REAL ESTATE AS AN INVESTMENT: TAX SHELTER STRATEGIES AND INCOME

Real estate is a popular investment for many reasons. It can provide a steady stream of income, the potential for capital appreciation, and a number of tax benefits.

In this blog post, we will discuss some of the best tax shelter strategies for real estate investors, as well as how to generate long-term income from your real estate investments.

INTRODUCTION

Investment real estate is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence while the others are used to generate rental income and profits through price appreciation. The tax implications for investment real estate are often different than those for residential real estate.

Real estate investment is the practice of purchasing property as an investment rather than as a primary residence, in order to generate income. It may be simply defined as any piece of land, structure, infrastructure, or other tangible assets that are often immobile yet transferrable to get a profit from it. Real estate investing uses real estate properties as an investment vehicle and gains profit through a variety of methods. It can be as simple as owning real estate, collecting cash flow in rental income, and selling the asset for a higher price due to appreciation. 

For thousands of years, the real estate business has been a very significant component of wealth. Real estate investment’s main aim is to purchase property with the intention of generating income and capital growth. Residential, farmhouse, business, retail, and leisure are the following examples that come under this category.

TYPES OF REAL ESTATE INVESTMENTS

Residential Real Estate

This category includes villas, townships, single-family homes, multi-family homes, and apartment buildings. . From an investment standpoint, each of these options offer distinct prospects.

For instance, the longevity of the construction and the rising value of land will drive up the prices of well-built villas and independent houses over time. Contrary to this, the value of apartments may not increase after ten to fifteen years of use. Therefore, they must be sold within five to seven years.

Commercial Real Estate

In this type of real estate, we’ve probably seen shopping malls, restaurants, schools, hospitals, and office buildings. They are more expensive to invest in than residential properties, but there are better chances of profit.

Industrial Real Estate

Industrial properties are buildings and factories used for manufacturing goods and storage. In order to keep residents safe from pollutants, they are typically located far from the city.

Despite the property’s recent conversion from agricultural land to industrial use, its value will be significantly higher than that of the nearby farmlands.

Land Real Estate

Land real estate is  India’s least-priced and safest real estate properties i. You need not worry about theft, damage, and upkeep when purchasing real estate as an investment.

Yet, creating passive income from real estate investments also calls for certain unconventional strategies that might only sometimes be successful. However, investing in it is an excellent idea because it can end up being very profitable.

WHY DO WE NEED TO INVEST IN REAL ESTATE?

Real estate has become a good investment option in India with the rising demand for real estate properties.  Buying a new home is always a dream come true for Indian households. While fulfilling this dream gives you emotional satisfaction, it also promises financial growth, as real estate investment in India has a good return on investment (ROI). Investment real estate can provide opportunities for financial gains to investors. Owning investment properties can help build wealth, increase income, and help diversify an investment portfolio.

The benefits of investing in real estate are numerous and can vary depending on the goal of the investor. How much money to invest in a real estate property can depend on the investor's risk tolerance. Also, an investor's time horizon is important to consider when making such a large purchase or investment. 

For millions of Indians, real estate remains their preferred form of investment for the following reasons:

• Appreciation of value: -  Due to a lack of available land, real estate values will undoubtedly rise, particularly in urban areas. It is said that real estate investments yield higher returns over time. A wise real estate investment appreciates over time. Additionally, rents typically rise annually, ensuring increased cash flow.

• Sufficient Cash flow via Rental Income:- By investing in real estate, you can induce cash inflow easily. A yearly rental income is a great way to make a good income. It offers great fiscal security to the investor. However, income from your reimbursement parcels ensures hassle-free retirement.

• Safe and Secured Option: - Compared to crypto and stock markets, real estate is a safer investment option and has grown consistently over the past few decades.

• Tax Benefits: -You could save money on taxes by investing in real estate. There are many tax reductions for putting resources into land. You can save up to INR 1.5 lakh on the principal amount if you choose a home loan under Section 80C. In a similar vein, according to Section 24, you can reduce the amount of interest you pay by up to 2 lakhs. You will also be able to lower your taxable income and make real estate investing more affordable.

TAX SHELTER STRATEGIES

There are a number of tax shelter strategies that real estate investors can use to reduce their tax liabilities. Some of the most common strategies include:

• Depreciation: Real estate investors can depreciate the value of their properties over time. This means that they can deduct a portion of the property's value from their taxable income each year.

• Mortgage interest: Real estate investors can deduct the interest they pay on their mortgages. This can be a significant deduction, especially in the early years of a mortgage.

• Other deductions: Real estate investors can also deduct a number of other expenses related to their properties, such as property taxes, insurance, and repairs.

You can, however, submit your taxes with the revenue agency and have your tax obligation reduced. You can claim deductible costs like management, insurance, advertising, utilities, repair and maintenance, and so forth.

Moreover, you might be able to deduct the difference from your other sources of income for tax purposes if your rental revenue is lower than your running expenditures.

AS AN INCOME OR LONG TERM INCOME

Real estate can provide a steady stream of income through rental income. Rental income can be taxed as ordinary income, but there are a number of deductions that real estate investors can take to reduce their tax liability.

In addition to rental income, real estate investors can also generate income from capital gains. Capital gains are realized when a property is sold for more than its purchase price. Capital gains can be taxed as either short-term or long-term capital gains. Short-term capital gains are taxed at the same rate as ordinary income, while long-term capital gains are taxed at a lower rate.

Real estate can provide a steady stream of income through rental income. Rental income can be taxed as ordinary income, but there are a number of deductions that real estate investors can take to reduce their tax liability.

In addition to rental income, real estate investors can also generate income from capital gains. Capital gains are realized when a property is sold for more than its purchase price. Capital gains can be taxed as either short-term or long-term capital gains. Short-term capital gains are taxed at the same rate as ordinary income, while long-term capital gains are taxed at a lower rate.

RULES OF SUCCESSFUL REAL ESTATE INVESTING

• Educate Yourself : -Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad. Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.

• Set Investment Goals: -A goal is different from a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true.

  Setting clear and specific investment goals becomes your road map and action plan to become financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all.

  Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required.

• Never Speculate: -Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the beginning.

• Maintain Control: - Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.

CONCLUSION

In essence, real estate investments are made to protect money and make a profit. Compared to other investment options, real estate offers significantly better returns, opportunities for leveraging, income tax sheltering techniques, and a higher level of personal control. This is the main reason why people want to invest in real estate.

Real estate can be a great investment for those who are looking for a steady stream of income and long-term appreciation in value. However, it's important to be aware of the tax implications of real estate investing before you get started. By taking advantage of the available tax shelter strategies and maximizing your income, you can reduce your tax liability and increase your overall returns.