REIT
These Unit Investment Trusts have a tax advantage that corporations do not. They are not taxed at the corporate level if they pass at least 90% of their net income to investors.
Compare this to buying shares of a stock in a company that pays corporate taxes, then maybe pays dividends or manages to grow in business potential (which is the main element of stock market price growth). Theoretically, a REIT will produce a greater net return because of less total taxation at the two levels. This return is mostly income for those investing in mortgages; mostly capital gain for those primarily investing in actual properties that are eventually sold off as it liquidates or reinvests.
Investors desiring income buy these; they always liquidate in a decade or less. When they sell off properties, like-kind exchanges can take place that defer capital gains unless the investor reinvests. This capital gains-related tax-deferral shelters some of the current income, causing investors to become addicted—so to speak—to reinvesting or else face recapture of some of the deferred gain. In the accumulation planning chapter, we examined the lack of transparency (cash thrown off can be new investor money, net rent, rent when maintenance should have been paid for, etc.). But publicly traded REITs have many eyes examining the properties and management decisions, so that version is far more transparent. If your portfolio is quite large and the management team as well as the brokerage are both committed to transparency, then these can be a partially tax-sheltered form of income and gain. Obviously, if they generate income, they would be cumbersome in an IRA or qualified plan, as reinvestment of the income would constantly build up non-invested cash, but it is possible to hold these in such plans Limited partnerships and general partnerships generally have extra tax benefits derived primarily from special oil and gas exploration or fleet accelerated depreciation or medical research, etc.
These ventures are more risky than REITs because they seek things that may not exist in full or may deplete faster than expected. Incentives in the tax code are specific to the activity that Congress deemed should be advantaged for the sake of the nation, and these credits, deductions, and accounting advantages pass through to the investor in addition to the entity escaping corporate taxation.
If you are addicted to 1031 exchanges, especially with realty that must be exchanged in-kind with certain time restrictions after sale in order to buy the new property and so avoid recognition of capital gain or certain types of tax benefit recapture, then consider these two reputable middlemen: Asset Preservation, Inc. and the website apiExchange.com. These can help you comply with timing issues through trustee handling of the sale and acquisition.
As always, involve the applicable experts in your planning and negotiations, perhaps assembled by your financial planner: tax attorney, real estate attorney, estate planning attorney, CPA, insurance specialist, and commercial or residential Realtor and an appraiser (business appraiser, commercial realty appraiser, etc.). Don’t trust anyone else’s estimate of value. Get your advisors onto your payroll and acting as fiduciaries to you.
Most municipalities allow discounted residence property tax rates for seniors. One must be a certain age, usually 65, and with low adjusted gross income. Some municipalities use gross income or add back deductions to AGI.
Nature/Historical Easements and Other Gifting
It is possible to obtain a current state and federal income tax deduction beyond normal limits for donating this sort of land or donating easements (rights-of-way and use) to the government or specially chartered conservancies and societies. Other types of gifts to charities can also reduce income taxation over several years. See the estate planning chapter’s gifting discussion.
