I’m going to talk to you today about something that I’ve been wondering: Why would you invest in real estate to save money on taxes?
This might be the most ridiculous thing I have ever heard in my life, and it is something that is very, very frustrating to me. I just don’t get the principles behind it, and the fundamentals of it don’t make any sense.
Why It’s Almost Always a Bad Idea to Invest in Real Estate to Save Money on Taxes
So, let me start off with my Aussie investors. A ton of you out there are using this thing called “negative gearing.” This means you’re investing in these super-duper expensive properties that cost you more than the income that you are getting every month. You are losing that money, but then you are losing all those losses to offset the income you are making from a 9-5. Guys, that is not why we invest in real estate. We invest in real estate to make money and to pay our taxes fairly. I always say I wish that I was paying $10 million in taxes, and do you know why? Because that would mean I’d probably be making $100 million. In the U.S. (and I know in Australia, too) the taxation system favors businesses. The more money you make as a business owner, the fewer taxes you pay. Unfortunately, that’s just the way it is.
Now, for everyone here on the East coast and West coast of the United States, your markets have boomed. They’ve gone up in value. So a lot of you guys can’t take advantage of losing money every single month by offsetting it against your income. Still, it is mind boggling to me that you are investing in these properties, losing money on your monthly mortgage repayments, which means your income is not covering your expenses. But you are doing that because of some prediction and hope that the property is going to appreciate in value more than you are losing on your mortgage repayments.
Related: Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t
Use Real Estate Investing to Supplement Your Income
Once again, this is mind boggling to me. I don’t get it. It doesn’t make any sense. Real estate should be about putting money in your pocket every single month. Forget about capital appreciation. I mentioned it in one of my previous blog posts that capital appreciation is a prediction. It is speculating because we don’t know what the future holds. You guys have to invest based on the numbers in the deal as they stand today. This means your income has to outweigh your expenses. There has to be positive cashflow left over, and there has to be a ton of money pouring into your pocket every single month.
Remember, we invest in real estate to supplement the income we are getting from a job we do not want to be working in. So why are you investing in capital appreciation? That will not supplement your income. That is intangible. It is equity; today it’s there, and tomorrow it could be gone. We don’t know where the market is going. We can’t predict the future.
So, again, do not do it. Invest based on cash flow; invest based on making an absolute fortune. When you make more money, pay your taxes fair and square. I said that the tax system favors business owners and folks doing well, so I’m sure you’ll have other tax advantages you can use through a good accountant.
Investors: What do you think of this assessment?
Leave your thoughts below!