Real Estate Investments


Your Home as a Real Estate Investment

After a productive work life, many Americans have purchased a home and acquired significant equity (equity is the difference between the value of a property and any remaining debt secured by that property).

This equity can be utilized to produce income in a variety of ways.

  • You can sell your home to turn the equity into cash for other investments, to move into an apartment, or to cover medical expenses.
  • You many not have to pay taxes on this transaction; consult your tax advisor.
  • You can refinance your home to take capital out for other investments, for vacation property, or for other needs.
  • You can get a “reverse mortgage” on your house, allowing you pull money out of your home without mortgage payments.

Current tax law will often allow you to either completely avoid income tax on the capital gains from selling your home and/or to pay significantly lower capital gains taxes on portions of those capital gains. Again, you should consult your tax advisor or financial advisor to better understand these options. Useful information from the IRS regarding selling your home is available at:,,id=106951,00.html and in IRS Publication 523

REITs as Real Estate Investments

REITs are a way to buy into real estate investments much like purchasing stocks. “REIT” is an acronym for Real Estate Investment Trust. A REIT pools the money of many investors to invest in real estate.

Most REITs invest in the equity in real property, some in mortgages and some in both. REITs often specialize in the types of real estate in which they invest; for example, some specialize in apartment, some in shopping centers, some in commercial or industrial real estate, etc. Additionally, some REITs are simply investment vehicles owning shares of other REITs to provide real estate investment diversification.

Unlike other shared real estate investments, REITs pay no income tax on their earnings so long as they distribute 95 percent of their net income to share holders (REIT shares are called “units”). The distributions are taxed to the unit holders as dividends.


Rental Property as Real Estate Investments

Rental property can provide a number of financial investment and tax advantages to the astute investor. Among these advantages are:

  • Income from rents.
  • Capital appreciation.
  • Tax reduction by depreciating property improvements (such as buildings).
  • Tax reduction by converting ordinary income into capital gains, which is generally taxed at a lower rate.
  • Rental property may be exchanged (called a “1031 Exchange”), if done correctly, without tax consequences. This can be used to build your real estate investment portfolio while postponing tax obligations (consult your tax advisor).


Second Homes or Retirement Properties as Real Estate Investments

Second homes, vacation properties, and retirement properties can also be good real estate investments. They are much like other rental properties with some exceptions:

  • Income from rents, except that your rental income may be reduced by the extent of your personal use of the property. Capital appreciation.
  • Tax reduction by depreciating property improvements (such as buildings); depending on the amount of personal use, tax advantages may be reduced significantly by personal use. Consult your tax advisor to understand this better.
  • Tax reduction by converting ordinary income into capital gains, which is generally taxed at a lower rate.

Of course, one of the main values of these types of properties may be the use you and your family make of the property. The enjoyment value of a waterfront property, a ski lodge, or a condominium in paradise may far outweigh any tax disadvantages of using your own property.