As most physicians fall into the highest tax brackets under federal and state law, investments that provide tax reduction, deferral, or elimination are preferable to those that do not.
Real estate is one financial instrument that many high-income people use to develop wealth. Real estate investing could be a difficult business to navigate. Even a single piece of property can be turned into a wealth-building venture if you do your due diligence. As a result, you will achieve financial independence and increase your net worth.
Here are some of the reasons why doctors should explore real estate investing, ranging from tax advantages to passive income.
Ways to Invest in Real Estate
There are a variety of ways to invest in real estate, and not all of them include buying apartment complexes and working as a part-time landlord. That is one option, but depending on how much money and time you have to devote, there are a variety of alternatives.
Rental Property Investment
Apartment buildings don’t have to be big complexes with dozens of occupants to be effective. A multifamily residence that you rent to two or three separate tenants can be a small rental property.
Maintaining a rental home will require some effort. You’ll need to hire a property manager and a maintenance staff at the absolute least.
However, the more monthly rents you can collect as payment toward the property’s cost, the sooner you can pay it off and sell it for a profit. You’ll make a profit that you can reinvest in another piece of real estate or a different form of investment.
Property Investment for an Adult Child
Do you have an adult child who is planning to buy a house for the first time with little or no money down?
If they are thinking about getting a mortgage with PMI, you might want to step in and help them purchase a property.
Purchasing a single-family house for an adult child is an excellent strategy to diversify your real estate holdings. Without having to deal with strangers as tenants.
Many physician-parents have purchased a property for their adult child – with one catch. That the child will pay the mortgage on time and eventually purchase the house. Some physician-parents, on the other hand, retain a landlord-tenant relationship with their children. In this situation, the equity in the house becomes the parent’s profit when it is sold.
Primary Home Investment
Most people think of “investment assets” as homes or buildings they don’t reside in. However, your primary residence should always be your first and major real estate investment.
Renting a house allows you to move whenever you choose and avoid having to pay for pricey repairs if something goes wrong. Landlords, on the other hand, are the only ones who profit from tenants.
It can be tempting for young medical professionals just starting out in their careers to rent until they figure out when and where they want to settle down. However, it is always preferable to own a home, pay your mortgage on time, and develop equity.
Secondary or Vacation Home Investment
Is there a particular area you like to visit on weekends or during the summer?
Consider buying a vacation home if your first mortgage is coming to an end or if you can afford a second mortgage payment.
You may be able to rent your secondary home by the week or month, depending on where you buy. When you’re not utilizing the property, you can earn passive money this way.
Tax Benefits of Investing in Real Estate
Physicians are among the highest-paid professionals in the United States when compared to those in other fields. And, as all American employees are aware, the more money you earn, the more income taxes you pay.
Physicians, as high-income earners, aren’t eligible for numerous tax breaks. And it’s all because you earn too much money in the eyes of the Internal Revenue Service. However, owning real estate can help you save money on taxes in a variety of ways.
Claim Professional Real Estate Status
Unsurprisingly, not all rental homes are profitable. There may be years when you lose money due to the high cost of a mortgage, a lack of tenants, property taxes, insurance, and pricey repairs. (This is especially true in the first few years of home ownership.)
And if that happens, having one spouse claim “professional real estate status” can help you save a lot of money on your taxes.
To be qualified for professional real estate status, you must demonstrate that you worked 750 hours on your rental property over the course of the year. If you own more than one rental property, you can use it on all of them.
This includes time spent collecting rent, showing units to potential tenants, billing, managing maintenance staff, and performing repairs, among other things. If you’re a doctor with a spouse who doesn’t already work full-time, your spouse can take on these responsibilities and claim professional real estate status.
If you’re married filing jointly, you can deduct the losses on your rental property from your physician’s earnings. This can actually help you save money on taxes by putting you in a lower tax bracket.
The nature of the investment game is to make profits rather than loses. However, if losses do occur, this is one approach to lessen the blow.
Deduct Business Expenses
You can deduct business expenses on your rental properties and real estate investments in the same way that you can for a home office or private practice.
Maintenance fees, repairs, and the salaries paid to property managers are all classified as business expenses. All of this can help you pay less tax to the IRS in the long run.
Pass-through Deduction Advantages
By taking advantage of the pass-through deduction, you may be able to minimize your tax liability.
Small business owners can deduct up to 20% of their profits from their taxes using the pass-through deduction. You must be the only proprietor of the business to claim this deduction. If they collect rent, landlords can be regarded small company owners.
Any investment, regardless of type, has no assurance of making a profit. Real estate, on the other hand, isn’t like most other assets. There are numerous reasons to consider investing a portion of your profits in real estate.
For physicians and high-income earners, real estate is a great way to invest your money and build wealth over time. If you’re ready to start with your real estate venture, feel free to connect with IDM Professional Corporation CPA.