Here's the back story. My dad was a big proponent of owning investment real estate. Back then, there were significant tax advantages for owning rental real estate, that are no longer available today. At that time, one could use real estate losses, due primarily to depreciation, to offset and reduce wage income. In addition, depreciation recovery was taxed at long term capital gains rates.
I partnered with my dad on a few real estate investments, mainly for the tax breaks which did reduce my taxable income. However, none of the investments did much better than break even.
Since then, those tax benefits have mostly been eliminated by the tax code changes. Real estate losses are now limited to $25000 and only below $150,000 AGI income unless one is a "real estate professional." This limits high income earners from using rental real estate to reduced wage income. In addition, depreciation recapture is now taxed at 25% rate instead of the 15% long term capital gains rate.
When my parents both passed away, I inherited a partnership share in commercial rental property and vacant investment land. The commercial property was fully paid off, long term tenants, and managed by a property management company. The vacant land was residential property that abutted commercial properties. Both properties were located in different states from where I resided and were relatively low effort. After 6 years, I received an unsolicited offer by a developer for the vacant land and it took almost 3 years to complete the deal. The commercial property is positive cash flow, but most of the other partners are not involved leaving all the work to one other partner and me.
Based on stories I've heard, I realized I have been extremely lucky with both of these real estate investments. They both have been profitable and relatively low effort. However, I also realize that most real estate investments take much more effort, financial commitment and risks. Since I am moving towards simplifying our retirement investments, I am unlikely to take on any new real estate investments, other than to invest in REIT stocks.
Are real estate investment right for some people? Absolutely. It can be a great investment. Doing well takes a lot of time, effort, skills and patience, which I don't want to do in retirement.
This is not financial, investment, nor real estate advice. Please consult a professional advisor.
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