People always talk about how the wealthy pay less taxes then the middle class. How do they do this with the sale of real estate?
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Well I think the statement that wealthy pay less taxes is more nuanced than they just across the board pay less taxes.
What is common is that the wealthy own business, companies, and corporations that many assets can be written off as expenses, including real estate. There’s all kinds of other tax laws I’m not even familiar with that apply too, that effectively allow the wealthy, and especially their corporations, to pay nothing. Part of this is affording teams of expert accountants and tax lawyers that know and kind find loopholes.
I’m not one of those people but generally if you don’t have some kind of business or corporation to attach things to as expenses or something you can’t really offset taxes. I think… but someone else may know better.
You can’t offset taxes using a 1031, a 1031 is used specifically for deferring taxes, i.e. you sell a property that has increased in value but do not have to pay taxes if you buy another, similar property. Also in that category are Qualified Opportunity Zone funds, Delaware Statutory Trusts and UPREITs which work similarly and each have specific limitations on the investment you can roll the capital gains into. Deferring capital gains taxes allows you to use the money you would have paid in taxes on other investments. It also, in many cases, allows you to hand it down to your heirs without either of you paying the taxes.
If you’re looking to offset capital gains taxes, that is done by realizing capital losses, meaning selling other investments at a loss in the same tax year. There are specific rules so for ELI5’s sake if you sold one house at a $100K gain and another at a $100K loss your net gains would be $0 and you wouldn’t owe any taxes.
Earned wages are taxed with employment taxes. FICA, Social Security, etc. whereas investment income is only taxed as short term or long term taxes. Much less than working taxes.
Well, when selling then a 1031 exchange is typically the way. But real estate wealth is also built by leveraging equity in buildings for cash-out refinancing or taking lines of credit to use for down payments on additional property. This allows them to keep compiling a larger portfolio.
Additionally there ways to amortize buildings, deduct expenses (company lease of car used to check properties, company pays for iPhone tenants may call on, etc) to reduce income.
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