This month’s edition of MMFD features part 2 of Kristy and Katherine’s deep dive into the home-buying maze. In this part of the podcast, our intrepid financial seafarers discuss the concept of real estate as an investment. “Flip this House”, “Good Bones”, etc…it has to be pretty easy! RIGHT?? No so fast… Back to help us navigate the shifting tides of the real estate market and the shoals of home purchasing is Ms. Katherine Vessenes.

About Ms. Vessenes:

Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.

Quick Summary:

Money Minutes Episode #17 – Real Estate as an Investment

Previously there were significant tax benefits to owning real estate which allowed for generous deductions to reduce your tax liability.  New tax laws have changed things significantly:

• decreased tax benefit on home mortgage now limited to $750k

• deduct interest on mortgage only if “acquisition indebtedness” the money must be used to buy the home or improve the home. If you plan to use the funds to pay off student loans or other purchases cannot qualify for the tax right off.

• must be primary residence that is owner occupied

• home equity line of credit (HELOC) interest can be tax right off if used to improve the home ** must keep records for IRS.

 Capital gains – any purchase you made that gains profit while in your possession (i.e. real estate, art etc.) is subject to capital gains tax or long-term capital gains (if owned for > 1 year) which is currently at 15-20% federally plus state capital gains (5-10% + depending on state).  Once can avoid long term capital gains tax by taking profit and rolling it in to next home, currently a max profit of $500K if married or $250K if single.

• Can only work if home principal residence

• Have to live as resident for 2 y years before you sell otherwise considered investment property and subject to ordinary income tax

• Legal residence is a grey area and variable by state that is quite complex, need to finalize details w financial planner/lawyer/accountant as you make these decisions

• Current sales price - Original purchase price= profit -> this amount subject to capital gains

 Real estate as an investment – part owner in building, investor in real estate development etc.

• Advantageous tax laws are no longer - Tax laws have change significantly and at one time real estate was very attractive investment but things have changed. i.e. depreciation deductions have changed

• Real estate investments are highly “ill liquid” and if market changes you could be in the position to hold the property for years until the market recovers

• If you find yourself “upside down” in the property can cost lots of money to get out of the deal, can cause a significant hit to your credit rating, and may have to pay out of your monthly budget to cover costs.

• Never a primary investment strategy however may be an option in certain circumstances. 

• Real estate mutual funds can be a more flexible option allowing you to be in the real estate market but giving you more liquidity

• If you partner on a building realize that you are responsible for the entire debt (not just your percentage) so make sure you are dealing w responsible and ethical partners that will uphold their end of the deal.

• Very rare that an apartment building will be a successful investment if you are paying a mortgage along w regular taxes, maintenance costs etc.  If you can purchase outright then may be sensible option but should be reviewed with your trusted financial adviser.