Owning investment property rentals is a tremendous wealth
building strategy. Thousands of individuals have amassed great wealth by
investing in rental investment property.
Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in the residential property market. These fluctuations can wipe out or severely reduce equity positions in property as we’ve seen in 2008 and 2009.
The busting of the real estate market was foretold by a great many. The fact the bubble would burst so violently and nearly take down the entire financial system was not. It was an eye opener to say the least and millions of people who were wealthy because of property ownership no longer are. If only they had planned for the inevitable fall. Alas, you still can.
Protecting equity gains in your investment property requires careful planning. The strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to the investment property tax strategy.
The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.
Scenario 1 – Without Tax Strategy
Assume you purchased a rental property in 1990 for $150,000 with nothing down. As of July 2009, the combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed $250,000 in gains, but all of it is at risk. You had a gain of $500,000 a few years ago, but cut it in half!
Scenario 2 – With Tax Strategy
We are going to use the same exact scenario. It is July 2009, you have $250,000 in rental property equity, but all of it is risk. You decide to implement the investment property tax strategy and the following occurs.
Our goal is to protect the $250,000 in gain on the rental property while also maximizing tax reductions. The first step is to refinance the property with, typically, an interest only loan. A percentage of the equity gain is taken out of the property and placed into an investment grade insurance product. The equity percentage is arrived at by determining the payment amount you can afford on the loan. Typically, it is tailored to match your current loan payment amount.
Going back to our scenario, what happens if property prices pull back 20% over the next year? You do not suffer the loss of $100,000 because the gain is sitting in your investment grade insurance product. Essentially, it is a wash and you have protected the capital gains while capturing a market based rate of return with no market risk
Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in the residential property market. These fluctuations can wipe out or severely reduce equity positions in property as we’ve seen in 2008 and 2009.
The busting of the real estate market was foretold by a great many. The fact the bubble would burst so violently and nearly take down the entire financial system was not. It was an eye opener to say the least and millions of people who were wealthy because of property ownership no longer are. If only they had planned for the inevitable fall. Alas, you still can.
Protecting equity gains in your investment property requires careful planning. The strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to the investment property tax strategy.
The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.
Scenario 1 – Without Tax Strategy
Assume you purchased a rental property in 1990 for $150,000 with nothing down. As of July 2009, the combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed $250,000 in gains, but all of it is at risk. You had a gain of $500,000 a few years ago, but cut it in half!
Scenario 2 – With Tax Strategy
We are going to use the same exact scenario. It is July 2009, you have $250,000 in rental property equity, but all of it is risk. You decide to implement the investment property tax strategy and the following occurs.
Our goal is to protect the $250,000 in gain on the rental property while also maximizing tax reductions. The first step is to refinance the property with, typically, an interest only loan. A percentage of the equity gain is taken out of the property and placed into an investment grade insurance product. The equity percentage is arrived at by determining the payment amount you can afford on the loan. Typically, it is tailored to match your current loan payment amount.
Going back to our scenario, what happens if property prices pull back 20% over the next year? You do not suffer the loss of $100,000 because the gain is sitting in your investment grade insurance product. Essentially, it is a wash and you have protected the capital gains while capturing a market based rate of return with no market risk
Ah, but it gets better.
The investment grade insurance product isn’t just any policy. Instead, the policy we use is tied to a stock market index. What if the stock market suffers a loss? Not to worry, this policy carries a guarantee that you will never lose a dollar, even if the market crashes. If the stock market did crash, the policy would simply credit you with nominal growth for the year in question. In all other years, the policy would grow tax-free.
Investment property tax reduction law can make this strategy extremely valuable. With this strategy, the loan payments on your rental property are completely tax deductible. Depending on the relationship between your loan payments and revenues from the property, you may show little or no profit for tax purposes. Meanwhile, your equity is growing tax-free in the insurance product.
Learning to manage the equity in your rental property is a critical wealth-building step. Using this investment property tax reductions strategy is an incredibly effective method for protecting and maximizing equity gains.
So, what has been accomplished? First, you have protected your rental property equity gains from home price fluctuations. Second, you have leveraged your equity into two growth channels, the stock market and appreciating house prices. Third, you have converted taxable growth [property appreciation] into tax-free growth [insurance].
With housing markets ready to cool down, this strategy effectively locks in your profits. Preserving equity gains should be a primary goal of any investment property owner.
The investment grade insurance product isn’t just any policy. Instead, the policy we use is tied to a stock market index. What if the stock market suffers a loss? Not to worry, this policy carries a guarantee that you will never lose a dollar, even if the market crashes. If the stock market did crash, the policy would simply credit you with nominal growth for the year in question. In all other years, the policy would grow tax-free.
Investment property tax reduction law can make this strategy extremely valuable. With this strategy, the loan payments on your rental property are completely tax deductible. Depending on the relationship between your loan payments and revenues from the property, you may show little or no profit for tax purposes. Meanwhile, your equity is growing tax-free in the insurance product.
Learning to manage the equity in your rental property is a critical wealth-building step. Using this investment property tax reductions strategy is an incredibly effective method for protecting and maximizing equity gains.
So, what has been accomplished? First, you have protected your rental property equity gains from home price fluctuations. Second, you have leveraged your equity into two growth channels, the stock market and appreciating house prices. Third, you have converted taxable growth [property appreciation] into tax-free growth [insurance].
With housing markets ready to cool down, this strategy effectively locks in your profits. Preserving equity gains should be a primary goal of any investment property owner.