Tax Planning and Real Estate Investments for High-Net Worth Investors: Part 3

How to Choose High Quality Real Estate

Start a search for real estate investment opportunities, and you’ll quickly come up with a long list of options. Among the ones you find, many will boast of tax benefits. They’ll offer to help you save a certain amount of what you owe each year to the IRS.

When I speak to individuals, however, I warn against investing in real estate solely for the attached tax savings. There are other factors that may be more important for the return on your investment. Let’s look at choosing high quality real estate, with an eye for tax planning for high-net-worth investors

Choosing High Quality Property

One of the most important factors to understand is to not let the “tax tail” wag the “investment dog.” What I mean by that is tax benefits are great… if the underlying investment is investable on its own merits. Several common types of property that you’ll see play into the strategy of real estate investing are: 

Besides these strategies, you’ll find real estate properties fall into different asset classes. Some of the      asset classes that are used in investment portfolios include:

  • Convenient store
  • Industrial
  • Medical
  • Multi-family 
  • Senior living facilities
  • Student Housing
  • Office
  • Retail
  • Hospitality
  • Self-storage
  • Mineral rights (e.g. investments in minerals beneath the ground)

Selecting the Right Asset Class          

When investing, you’ll need to choose an asset class and align it with a strategy in the right region. You’ll want to look for a property’s highest and best use. This requires the right level of capital and expertise. 

For example, you could find a distressed apartment and take it on as a value-add property. You might develop a self-storage center or invest in a convenience store in a prime location. The decisions you make will depend on the market and geographical factors involved in the investments. 

Investments in real estate property bring three potential benefits. First, they provide a steady cash flow. Second, the property typically appreciates in value. Third, there are often tax benefits tied to this type of investment. 

Looking at Your Income Level

For high-net-worth investors, there could be certain tax benefits that come from investing in real estate. The key to making this strategy work lies in choosing the right type of property. The exact savings will depend on your level of passive income (i.e. what they earn from other investments such as real estate income).

To make sure you’re getting the most out of your efforts, your advisor should go over your options with you. This typically occurs during the third and fourth quarter of the year. It is a separate conversation, apart from other tax discussions. 

When your advisor last invited you in, did they discuss the benefits of tax planning with real estate? If not, it may be time to bring in an additional team member.

Contact information
Matthew M. Chancey, CFP®
Mobile (407) 832-0805

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Matthew Chancey is a Registered Representative of Coastal Equities, Inc. and an Investment Advisory Representative of Coastal Investment Advisors, Inc. Neither Coastal Equities, Inc. nor Coastal Investment Advisors, Inc. is affiliated with Micel Financial LLC. Investment Advisory Services are offered through Coastal Investment Advisors, Inc., and securities are offered through Coastal Equities, Inc., Member FINRA/SIPC, 1201 N. Orange St., Suite 729, Wilmington, DE 19801.

Coastal and CoastalOne are trade names for the Coastal Companies. The Coastal Companies are Coastal Equities, Inc., Coastal Investment Advisors, Inc., a US SEC Registered Investment Adviser and Coastal Insurance Services which is made up of several affiliated insurance agencies, co-located at 1201 N. Orange Street, Suite 729, Wilmington DE 19801