probably don’t have dozens of $100k listings available to choose from, but a lot of the investing benefits still exist today.

Let’s talk about my tax situation with the property I mentioned above. Today, it’s worth nearly $350k meaning there is $250 of profit (350 value - 100 cost). Up until recently, it was still my primary residence. When I moved, I could have sold this property for $350k and been able to pay $0 in tax. How? Thanks to section 121, which allows individuals to exclude up to $250k in gains on the sale of their primary residence. I didn’t sell the property when I moved, though. Instead, I turned it into a rental.

Now that property is considered and investment property. I still have the exclusion mentioned above available to me for a short time frame, but now I have even more options. I can sell the property and cash in on the $250k profit, then move that profit to a different investment property, and not have to pay tax on the profits. Not yet at least. This is called a 1031 exchange, and it defers the tax, it doesn’t eliminate it. This just means that at some point you may have to pay tax on the profit that you moved, just not at this time.

Since I rent the property out, I get rental income every month. I have to claim this on my tax return, but I can write off expenses like interest, taxes, insurance, property management, etc. There’s also something called depreciation that the IRS allows me to deduct. It’s an expense that’s meant to represent the wear and tear on an asset. Think of this as an expense on paper for tax purposes, but not a real expense that I am taking money out of my pocket and paying for.

With so many write offs available, it isn’t unusual for a real estate investor to pay little to no taxes on the rental income they receive. Some investors have losses on paper that they then use to offset income from other businesses. Wayyy outta scope for this newsletter though.

For all of these reasons and so many more, I love real estate and I hope to continue adding properties to my portfolio. I am thankful that my tax guy gave me some great advice 13 years ago, otherwise I wouldn’t have had the chance to see first hand just how amazing real estate can be. If you’ve made it this far, you should probably come to the class 😊 I promise you’ll learn a ton! Hope to see y’all there!

See you next week,

Neyra

Remember, I’m A CPA but I’m not YOUR CPA. Please consult with a licensed professional for any tax, business, or investing decision you contemplate

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