Is it Better to Invest in Real Estate or Take a Loan in the United States?

When it comes to investments, many Chinese individuals dislike taking loans. However, this may not be a favorable practice when investing in the United States, especially in the rental realm. The returns are not substantial, and the tax burden is significant, making it less cost-effective.

When investing in rental properties in the United States, these are the major advantages:

1. Tax deduction

Investing in rental properties in the United States offer four major deductions on rental income. First, the interest on all loans is fully deductible. Second, all property taxes paid can be fully deducted from income. Third, depreciation, which is only a paper loss, can be deducted from income, allowing you to keep the money in your pocket. Fourth, all costs related to maintenance, insurance, and lawn care are also fully deductible.

2. High Investment Leverage

Let’s compare two investment scenarios.

Plan A: Mr. Chang invests $1 million in a rental property valued at $1 million. Since he doesn’t have any loan interest to deduct, only the property tax, depreciation, and maintenance costs of the $1 million property are deductible. In the end, a portion of his rental income may still be subject to taxation, with the tax burden increasing as the tax rate rises. When the property doubles from $1 million to $2 million, it means Mr. Chang has earned $1 million on his initial $1 million investment.

Plan B: On the other hand, Mr. Chang leverages by investing $1 million to purchase a $3 million rental property. This way, he can deduct the interest on the $2 million loan and also benefit from the property tax, depreciation, and maintenance costs of the $3 million property. With careful planning, Mr. Chang’s rental income may be largely tax-free. When the $3 million property doubles to $6 million, it means Mr. Chang has earned $3 million on his initial $1 million investment.

3. Utilizing 1031 Exchange for Tax-Free Property Appreciation

In the United States, when investing in real estate, the 1031 Exchange allows investors to earn money without paying taxes every time they sell and exchange properties. If funds are needed, one can leverage the property by taking out a mortgage. Then, use the rental income to pay off the loan interest. Moreover, the loan is not considered as income, exempting it from income tax.

Therefore, when investing in real estate in the United States, one should not assume that being debt-free guarantees safety. If one is not inclined to use their property as collateral for loans, they will miss out on many tax benefits. Some may worry about the possibility of losing properties due to excessive leverage during challenging times in the U.S. real estate market. In Southern California, the typical real estate cycle is around 10 years, with 3 to 4 years of economic downturn. If you have sufficient cash reserves to navigate through these tough periods, you can confidently proceed with leveraging through loans.

TransGlobal in the United States has over 30 years of experience in financial planning and management, specializing in six major management sectors spanning real estate, loans, insurance, investments, tax services, and education. With over 5000 independent cooperating agents across the United States and major cities in Asia, it stands as the benchmark brand for comprehensive one-stop wealth management services in the Asian community. Feel free to contact us, and let our professional team assist you.

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This article is for informational purposes only and should not be construed as financial advice or legal advice. Please consult with a professional to develop a strategy that is right for you. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. TransGlobal Advisory, LLC (TGA) does not provide legal, tax, or accounting advice. You should consult your personal tax or legal advisor before making any financial decisions.