Keeping Wealth Just As Important As Making It

Building Wealth Thru Investment Real Estate

Real estate investors work hard and invest lots of time in addition to lots of money in building their wealth through buying, holding and selling real property. They often spend their entire life buying and accumulating real estate in order to become financially independent and to have a worry free retirement. However, once you get to retirement and you start to "cash out" there are income tax consequences that must be addressed. Capital gain taxes and depreciation recapture taxes now come into play.

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Managing Capital Gain and Depreciation Recapture Taxes

Many real estate investors do not invest the same level of energy and drive into understanding the income tax effects of their real estate holdings, especially in terms of capital gain taxesand depreciation recapture taxes.

Investors keep working on creating and building their wealth through real estate, but they do not invest much, if any, time in "managing" and "planning" for the income tax consequences resulting from their real estate investment portfolio. Investors should invest sufficient time and resources in making sure that they are keeping as much of their wealth as possible. Making it is one thing; keeping it is an entirely different thing.

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Keeping and Continuing to Build Your Wealth

Keeping your wealth once you have created and built it is just as important as making it. The wealth that you have built and created from your real estate investments becomes your foundation or base from which you can continue to create and build additional wealth.

A large part of your wealth can easily be lost to income taxes. Careful income tax management and planning in conjunction with your tax advisors can go a long way toward maintaining and keeping the wealth that you have created instead of paying ordinary income taxes, capital gain taxes and depreciation recapture taxes.

Income tax management and planning involves lots of moving parts, but they can generally be broken down into three categories, each of which involve different planning and strategies:

• Year-to-year (ordinary)
• Retirement (retirement tax planning)
• Estate (death, estate, inheritance, gifttax planning)

Managing and Planning for Income Taxes

Maintaining or keeping your wealth is not just about making the right income tax favored investments but involves strategic thinking and planning. It includes the three categories mentioned above, which involve minimizing your annual income tax bill, deferring or excluding your capital gain taxes and depreciation recapture taxes on the sale of real property, planning for reduced income taxes during retirement, and minimizing your estate, gift and inheritancetaxes, avoiding gift taxes or transfer taxes, and much more.

Annual Income Taxes

There are many, manyopportunities to reduce and minimize your annual income taxes. It is critical to set some time aside to meet with your income tax advisors and talk about your business operations and/or real estate investments to ensure that you are managing your operations and investments in a way that will minimize and reduce your ultimate income tax liabilities.

Capital Gain Taxes and Depreciation Recapture Taxes

We anticipate that our capital gain taxes will be going up in the near term now that the elections are behind us and we have a new executive administration in the white house. President-Elect Obama and his campaign team made it crystal clear that they intend to increase our capital gain taxes to at least 20%.

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While there was no discussion regarding raising depreciation recapture taxes during the election, we anticipate that the depreciation recapture tax rates will also increase under the new executive administration. Depreciation recapture taxes can be deferred under certain circumstances such as a 1031 exchange, but is generally taxable when an asset is sold in the year of sale.

Although the current capital gain rates are very favorable compared to prior capital gain rates, it still makes sense to keep your money working for you by deferingthe payment of your capital gain taxes as much as possible. Deferring the payment of any capital gain taxes helps you continue to build and maintain (keep) your wealth over the long run.

Paying capital gain taxes is like running up hill. You can still get ahead, but you have to work so much harder to do so. Take advantage of any capital gain tax deferral or tax exclusion options that you can so that you are not running up hill. You should review the following capital gain tax deferral and tax exclusion strategies with your income tax advisors:

• 1031 Tax Deferred Exchanges
• 1033 Tax Deferred Exchanges - Natural Disasters/Condemnations
• 121 Tax Free Exclusion - Sale of Primary Residence
• 1031 and 121 Combined Strategies
• Cost Segregation Analysis
• Deferred Sales Trust
• Investing tax deferred or tax free through retirement accounts

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Do yourself a huge favor.  Make an appointment with your income tax advisor today and start planning to keep your wealth for tomorrow.