Real Estate vs Stock...Market What is the Best Investment For 2022?

Real Estate vs Stock Market.?Which is better??Why??What is the best investment for 2022??Let's take a look.

Welcome back, and Happy New Year! I’m Erik Braceland with Braceland Homes here in sunny San Diego, California, where we guarantee the sale and/or purchase of your home.?Here on the Braceland Homes Blog we cover topics related to buying and selling residential real estate, and trends happening across the housing market.

Today we'll look at the some of the best tax benefits of real estate investing.?I'll explain the basics of real estate depreciation, real estate leverage, cost segregation, 1031 exchange, how to pay less tax on rental income including rental property tax deductions, capital gains tax, taxes when selling a personal residence, the home equity loan, the home equity line of credit, and a surprise bonus.?I'll also break down a side-by-side comparison of actual real estate and stock market investments so you can see the difference.?Get comfy. You don’t want to miss a second of this one!?Folks often ask me, what are the best investments for 2022??They ask me "stock market vs real estate, which performs better?"?What do you think I tell them??Alright, spoiler alert...it's real estate for me!?Weird, right??So, of course I'm biased being a real estate and mortgage broker.?I did my due diligence and research, and went all in on real estate a long time ago.?I did that mainly because that's what fit my personality and circumstances.?Obviously there are people that do very well on both sides of this real estate vs stock market argument.?Just know that I will mainly argue in favor of real estate because that is what I have chosen to invest in, and what I love.

What are the best investments for 2022??stock market vs real estate, is such a broad and interesting debate, that I can't touch on everything in just one session.?I'll definitely be returning to this for future discussion, but today, being early in the year with tax season just around the corner, I'm going to attack this from a tax perspective, as I alluded to in the intro.?To set this up, I want to make it clear that I am not a tax professional, and I don't hold any special tax certifications or licenses.?All this is 100% legal, but you'll want to consult an actual certified public accountant, or CPA, AND a licensed real estate professional, such as myself, when putting any of this to practice.?I'll kick the discussion off focusing mainly on residential investment real estate, which includes rentals, with up to four units on a single property, because that's where the really Huge tax benefits can be found.?And many of these concepts also apply to commercial real estate.?Who wouldn't want to know, how to pay less tax on rental income??But stay with me to the end because I'll also touch on how seasoned real estate investors, and first-time buyers alike, can leverage the tax code for some awesome advantages.??

Real Estate taxes explained!?So which of these areas of investment will give us the best tax write off, tax breaks, etc., or just allow us to come out on top as far as keeping more money in our pockets??The news media and many stock proponents will argue that real estate is only a moderately profitable investment vehicle when compared to others such as stocks.?Hmmm...This does appear to be true, if you do a direct side-by-side comparison of these investments, before factoring in the impact of taxes and leverage.?Let's look at an example to see how this plays out.?I'm going to keep things fairly clean and simple for the purposes of our example.?To start, you'll see the purchase price of our investments.?Right from the start you'll see real estate wins, that's the green versus red, if you're wondering.?Why are the amounts different??Because with real estate you use the amazing power of real estate leverage to control a much larger asset with a relatively small investment.

You see here for both the real estate and the stocks our initial investment is the same one hundred thousand dollars.?Yet with our investment in real estate we are controlling a half million-dollar asset!?There is no leverage with the stock investment.?We can definitely get started for less money in either realm.?Many of you may already know this, and you'll see I'm using the standard 20% down payment model on a home for this example, but there are conventional loans available for as little as 3% down.?If you're an active duty service member or veteran, you can even get in the real estate game for zero down, although it is a little tricky for investment properties.

Next we can start to see what our stock broker and media friends are talking about.?Generally, at face value, stocks appear to out-perform real estate because of these pre-tax returns on that investment.

Fair enough.?Stocks win this round by $3000!

But what's this?!?! We have to pay roughly 20% between state and federal capital gains tax on our stock profits??Yuck!?Wait...no taxes on our real estate rental income??Why??We'll get to that shortly, but it looks like real estate is rallying for a comeback!

Oh!?Looks like the stock investment still wins by one thousand dollars...or does it??Ever heard of real estate depreciation??Man, real estate leverage is Awesome, but real estate depreciation is even better!?Physical, tangible, items you can touch, wear out over time, so the government gives you credit each year for that in the form of real estate depreciation on your investment properties.?Sorry, you can't depreciate your primary residence.?There are some exceptions to this if you are renting an accessory dwelling unit, commonly referred to as an ADU, a granny flat, or something of that sort on your property.?I actually do this with my own primary residence.?It's Super, and the rental income also covers two thirds of my mortgage!?You can also depreciate the items inside your investment property, separately from the structure through a process called cost segregation for even more of a tax break.?There is a lot more to this than we have time for today, but it is a thing, and its magical!

Back to our example, we have determined our annual depreciation to be $27,000! Let's see how we can use that.

So why didn’t we have to pay tax on that rental income??It's because we offset our?seven thousand dollars in real estate income with seven thousand dollars of our real estate depreciation. That leaves us another twenty thousand dollars to reduce the taxes on our business income or salary.

This twenty thousand dollar tax offset equates to roughly six thousand dollars of actual tax savings in a normal thirty percent tax bracket.?That's basically an additional six thousand dollars of tax-free income. If we take the initial seven thousand dollars of tax-free rental income from our real estate investment,?and then add this additional six thousand,?we now have a total benefit of thirteen thousand dollars from our real estate investment.?So in reality the real estate investment outperformed the stock investment by five thousand dollars...or sixty three percent!?Hooray for the tax benefits of real estate investing!?What so you think so far??Please let me know in the comments if you're finding this useful.

Pretty Great stuff, right??Well it gets better.?What if I told you, you could continue to sell that real estate investment, and upgrade to a bigger or nicer one that could generate you more income...and pay zero capital gains tax on the sale??It's true!?And you can play this capital gains exclusion game infinitely!?Ever hear of the 1031 exchange??Through the use of a 1031 exchange you can sell your investment property and reinvest the proceeds in another like property...while paying zero capital gains tax.?Imagine that you're doing pretty well with your finances, and you're growing weary of making repairs to that property you bought for half a million dollars because its old, or you don't like the quality of tenants you've been getting because the home is in a run-down neighborhood, or you want to upgrade to more units because your current rental is only a duplex or single residence.?I get it.?Half a million doesn't buy much in a market like the one here in San Diego.?Time for an upgrade!?1031 exchange.?Boom!?Nicer property, better quality tenant pool, more units, more income.?No capital gains tax!?Love it!?Anyone used this??Leave us a comment and share your experience!

What about all you non-investor folks that own your own home...or, those that are looking to buy soon??Do you get any tax breaks on paying our Uncle Sam??Yes!?As promised, there are some tax breaks on your primary residence.?The Capital Gains Exclusion allows you to sell your primary residence and not pay capital gains taxes on the first two hundred and fifty thousand dollars of profit if you are single...or pay nothing on the first five hundred thousand dollars if you are a married couple.?Profit is considered over and above what you paid for the home.?So if you bought the home for five thousand dollars, and you sold for seven thousand dollars, your gain or profit would be two hundred thousand dollars, and you would owe no capital gains tax on that sale.?You just have to live in that residence for at least two years to take advantage of capital gains exclusion.

Here's a tax-free bonus resource for you homeowners out there that few know about or consider...borrowed money.?Get a home equity loan!?The money you borrow using loans isn't taxed.?You can get additional tax-free proceeds from your real estate by refinancing your home loan to cash out some or all of your home equity.?Home equity is simply the difference between what you what your home is worth compared to what you owe on the home loan.?Sticking with our five hundred thousand dollar purchase example with the one hundred thousand dollar down payment, you are left with a four hundred thousand dollar loan amount.?Say several years have passed, you've payed your mortgage down to three hundred and fifty thousand dollars, and your home has now appreciated to a value of six hundred thousand dollars because of an upswing in the local housing market.?Now your home equity is equal to two hundred and fifty thousand dollars, six hundred thousand minus three hundred and fifty thousand.?So you have a quarter million dollars that you can cash out tax free with a home equity loan, and go do what you want.?Nice.?You can also do something similar using a home equity line of credit, or HELOC as you may have heard it been called.?A HELOC is basically a revolving line of credit against your home equity.?You even get a credit card that you can use to charge purchases with.?So forget taking an early withdrawal from your 401K, for those home improvements, vacation, or new car.?That option will fetch you a beating on taxes and penalties.?You're welcome.?By the way, you can even use a HELOC from your primary residence, to cover the down payment on an investment property, as one of my clients just did.?Pretty cool.

I think I've given you plenty to consider, and hopefully put into practice for now.?At the very least I've given you something to pester your tax professional about.?Give me a call or text me at 619-947-3560 when you're ready to get started putting these concepts to work for you.?