8 Reasons Single Young Professionals Pay A Lot In Taxes (and what they should do about it)

It’s tax time and if you’re like most Americans you’re either hoping for a refund or praying you don’t owe Uncle Sam money you already spent. Unfortunately, many single young professionals are in the latter group, my brothers included.

After doing some research, asking other young professionals, and talking with my father (who is a government auditor) I began to learn several key reasons why my brothers’ tax rate, and yours too, may be much higher than the average. Here’s what I discovered….

1. They make a lot of money. This first reason is self-explanatory. In order to pay a high amount in taxes you usually have to be earning a high income. While everyone’s definition of “high income” may vary, it’s safe to say that if you are a single young professional making at least 6 figures per year (in any city except San Francisco, LA, DC, or NYC) then you are probably doing pretty well for yourself. Our tax code is progressive, which means that the more money you make the higher percentage you pay in taxes. While this may be a huge drag for many people in the higher tax brackets, the government provides services and protections we all benefit from and we can’t expect those struggling to provide for their basic needs to fund it. Much of the burden falls on the high earners.

2. They earn most, if not all, of their income from their employer. Earned income, such as the salaries we get from our jobs, is taxed at a much higher rate than passive income or investment income. So, if you get all of your money from your job and have not started generating other revenue streams from various investments or business ventures then you will be taxed at a higher percentage. Some young professionals make a good portion of their income from commissions due to sales or may earn end-of-the-year bonuses from their job. If these bonuses or commissions come in the form of a separate check, they are taxed at an even higher rate (22% in 2018). This means that nearly a fourth of the extra money they earned went directly to the government in taxes. Whether it’s all “earned income” from salary or a combination of salary, bonuses, and commissions, the issue is that the type of income they receive is taxed at a high rate.

3. They are single. It is no secret that married people have lower tax rates than single people. Just look at the tax brackets and you’ll see that a married couple making the same amount of money as a single person will pay much less in taxes each year. Why? Well because back in the day it wasn’t as common for both adults in a marriage to be employed. Typically, only the male worked and the wife stayed home to raise the kids. Thus, the government gave a tax break when people got married because it assumed that there was only 1 person working and didn’t want to overtax that one person who had to also use part of his (or her) earnings to financially support the non-working spouse. Nowadays, it is much more common that both people in a marriage work, but that tax benefit is still in place. Many young professionals are single and have waited longer to get married, thus they end up paying a higher portion in taxes. (Of note, this rule is reversed for couples that make over $600,000 a year, but for most folks, married couples pay less in taxes than single people.)

4. They do not have kids. The government wants people to procreate. Having kids that grow up to be productive members of society benefits the country as a whole and solidifies our viability as a nation. But kids cost money. Those little humans have so many needs and require a plethora of resources that can be quite expensive. The government understands this fact and has various tax breaks in place for people who have kids as a way of saying “here’s a small token of our appreciation for taking care of the little people.” Parents get a tax credit for raising kids, additional reimbursements for childcare costs, and other tax deductions for educational expenses. This does not make up for how much parents spend since kids are quite expensive, but it does help. Many single young professionals don’t have kids, so they are ineligible for these credits and tax breaks.

5. They do not have any dependents. Along with receiving a tax credit for having kids, there are also tax deductions for taking care of other people. Anyone who takes care of someone who can not, or does not, care for themselves (such as a child, disabled person, non-working relative, or elderly parent) can file his or her taxes as “head-of-household” instead of “single” which makes them eligible for larger tax deductions that save them even more money. Now I’m not suggesting that young professionals become fiscally responsible for other people, but I am pointing out the noticeable difference in tax savings that come from changing one’s tax filing status from single to Head-of-Household.

6. They do not own a home. Many young professionals prefer to live in major cities. They like being close to their jobs and having the convenience of apartment-style living (i.e. free maintenance repairs, in-house gyms, the freedom to move to another place after the lease ends, etc.). As a result, they pay rent. The only bad thing about paying rent and living in an apartment is that they are ineligible for one of the largest deductions in the tax code: the mortgage interest deduction. Many people who own a home have a monthly mortgage payment (since they didn’t pay the full cost for the home up front). While a portion of this mortgage payment is used to pay off the amount they borrowed from the bank, another portion of this monthly payment goes towards “interest” (the fee that the bank charges for loaning you money for the home). The government wants people to purchase homes and have reliable housing so there is an incentive in the tax code that allows homeowners to deduct the portion of their monthly mortgage payment that is “interest” from their taxes. When you first buy a home the “interest” portion of the mortgage payment is a fairly large percentage, so the mortgage interest deduction adds up to a large amount in tax savings. Thus, while many single young professionals are paying rent, some of their counterparts have purchased a home. Even though the monthly payment for the person who lives in a home may be the same or slightly higher than the cost of rent, the person who lives in the home is able to deduct a large portion of their monthly payment from their taxes and could be saving tens of thousands of dollars each year.

7. They are not putting much money into retirement accounts. Although some jobs may not offer a 401K, the majority of salaried jobs have a retirement account in place for their employees. The advantage of these accounts is that many of them are “tax-deferred.” This means that when you contribute to retirement plans like a 401K, you aren’t taxed on the money you put into the account until years later. As a result, the more money you put into your retirement account now, the lower your tax rate will be when you file your taxes each year. Despite these tax savings, many single young professionals don’t put as much money into their 401Ks as they can. To be fair, it is usually because they prefer to have more money available to them during each pay period. They might have other uses for that money, want to prioritize paying off their student loans, or may simply desire to live a more affluent lifestyle. While these are all understandable reasons, the fact that they are not contributing more to their 401Ks raises their tax rates.

8. They do not have enough money coming in from investments. The profit you make from investments (whether it is investing the stock market, real estate, or various businesses) is taxed at a much lower rate than earned income from your job. Sometimes it can even be shielded from taxes entirely. If single young professionals really want to lower how much they pay in taxes, they may need to invest the money they have in ways that can decrease their tax rates and add to their monthly incomes.

Despite all of these reasons for a high tax rate, my solution isn’t necessarily to get married, start having kids, or quickly buy a home or condo. While those are all viable things to do, I don’t advise that anyone rush into a decision like that. Making a decision in haste could have endless repercussions that could far outweigh the tax savings.

Instead, single young professionals should start actively investing more of their money. I am not suggesting that they randomly buy some stocks they saw on Bloomberg, or start investing in things they barely understand (like Bitcoin). Single young professionals should strongly consider starting a side business or begin investing in things like commodities or real estate. They will have to increase their knowledge on whichever route they choose so that they make educated investment decisions. Nevertheless, becoming an active investor or business owner will not only lower their tax rate, but it will also increase their monthly revenue and make them less dependent on the salaried jobs that keep taxing them at high rates.

To summarize, many single young professionals pay a lot of money in taxes. While each person’s situation may differ, there are usually 8 main reasons their tax rate is so high. They make a high income, they get most of their money from their jobs, and don’t actively invest a significant portion of their income. They also are single (and forgo the tax benefits of being married), many don’t have kids or dependents (which may save them money overall, but still make them ineligible for the plethora of tax incentives available to parents). Plus many of them prefer the perks of apartment style living (and are ineligible for deductions available to homeowners). Lastly, they do not contribute as much to their retirement accounts (which would further decrease their tax rates). Until these single young professionals decide to get married, procreate, and find a home, they should strongly consider investing more of their money. Profit earned from investments can not only add to their monthly incomes, but it can also substantially lower the amount they pay in taxes. A pretty sweet deal, if you ask me.

Do you agree? What things do you think you could start doing to lower your tax rate?

10 Things To Remember Before You File Your Taxes

It’s tax time and most of us are getting ready to gather documents for one of our family members or a rep over at H&R block. Wait a second though. Instead of paying someone to file your taxes or merely hoping the person doing them doesn’t make any mistakes, why not try to learn a little about taxes (and how to reduce them) for yourself?

Learning how to do your own taxes probably isn’t number 1 on your bucket list, but face it.  No one is going to care as much about your money as you are.

The more you know, the more you can make sure you’re getting all the tax credits and deductions you can. Plus, learning about taxes helps you rethink how you can better structure your money next year to pay even less than you are paying right now.

As you think over the idea, here are a few things to remember to help you get through tax season this year:   

1. Many people will pay less money in taxes this year. With the new tax law, there are a few allowances that many people benefit from. First, the tax rates are lower for people in each income bracket. For example, last year the marginal tax rate for single people with an adjustable gross income of least $38,000 was 25%, this year it will be decreased to 22%. Last year, the marginal tax rate for married couples with an adjustable gross income of at least $165,000 was 28%, this year it will be reduced to 24%. Along with lower tax rates for everyone, the standard deduction was increased this year to $12,000 for singles and $24,000 for married people. This means that many people will be able to deduct even more money and pay much less in taxes this year. 

2. Consider filing taxes if you have student loans and are about to graduate. Although many full-time students don’t need to file taxes since they probably don’t have any income, there is an entirely different reason you may want to file taxes. Oftentimes, your student loan payments are based on how much money you made the previous year. In other words, they are “income-based.”

   If you can show an income of zero dollars this year when you file your taxes, when you graduate from your school in a few months and have to start paying back your student loans there is a very real possibility that your required payment will be zero dollars for the first year. How is this possible? The initial payment calculations are based on the income you made the last time you filed your taxes, so if you file taxes this year with an income of zero dollars then your student loan repayment for the first year may be zero. (This has happened for many graduating medical students who entered residency training programs as doctors so I strongly advise you to consult a student loan advisor and at least consider filing taxes. Many tax preparers will do it for you for free.)

3. If your refund is large, then you should consider adjusting the amount you have deducted from each check throughout the year. Although it can feel nice to get a large refund each April, it may not be the wisest thing. Most of the time when you get a huge refund from the government after filing your taxes it is because you paid the government too much in tax money throughout the year. In other words, you had too much deducted from your check each month and the government is now returning the excess amount. Basically, you let the government use and invest your money as it wanted to and then return it back to you a year later.

   Because the government has this excess amount of YOUR money, you weren’t able to use that money during the year as you would have liked. Because the government had your money you were not able to invest that money in stocks or real estate etc. which would have allowed you to earn a profit on that money as interest. So even though the large check feels good, why would you allow the government to have access to your money just for them the return it back to you in April interest-free? It may be better to stop giving them the excess in the first place. Talk to the person who does your taxes. Consider having less money deducted from your check each pay period and instead use that money to increase your monthly income or invest it to make a profit.

4. Tax credits and tax deductions are the key to helping you save money. Tax credits offset the amount you owe to the government in taxes “dollar-for-dollar.” Tax deductions reduce the amount you owe the government by a “percentage of each dollar.” Even though they are different, both tax credits and deductions are government incentives that lower your tax rate. They are the ultimate key to helping you save money in taxes so double check to make sure you have claimed all of the tax credits and deductions you are eligible for. Some examples of tax credits are: the family credit (for having kids), the education credit (to help offset the cost of college tuition), and investment tax credits (for business owners and investors who build low-income housing, do research, or develop innovative products and services). Examples of tax deductions are charitable contributions (money you give to charities, non-profit organizations and churches), health savings accounts, student loan interest, home mortgage interest, etc.  

5. Make sure you’ve contributed as much as you can tolerate into your IRA (if you have one). I went through the basics of an IRA in a previous post, but in case you missed it (or skipped it), I’ll do a brief overview here. An IRA is an Individual Retirement Account that allows you to save and invest money for retirement in a way that lowers your taxes. When you save for retirement you don’t just let money sit in a savings account. Instead, the money in the retirement account is usually invested in the stock market with the hope of it making even more money in profits. When people invest money on their own, they must pay “capital gains” taxes on the profit they make. However, when people invest money inside of retirement accounts like and IRA or 401K, they are taxed at a lower rate and often don’t have to pay taxes on this money until years later.

   Since IRAs and 401Ks allow you to save money in taxes and delay paying some of the tax money you owe, it is best to put as much money into these accounts as you can afford. The deadline to contribute to a 401K was December 31st (unless you filed for an extension), but you can still contribute into an IRA up until the tax filing deadline and use that contribution to lower the amount of money you owe in taxes this year. Of note, the IRA and 401K contribution limits will increase for 2019 so you may be able to save even more money through these accounts next year.  

6. Get proof of any charitable donations. It might seem a little weird to go calling your church about the tithe money you donated on Easter Sunday, but it can save you quite a bit of money on your taxes. The government likes when we give to those less fortunate or to charitable organizations so it gives us a tax deduction for doing so. When people file taxes, they can opt to reduce the amount they pay in taxes by taking a “standard deduction” (which is $12,000 for a single person or $24,000 for a married couple) or they can choose to “itemize” their deductions. As you start making more money and your income rises, the amount you pay in taxes may increase as well. One way to combat that it to itemize your deductions, especially if the total amount you “itemize” is higher than the default “standard deduction.”

   One of the things you can itemize is charitable contributions (including donations to nonprofits and churches). Most churches keep decent records and should already be mailing you a statement of your contributions over the past year, but if your church hasn’t sent you a copy of this record then you should definitely ask for it. In general, make sure you are keeping track of donations to churches, especially your tithes, in some sort of record-keeping book or app if you donate using cash. In order to deduct what you paid from your taxes, the government needs proof that you actually donated. It’s much harder to provide this proof if you pay with cash and/or if your church or organization doesn’t have the best accounting methods. Keep your own records, just in case.

7. Be sure to deduct any mortgage interest you might have paid on your home. When you take out a mortgage to purchase a home, the bank charges you a fee when they loan you the money. That fee is called “interest” and you will pay a small percentage of it each time you send in your monthly mortgage payment to the bank. Since this “interest” is not being used to pay back the loan and is money that the bank receives as profit, the government allows you to deduct most, if not all, of this interest from your yearly taxes. In fact, you can deduct up to $750,000.

   Now you obviously cannot deduct what you didn’t pay. So, if you only paid $10,000 in mortgage interest last year, then you can only deduct $10,000 from your taxable income. Nevertheless, the limit is pretty high which means that most of the interest you paid will be deductible and work to lower how much you owe in taxes. This is important because oftentimes when you first buy a home, the mortgage payment you send to the bank each month is mostly interest. Thus, you can deduct this huge amount in interest from your taxes.

   This is one of the main reasons young, single, professionals who are high-income earners are encouraged to purchase a home or a condo instead of renting. The argument is that they could be paying off a mortgage and deducting a huge amount of that monthly mortgage payment from their taxes which would save them thousands of dollars in taxes each year. Now there are lots of other costs and fees associated with buying a home that you have to keep in mind and I briefly mention them here. Long story short, I don’t advise anyone to simply rush into buying a home just for the tax benefits, but I am saying that it can be a huge tax savings, everything else being equal.

8. Get a statement of how much you’ve paid in student loans (particularly the interest). You may also be able to deduct the money you paid in student loan interest from your taxes. In fact, this deduction is similar to the mortgage interest rate deduction explained in above. When you pay back your student loans you are paying back the amount you originally borrowed (the principal) along with the fee the bank or the government charged you for borrowing the money in the first place (the interest). According to the tax law, you can deduct up to $2,500 of interest you paid towards your student loans from your taxable income (as long as you make less than $80,000 a year for a single person or $160,000 as a married person). 

9. Calculate your business expenses and be sure to deduct them when you file. If you are self-employed, contract out your services, own a business, or have just launched a new website, you are eligible for deductions that can help lower your tax rate. For example, if you work from home, you can deduct a portion of your rent, internet, and electric bills as “business expenses.” You can even deduct the cost of gas as you travel to and from clients and include any educational materials or resources you purchased when you first started. Although you also must pay taxes on any income you get, the bonus of getting to subtract out any business expenses or materials you purchased is a decent deal. Just be sure to keep good records and/or download an app on your phone that makes it easy for you to scan and save receipts & invoices from clients.

10. Real estate Investors can deduct even more money from their tax bill. If you are new to the world of real estate investing then you’ll be pleased to know that real estate investors can deduct a lot more money from their taxes than most other people. Notice I said real estate investors and not “homeowners.” If you simply own a home then you can usually only deduct the mortgage interest, BUT if you invest in real estate you can deduct a lot more than that. Real estate investors can deduct the cost of things like property taxes and insurance, repairs and maintenance (up to a certain point), transaction costs in the form of “amortization,” etc. Plus, with the new tax law, there are even more deductions. For example, real estate investors can now deduct even more depreciation sooner through new forms of cost segregation and may even be able to deduct a large percent of the purchase price (via the 20% income pass through deduction) if they meet certain qualifications. The nuances of tax deductions for real estate investors can get quite complicated and I won’t pretend to know them all. My point is that if you invest in real estate you are probably eligible for more deductions than you think, which would drastically lower the amount of taxes you owe. I’d strongly advise you to get a tax advisor that specializes in real estate.

To summarize:  You should consider learning a little bit about taxes. Even though you may not want to actually file your own taxes, learning some basics will help you figure out how to structure your life to save more money in taxes each year. Students graduating from undergraduate, masters or doctoral programs should consider filing their taxes this year so that their income-driven loan repayment is zero dollars for the first year. Everyone who files taxes should know that qualifying for more tax credits and tax deductions are the key to saving you more money.

If you are going to get a big refund in April, you are probably having too much money deducted from each of your paychecks. You should speak with a tax advisor about reducing it, so you can have more money on your check each pay period. Contributing more money to an IRA account will save you more money in taxes and you still have the chance to contribute to this account before you file your taxes this year. If you give to charity or pay tithes, get proof of how much you gave because it can lower how much tax money you owe.

If you bought a home or have paid money in student loans get a statement of how much money you paid in interest because you can subtract that interest money from the amount of taxes you owe. Anyone who owns a business can subtract “business expenses” even if the business just began and hasn’t started making money yet. Lastly, real estate investors are eligible for many deductions this year so they should be sure to consult with a tax advisor that specializes in that particular area and use the IRS website as a guide.

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Benefits of Real Estate Investing, Part 2

In addition to helping you purchase assets, increase your net worth, and lower your tax rate, real estate has other benefits as well…

1. You can invest in it using leverage aka “other people’s money.” When you purchase real estate, either as a home to live in, or as an investment property, you don’t have to pay the full cost of it upfront.

   When people buy a home, they usually pay a small percentage of the cost as the “down payment” and then get a loan from the bank (i.e. a mortgage) to cover the rest. This method can be used in the investment world as well.

   For example, you can buy a home to rent out to family members or even buy an entire apartment building in your local city with the help of a loan from the bank. In fact, many investors fund a majority of their real estate deals using other people’s money (whether that’s money from the bank or money from investment groups, private funds, grants from local city governments, or small loans from family and friends).

   Experienced real estate investors raise money for the down payment from other rich people and then get a loan from the bank to cover the rest. By using other people’s money to fund the down payment and securing a loan from the bank to cover the rest, these investors get to own real estate properties even though they didn’t use any of their own money to purchase them. Quite a deal, if you ask me.

   Although they have to pay back these funds eventually, there are several investment strategies (like refinancing) that allow these investors to pay back that money much sooner while still keeping a big profit for themselves. You can do this too.

   Having the ability to use other people’s money to make a decent profit for yourself, and for them, is a pretty sweet deal.

   Investing in the stock market doesn’t really offer this kind of advantage. Banks, private funds, and wealthy businessmen are far more willing to loan you money for a real estate deal than for almost any other kind of investment.

2. You can protect your assets. As you can imagine, the more money you get the more you are going to want to protect it.

   The last thing you want is to get into a car accident or make a costly mistake on your job and have someone sue you for every dollar you’ve ever earned (yes, people do this). Thus, “asset protection” or protecting your net worth from creditors and lawsuits is an area of extreme interest for wealthy people in America. Real estate can be great for that.

   Oftentimes, when people purchase a piece of real estate with the goal of making money from it, they don’t purchase it the way you would normally think.

   Instead of having money in their checking account and simply paying for all or part of it, they set up a protection entity called an LLC. The main goal of setting up an LLC and buying the property through that LLC is that it protects the value of your investments from lawsuits.

   Thus, if someone sues you personally they cannot get any money or value that is within the LLC and if one of the tenets in your property decides to sue to the apartment that is held within the LLC, he or she is not able to get any of your personal money or net worth.

   In other words, the LLC separates your personal money from your investment money, even though you are in charge of both. In fact, many rich people and smart investors set up tons of LLCs.

   For example, they may partially own 20 houses and set up a different LLC for each home. That way, if someone sues them personally or someone sues one of their LLCs, that person cannot get any of the money in any of the other properties.

3. You have the freedom to decide how involved you want to be in the investment. You can invest in real estate “actively” and use it as a job OR you can invest in real estate “passively” in your spare time. You get to decide. It caters to everyone.

   Many of us enjoy our day jobs. We like the work we do and the impact it has on others. However, our jobs often take up a significant portion of our time and don’t leave much room for anything else, especially for those who have a spouse or kids.

   One of the things I love about real estate investing is that once you learn some investment basics, it doesn't have to take up much of your time.

   If you’re the opposite of me and you hate your day job entirely, there are other types of real estate investing that are more active and can be used to completely replace your old job.

   In other words, if you want to quit your job and instead make real estate your career, then you can invest actively. However, if you love your job and just want to use real estate as an additional stream of income then you can invest passively.

   Both types of investments make money, you just have to decide which side you are going to be on.

   Theoretically, the active investors put themselves in a better position to make more money (or use less of their own money in the deals) than the passive investors, but believe me, both types of investors walk away from the investments very happy (provided they found the right deals in the first place).

My point? In addition to things like extra monthly income, lower taxes, and appreciation, real estate offers several other benefits. It gives you the chance to invest using other people’s money which makes it less of a risk and a much lower financial burden for you. Real estate investing also has several entities, like an LLC, which will allow you to protect the money in your investment from lawsuits and creditors. Plus, there are so many different forms of real estate investing that you can choose how involved or uninvolved you want to be in a way that caters to your lifestyle and competing demands.

Tell me, are you considering real estate investing? Which advantage of real estate investing appeals to you most?

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Benefits of Real Estate Investing, Part 1

There are several different investments you can make, but I think real estate is one of the best.

1. It allows you to buy an asset (something that goes up in value). Now I know some of you may be thinking back to the housing market crash of 2008 or the impending downturn many speculators think will happen in 2019, but hear me out.

   Even though the housing market may experience dips here and there, it always recovers. As a whole, houses, apartments, and commercial buildings increase in value over time, even when you factor in inflation.

   In 2009, studies showed that the average cost of a 3 bedroom house in my home state of Florida was around $175,000. Although prices dipped in 2012 to $125,000, they recovered soon afterwards. As of January 2019, the average price for a 3 bedroom home in Florida was around $230,000, an increase of $55,000 from 10 years ago.  

   Since houses increase in value over time, they are a great investment to have. So instead of using your money to buy liabilities like cars, clothes, and phones that decrease in value from year to year, investing in real estate allows you to buy something that increases in value.  

2. It can be used to increase your net worth through “appreciation.” For those new to real estate investing, appreciation is the fancy term used when something increases in worth. When you subtract your debts (student loans, credit card bills, and any bank loans) from your income and assets (things you own) what is left over is deemed your net worth.

   Investing in real estate gives you the chance to further increase your net worth through a principle called appreciation. In general, there are two forms of real estate appreciation, “forced” appreciation and “unforced” appreciation.

   Forced appreciation is when real estate increases in value due to circumstances you can control. Examples of this forced appreciation are when people buy rundown properties and renovate them afterwards (in an effort to increase their value) or when apartments increase the monthly rent (in order to increase their revenues).

   Unforced appreciation, on the other hand, is when real estate increases in value due to circumstances you cannot control. For example, a person may purchase a home and then 5, 10 or 15 years later he or she may realize that the home is worth significantly more than what they originally paid for it.

   Many times, the homeowners didn’t do anything special to cause the value of the home to increase besides pay their mortgage and mind their own business. The value of their home increased simply because more people were looking to buy in their area, the local economy had improved as whole, or the land on which the house was built became more valuable. Either way, the homeowner didn’t have much to do with the appreciation. It occurred do to factors he/she had no control over.

   Thus, whether it’s forced or unforced, as real estate appreciates in value your overall net worth increases as well.

3. Investing in real estate can increase your cash flow. Cash flow is what real estate investors call the money that is deposited in their bank accounts for investing in certain deals. It’s their profit or the money they get to keep after subtracting their expenses from their revenue.

   Since it typically shows up as a check or a direct deposit into one’s bank account, investors call it “cash” and since it happens periodically (every month or quarter) it “flows,” hence the term “cash flow.”

   Real estate investors usually generate cash flow by charging their tenets a monthly rent. After investors collect their rent money, they pay for any expenses or repairs, send a check to the bank to pay the monthly mortgage, and keep whatever is left as their cash flow. This cash flow ends up serving as an extra stream of income to supplement the money they already make from their day jobs. It’s a pretty sweet deal that puts more money in their pocket each month.

4. Investing in real estate can help you save money on taxes. For the most part, any time you sell something, or make money from providing a service or job, you owe the government taxes.

   The government provides several free services and protections we all benefit from (ie. firefighters, police officers, schools, national defense, social programs, etc) so when we make money, we must pay a certain percentage back to government in return.

   Technically speaking, a real estate owner is supposed to pay taxes on the profit or cash flow they collect in rent. However, not many of them do, legally.

   The reason real estate investors don’t pay taxes on this profit is because the government actually wants people to invest in real estate. It understands that citizens need a place to live and housing options can be scarce. Thus, it wants to incentivize its citizens to rent to each other.

   One way it does this is by allowing real estate investors to subtract out any real estate losses from real estate gains. The real estate loss that most investors claim on their tax returns in order to minimize the amount they pay in taxes is something called “depreciation.”

   Depreciation is the real estate concept used to describe the reality that the materials (bricks, windows, pipes, etc) used to make a home or apartment building will wear out over time and need to be replaced.

   Because of this fact, the government allows real estate investors to subtract a percentage of the real estate that “depreciates” or wears out over time from the profit they make. By the time most investors subtract out this “depreciation” they end up reporting a much lower amount in overall profit and this allows them to pay a much lower percentage of taxes than they would have otherwise.

   Plus, many good real estate investors take advantage of other government incentives, in addition to depreciation, that virtually wipe out most of the taxes they would have had to pay. In other words, real estate investors put money into deals, make a profit from those deals, and avoid paying taxes on most, if not all, of that money due to various government incentives in the tax code. If you start investing in real estate, you can begin taking advantage of some of these incentives as well.

My point? Real estate investing offers many benefits. It allows you to purchase something that increases in value and gives you the opportunity to raise your net worth through different types of appreciation. Plus, it can serve as a second stream of income by providing you with monthly cash flow. With the help of a good advisor, it can also make you eligible for government incentives that lower your tax rate.

Now that you know some of these incentives are you willing to give real estate a try? Are you more open to the idea of looking into some real estate deals?

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