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5 Real Estate Investment Tax Strategies That Can Protect You From Inflation

Inflation can ruin your investment profits in several ways. Negative or declining interest rates, for instance, are one of many consequences of inflation. But there are ways you can protect yourself from inflation and its ravaging effects. Inflation and Real Estate Inflation is one of the biggest threats to real estate investors. Inflation equals a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services. This causes prices to rise, which means you can’t buy as much for your money as you could before inflation. It’s also called “cost-push inflation” because businesses have more costs to produce goods and services than to pay for those costs. That makes it harder for them to make a profit, which causes them to raise prices. Inflation can be good or bad for investors in multifamily properties, depending on your situation. For example, if you’re looking to sell a property in a few years, you may want to consider strategies that protect you from inflation. But if you’re planning on holding onto your investment for decades, then inflation won’t be as much of an issue. Multifamily Real Estate As A Hedge Against Inflation Is Inflation Bad For Real Estate Investors? The impact of inflation on real estate varies depending on whether you are a buyer or seller. Generally speaking, when inflation increases, so do rents and property values which means that sellers should benefit from higher selling prices while buyers may be hurt by rising mortgage payments (although they will also benefit from lower down payments). Real estate is considered an inflation hedge because it tends to perform well when inflation rises. The reason is that as prices increase, so do rents — at least in most areas of the country.  Top Five Real Estate Investment Tax Strategies Since inflation reduces the purchasing power of money, real estate investors need to protect their assets from inflation by using tax strategies. Here are six multifamily tax strategies to help protect your investments from capital gains taxes: 1. Tax-Free Exchanges with Like-Kind Property: The tax code allows you to exchange your existing property for a like-kind property without paying taxes on the gain from your original property. This is one of the most powerful strategies for protecting yourself from inflation because it allows you to defer taxes on all or part of your capital gains. For example, if you own an apartment building and want to sell it at a profit, you can exchange it for another building instead of selling it outright. If you exchange at the right time, you could avoid paying taxes altogether. However, this strategy has limitations: You must have owned and used the property for at least one year before receiving any tax benefits from an exchange. You can’t make an exchange if there was a significant improvement or customizing made after purchase (like adding an elevator). And finally, if your original property is worth less than $250,000 when making an exchange (or $500,000 if filing jointly with a spouse), then there are no limits on how much gain you can defer or avoid altogether. 2. Tax-Advantaged Investments Accounts Tax-advantaged investments, such as 401(k)s, IRAs, and Roth IRAs, are a great way to keep more of your hard-earned money. Here are some of the most common types of tax-advantaged investment accounts: 401(k)s: These plans allow employees to contribute pre-tax dollars into their retirement accounts. The contributions are deducted from an employee’s paycheck before taxes are taken. The money then grows tax-free until it’s withdrawn during retirement years. Roth IRAs: Roth IRAs offer many of the same benefits as 401(k)s with one major difference—the contributions are made after taxes have been paid. Because contributions must be made with after-tax dollars, there is no tax deduction when making withdrawals during retirement years. However, any growth in the account from interest and investment gains can be withdrawn tax-free at any time during retirement. 3. Hedging Your Portfolio With Options Options give you the right to buy or sell an asset at a specific price on or before a certain date. You’re betting on whether the underlying asset will increase or decrease in value before it expires. For example, if you’re confident that inflation will rise over the next year, you might purchase put options — which allow you to sell assets at a specified price — as an insurance policy against rising prices. If inflation rises, these options will become valuable because they allow you to sell assets at higher prices than what would otherwise be possible without them. This strategy can also be used with other types of investments, such as stocks and bonds, to protect against losses from deflation instead of from inflation. 4. Accelerated depreciation deductions Accelerated depreciation deductions allow investors to write off more than what they actually spend on their properties, thus reducing their taxable income. This strategy allows investors to reduce their tax liability and increase their cash flow by writing off more expenses than they actually incur on their properties. 5. Convert to Qualified Leases If you own a rental property, you may be able to convert your rental income into a qualified leasehold interest and avoid paying taxes on the money received until you sell the building. This strategy works best if you’ve owned the building for over two years and plan to hold onto it for at least five years to qualify for depreciation. You can also use this strategy if you’re interested in moving out of the property management business but want to keep collecting rent checks from tenants long-term. Conclusion As multifamily real estate investors, you might think that you need to watch out for the usual income taxes, but taking advantage of some of these strategies can help keep your tax liability lower. In addition, there are some ways that property management companies can use to maximize their profits and protect themselves from inflation. … Read more

Multifamily Real Estate As A Hedge Against Inflation

Inflation is a serious concern for investors. When inflation is up, interest rates tend to be up as well. That’s because the Federal Reserve will raise interest rates if inflation increases to keep it in check. When interest rates are high, it makes sense for investors to look at other ways to make money. One way is through multifamily real estate. Multifamily real estate is a good hedge against inflation because it’s an asset that can increase in value and provide income. As inflation increases, the value of your property will increase. In addition to selling it at a higher price, you also have the option to rent it out and make money from your investment. When you buy a multifamily property, you’re purchasing more than just a house. You’re buying an asset that can be rented out and generate income for you. This means that if inflation increases, your property could also increase in value. This is one of the most important reasons why investing in real estate is one of the best ways to protect yourself against inflation. High Inflation And The Stock Market When inflation rises rapidly, it becomes difficult for investors to make money on the stock market because stocks are considered long-term investments and tend to increase more slowly than inflation over time. For example, if inflation were 10 percent per year, stocks would have to go up 11 percent just for the investor to break even after taxes and fees were removed from their returns. Multifamily Real Estate As A Hedge Against Inflation Inflation is a severe concern for real estate investors. Inflation can erode the value of investments in real estate and other assets, making it harder to generate income. However, there are several ways that investors can hedge against inflation to protect their portfolios. One way to hedge against inflation is through multifamily real estate investments because this asset class has historically withstood the economic pressures of rising prices. This makes sense when you consider that the cost of living also increases over time. As rents rise, so does the demand for more affordable housing options such as apartments and condominiums. Multifamily real estate is an asset class that can hedge against inflation in a few different ways: It can provide a relatively stable cash flow over time. It can act as an inflation hedge because it increases in value over time. The property’s value is based on its income stream, which increases as rents increase due to rising rents and inflation. For example, if you own a building that brings in $2 million per year in rental income and your annual mortgage payment is $1 million per year, your net cash flow (income minus expenses) will be $1 million per year (assuming no vacancies). This means that if you are paying 6% interest on your mortgage loan, the value of the building is $20 million ($1 million / 6% = $20 million). If the building appreciates by 3% per year (which would happen if rents were increasing), then after five years, it would be worth $22 million ($22 million – $20 million = $2 million). While you still pay off your mortgage loan at 6%, your net worth has increased by 3%. Another way to hedge against inflation is by ensuring that your properties are well-maintained and managed effectively. If you own an apartment building with tenants who are happy with their living situation, they’ll be less likely to move out or complain about problems with their apartments. This means your property will remain more valuable than others in its area and allow for future appreciation in its value over time. Final Thought Overall, multifamily real estate is an excellent investment to hedge against inflation when prices rise. Of course, it’s still important to research before you dive in and buy property, but once you’ve chosen the right location and established a sound financial plan, you can start building wealth with prudent and practical means. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.


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