The high cost of housing in San Diego often obscures the role that real estate has played in wealth building. As a result, many people remain uninformed as to their opportunity to build an estate and consequently, they fail to fully employ all of the tools available to them.
As an asset class, real estate is far and away the most subsidized, with the Federal Government kicking in over $100 billion to homeowners in the form of tax benefits. And, despite possible short term fluctuations in value, long term appreciation is as certain as land is scarce.
Anyone with a "decent" and dependable income should implement a plan to avail themselves of all of the tools of planned real estate ownership. Chief among these are leverage and tax avoidance.
If you can make a tidy profit on someone else's money and reinvest what otherwise would go to taxes, you have a can't-miss formula for building a nest-egg.
Tool Number One — Leverage
Aptly named for the grand-daddy of all tools, the lever, this is the one that you'll want to take full advantage of. Unfortunately, many of us have been conditioned to avoid debt and we view the act of borrowing money with trepidation and loathing.
Further, pop financial writers reinforce the negative stereotyping of leverage by simply referring to mortgage financing as debt.
Seeing the possibilities in leverage can only occur with a radical shift away from that kind of thinking. As much as I favor the idea of compound interest, most people are not going to save and invest their way to wealth or even a comfortable retirement.
To get the big picture, it is best to think about real estate investing as maximizing the use of the tools available to you. They exist. Why not put them to work for you?
The advice from the writers seems to counsel against leverage because it is risky. Isn't that just like the privileged class to tell us not to take any risks?
I see it differently, if you have nothing or not that much, you had better either win the lottery, sue someone, or create the "next big thing" because otherwise you have no shot without risk. Maybe I'm not as smart as I think I am, but if I'm risking mostly someone else's money, I'm not taking much of a risk.
For most working families, leverage provides them with not only a roof over their heads and extraordinary tax relief, but also the single best investment they'll ever make.
Investment gurus often compare real estate to stocks and bonds and have determined that over the long-run, the rate of return for stocks has been substantially higher than for real estate.
But let's not forget that because of leverage, it isn't necessary to have money to be able to make an investment. And if you have nothing invested, you can't really calculate your return on investment. Last time I checked, that's as good as it gets.
When you begin to see the possibilities of leverage, you will realize that there is no such thing as too much leverage. If a little is good, a lot is better.
Tool Number Two — The Mortgage Interest Tax Deduction
Much is made about the interest rates charged for real estate loans without noting that the cost of the money is the largest single tax deduction available to working families. This deduction applies to a first and second home up to a maximum of $1,100,000. Therefore, the savvy investor wants to own two homes and to leverage a minimum of $1,000,000 in acquisition financing and $100,000 in equity financing.
Tool Number Three — Section 121 of the Internal Revenue Code
It's been nearly eight years since the passage of the Taxpayer's Relief Act of 1997, but most people still do not understand its implications. The repeal of Section 121 of the Internal Revenue code should be called the Second Home Ownership Bill.
Prior law allowed the seller of a personal residence to defer payment of taxes on a home's profit (capital gain) by acquiring another home of equal or greater value. Then, upon reaching the age of 55, a seller could exclude up to $125,000 of gain, one time in their life, providing they lived in the home 3 out of the past five years.
But the new law, the Taxpayer Relief Act of 1997, is absolutely jaw dropping in its generosity. Gone is the once-in-a-lifetime limitation and the age restriction. The occupancy requirement is dropped to two years out of the past five, and the limit is raised to $500,000 for taxpayers filing jointly. This means you can start young and do it over and over again, every two years if you want.
You can own two homes simultaneously and exclude the gain on both by living in each for two years.
Tool Number Four — Section 1031 of the Internal Revenue Code
This is perhaps the most under-utilized tool in the box. What seems complicated and difficult really isn't. You just need the support of a qualified team of professionals to bring the pieces together. When combined with the 121 exclusion above, it is possible to defer gains from investment properties into a personal residence that you can occupy and then qualify for the $500,000 exclusion upon selling.
To learn more, attend our upcoming Saturday workshop in Carlsbad. The next one is June 18th. Call Mary at 760.804.3727 to make a reservation.
George W. Mantor is The Real Estate Professor and the host of "Keepin' It Real, real talk about the real thing, real estate" on AM 1000 KCEO Radio, www.kceoradio.com, Tuesdays at 7:00am. He is also the Founder and President of the Associates Financial Group Inc, a full service real estate and mortgage brokerage headquartered in Carlsbad serving the tri-county area. Visit our website at www.myafg.com.
As an asset class, real estate is far and away the most subsidized, with the Federal Government kicking in over $100 billion to homeowners in the form of tax benefits. And, despite possible short term fluctuations in value, long term appreciation is as certain as land is scarce.
Anyone with a "decent" and dependable income should implement a plan to avail themselves of all of the tools of planned real estate ownership. Chief among these are leverage and tax avoidance.
If you can make a tidy profit on someone else's money and reinvest what otherwise would go to taxes, you have a can't-miss formula for building a nest-egg.
Tool Number One — Leverage
Aptly named for the grand-daddy of all tools, the lever, this is the one that you'll want to take full advantage of. Unfortunately, many of us have been conditioned to avoid debt and we view the act of borrowing money with trepidation and loathing.
Further, pop financial writers reinforce the negative stereotyping of leverage by simply referring to mortgage financing as debt.
Seeing the possibilities in leverage can only occur with a radical shift away from that kind of thinking. As much as I favor the idea of compound interest, most people are not going to save and invest their way to wealth or even a comfortable retirement.
To get the big picture, it is best to think about real estate investing as maximizing the use of the tools available to you. They exist. Why not put them to work for you?
The advice from the writers seems to counsel against leverage because it is risky. Isn't that just like the privileged class to tell us not to take any risks?
I see it differently, if you have nothing or not that much, you had better either win the lottery, sue someone, or create the "next big thing" because otherwise you have no shot without risk. Maybe I'm not as smart as I think I am, but if I'm risking mostly someone else's money, I'm not taking much of a risk.
For most working families, leverage provides them with not only a roof over their heads and extraordinary tax relief, but also the single best investment they'll ever make.
Investment gurus often compare real estate to stocks and bonds and have determined that over the long-run, the rate of return for stocks has been substantially higher than for real estate.
But let's not forget that because of leverage, it isn't necessary to have money to be able to make an investment. And if you have nothing invested, you can't really calculate your return on investment. Last time I checked, that's as good as it gets.
When you begin to see the possibilities of leverage, you will realize that there is no such thing as too much leverage. If a little is good, a lot is better.
Tool Number Two — The Mortgage Interest Tax Deduction
Much is made about the interest rates charged for real estate loans without noting that the cost of the money is the largest single tax deduction available to working families. This deduction applies to a first and second home up to a maximum of $1,100,000. Therefore, the savvy investor wants to own two homes and to leverage a minimum of $1,000,000 in acquisition financing and $100,000 in equity financing.
Tool Number Three — Section 121 of the Internal Revenue Code
It's been nearly eight years since the passage of the Taxpayer's Relief Act of 1997, but most people still do not understand its implications. The repeal of Section 121 of the Internal Revenue code should be called the Second Home Ownership Bill.
Prior law allowed the seller of a personal residence to defer payment of taxes on a home's profit (capital gain) by acquiring another home of equal or greater value. Then, upon reaching the age of 55, a seller could exclude up to $125,000 of gain, one time in their life, providing they lived in the home 3 out of the past five years.
But the new law, the Taxpayer Relief Act of 1997, is absolutely jaw dropping in its generosity. Gone is the once-in-a-lifetime limitation and the age restriction. The occupancy requirement is dropped to two years out of the past five, and the limit is raised to $500,000 for taxpayers filing jointly. This means you can start young and do it over and over again, every two years if you want.
You can own two homes simultaneously and exclude the gain on both by living in each for two years.
Tool Number Four — Section 1031 of the Internal Revenue Code
This is perhaps the most under-utilized tool in the box. What seems complicated and difficult really isn't. You just need the support of a qualified team of professionals to bring the pieces together. When combined with the 121 exclusion above, it is possible to defer gains from investment properties into a personal residence that you can occupy and then qualify for the $500,000 exclusion upon selling.
To learn more, attend our upcoming Saturday workshop in Carlsbad. The next one is June 18th. Call Mary at 760.804.3727 to make a reservation.
George W. Mantor is The Real Estate Professor and the host of "Keepin' It Real, real talk about the real thing, real estate" on AM 1000 KCEO Radio, www.kceoradio.com, Tuesdays at 7:00am. He is also the Founder and President of the Associates Financial Group Inc, a full service real estate and mortgage brokerage headquartered in Carlsbad serving the tri-county area. Visit our website at www.myafg.com.