A house is an investment- True or False

[mook]

Also, it can be a great investment as a primary residence. The tax code is setup such that you can make a huge profit on your home TAX FREE (up to 500k as a couple).

This one is DEFINITELY a huge benefit of real estate, no doubt.

I have no damned clue why it exists, though. Seriously, why should I pay taxes to go work, but not on the windfall that happens from selling a house?

How is the dough suddenly dropping in your lap from a house sale any different than, say, winning a bunch of money on a game show or lottery (which you pay taxes on)?

Our tax laws are so screwy.

 

[blazerboy30]

This one is DEFINITELY a huge benefit of real estate, no doubt.

I have no damned clue why it exists, though. Seriously, why should I pay taxes to go work, but not on the windfall that happens from selling a house?

How is the dough suddenly dropping in your lap from a house sale any different than, say, winning a bunch of money on a game show or lottery (which you pay taxes on)?

Our tax laws are so screwy.

Agree with it or not, I think it goes back to the idea that real estate appreciates with inflation. I believe the thought is that individuals should not have to bare the tax burden due to inflation. I can see some justification for this because the Fed is so responsible for inflation. It turns out that the profits are much larger than the inflation due to being leveraged.

 

[DaRizzle]

I know.

What I'm saying you can do is:

You can purchase an investment property and let it appreciate as long as you like.
Then, you can 1031 exchange it into something nicer, that you might want to live in and make your primary residence.
However, it must remain as an investment property for a minimum amount of time, since the 1031 exchange stipulates the two properties being "like properties".
After this minimum amount of time, you can move in to it as a primary residence.
Then, years later, you can sell this primary residence, and not pay any tax on $500k of profit ($250k for an individual).

That is a pretty amazing investment to not pay any tax on. Show me another investment that is absolutely tax free for $500k of profit.

Yeah...nothing wrong with that...rock on

 

[The_Lillard_King]

This one is DEFINITELY a huge benefit of real estate, no doubt.

I have no damned clue why it exists, though. Seriously, why should I pay taxes to go work, but not on the windfall that happens from selling a house?

How is the dough suddenly dropping in your lap from a house sale any different than, say, winning a bunch of money on a game show or lottery (which you pay taxes on)?

Our tax laws are so screwy.

I think it is to promote familes being home owners.

Also, I hear the lobbists for the real esate are very influential. : )

I have a lot of friends who own property as investments (those damn slum lords) . . . they are often busy on the weekends and justs seems like a big old headache to me. But maybe they will be laughing all the way to the bank.

Of course the assumption in all this is you make 500K on the investment . . . anyone who decided to start buying properties a year ago are probably wishing they picked a different investment for their money.

 

[tlongII]

I know.

What I'm saying you can do is:

You can purchase an investment property and let it appreciate as long as you like.
Then, you can 1031 exchange it into something nicer, that you might want to live in and make your primary residence.
However, it must remain as an investment property for a minimum amount of time, since the 1031 exchange stipulates the two properties being "like properties".
After this minimum amount of time, you can move in to it as a primary residence.
Then, years later, you can sell this primary residence, and not pay any tax on $500k of profit ($250k for an individual).

That is a pretty amazing investment to not pay any tax on. Show me another investment that is absolutely tax free for $500k of profit.

A 1031 exchange must remain as a rental property for 2 years before it can be converted to a primary residence. That is my understanding from a recent transaction anyway.

 

[DaRizzle]

Its a total of 2 years within a 5 year period

 

[Denny Crane]

First table is historical, cumulative, compounded.

<table border="0" cellpadding="5" cellspacing="0"><tbody><tr><td>
</td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite¹</td> <td>Dow Jones Ind Avg¹</td> </tr> <tr> <td>1-Year</td> <td> -5.95
</td> <td> -3.08
</td> <td> -11.09
</td> <td> -6.71
</td> <td> -8.67
</td> <td> -13.88
</td> </tr> <tr> <td>3-Year</td> <td> 1.27
</td> <td> 3.78
</td> <td> 2.85
</td> <td> 2.92
</td> <td> 2.10
</td> <td> 2.26
</td> </tr> <tr> <td>5-Year</td> <td> 11.61
</td> <td> 13.89
</td> <td> 7.03
</td> <td> 9.75
</td> <td> 6.03
</td> <td> 4.26
</td> </tr> <tr> <td>10-Year</td> <td> 10.64
</td> <td> 11.78
</td> <td> 2.91
</td> <td> 6.81
</td> <td> 2.19
</td> <td> 2.51
</td> </tr> <tr> <td>15-Year</td> <td>10.90</td> <td> 11.63
</td> <td> 9.19
</td> <td> 9.09
</td> <td> 8.28
</td> <td> 8.10
</td> </tr> <tr> <td>20-Year</td> <td> 9.93
</td> <td> 11.56
</td> <td> 10.41
</td> <td> 9.73
</td> <td> 9.38
</td> <td> 8.74
</td> </tr> <tr> <td>25-Year</td> <td> 9.90
</td> <td> 12.30
</td> <td>11.37</td> <td> 9.13
</td> <td> 8.48
</td> <td> 9.42
</td> </tr> <tr> <td>30-Year</td> <td> 11.80
</td> <td> 13.89
</td> <td> 12.12
</td> <td>NA</td> <td> 10.20
</td> <td> 8.98
</td> </tr> <tr> <td>35-Year</td> <td> 10.48
</td> <td> 13.28
</td> <td> 10.77
</td> <td>NA</td> <td> 9.15
</td> <td> 7.43
</td> </tr> </tbody> </table> ¹ Price only returns.
Highest total return for the period in bold.
Total returns expressed in percent.
Data for periods ending April 30, 2008.
Calendar Year Total Returns, Periods Ending December 2007:

<table border="0" cellpadding="5" cellspacing="0"> <tbody> <tr> <td>
</td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite¹</td> <td>Dow Jones Ind Avg¹</td> </tr> <tr> <td>1-Year</td> <td>-17.83</td> <td>-15.69</td> <td>5.49</td> <td>-1.57</td> <td>9.81</td> <td>6.43</td> </tr> <tr> <td>3-Year</td> <td>6.13</td> <td>8.50</td> <td>8.62</td> <td>6.80</td> <td>6.83</td> <td>7.15</td> </tr> <tr> <td>5-Year</td> <td>16.64</td> <td>18.17</td> <td>12.83</td> <td>16.25</td> <td>14.71</td> <td>9.72</td> </tr> <tr> <td>10-Year</td> <td>9.63</td> <td>10.49</td> <td>5.91</td> <td>7.08</td> <td>5.38</td> <td>5.31</td> </tr> <tr> <td>15-Year</td> <td>12.33</td> <td>13.02</td> <td>10.49</td> <td>10.10</td> <td>9.53</td> <td>9.72</td> </tr> <tr> <td>20-Year</td> <td>10.86</td> <td>12.31</td> <td>11.81</td> <td>11.34</td> <td>10.97</td> <td>10.09</td> </tr> <tr> <td>25-Year</td> <td>10.73</td> <td>13.17</td> <td>12.73</td> <td>10.79</td> <td>10.23</td> <td>10.69</td> </tr> <tr> <td>30-Year</td> <td>12.01</td> <td>14.15</td> <td>12.95</td> <td>NA</td> <td>11.36</td> <td>9.67</td> </tr> <tr> <td>35-Year</td> <td>10.26</td> <td>13.16</td> <td>10.97</td> <td>NA</td> <td>8.91</td> <td>7.60</td> </tr> </tbody> </table> ¹ Price only returns.
Highest total return for the period in bold.
Total returns expressed in percent.
Data for periods ending December 31, 2007.

 

[mook]

First table is historical, cumulative, compounded.

<table border="0" cellpadding="5" cellspacing="0"><tbody><tr><td>
</td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite¹</td> <td>Dow Jones Ind Avg¹</td> </tr> <tr> <td>1-Year</td> <td> -5.95
</td> <td> -3.08
</td> <td> -11.09
</td> <td> -6.71
</td> <td> -8.67
</td> <td> -13.88
</td> </tr> <tr> <td>3-Year</td> <td> 1.27
</td> <td> 3.78
</td> <td> 2.85
</td> <td> 2.92
</td> <td> 2.10
</td> <td> 2.26
</td> </tr> <tr> <td>5-Year</td> <td> 11.61
</td> <td> 13.89
</td> <td> 7.03
</td> <td> 9.75
</td> <td> 6.03
</td> <td> 4.26
</td> </tr> <tr> <td>10-Year</td> <td> 10.64
</td> <td> 11.78
</td> <td> 2.91
</td> <td> 6.81
</td> <td> 2.19
</td> <td> 2.51
</td> </tr> <tr> <td>15-Year</td> <td>10.90</td> <td> 11.63
</td> <td> 9.19
</td> <td> 9.09
</td> <td> 8.28
</td> <td> 8.10
</td> </tr> <tr> <td>20-Year</td> <td> 9.93
</td> <td> 11.56
</td> <td> 10.41
</td> <td> 9.73
</td> <td> 9.38
</td> <td> 8.74
</td> </tr> <tr> <td>25-Year</td> <td> 9.90
</td> <td> 12.30
</td> <td>11.37</td> <td> 9.13
</td> <td> 8.48
</td> <td> 9.42
</td> </tr> <tr> <td>30-Year</td> <td> 11.80
</td> <td> 13.89
</td> <td> 12.12
</td> <td>NA</td> <td> 10.20
</td> <td> 8.98
</td> </tr> <tr> <td>35-Year</td> <td> 10.48
</td> <td> 13.28
</td> <td> 10.77
</td> <td>NA</td> <td> 9.15
</td> <td> 7.43
</td> </tr> </tbody> </table> ¹ Price only returns.
Highest total return for the period in bold.
Total returns expressed in percent.
Data for periods ending April 30, 2008.
Calendar Year Total Returns, Periods Ending December 2007:

<table border="0" cellpadding="5" cellspacing="0"> <tbody> <tr> <td>
</td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite¹</td> <td>Dow Jones Ind Avg¹</td> </tr> <tr> <td>1-Year</td> <td>-17.83</td> <td>-15.69</td> <td>5.49</td> <td>-1.57</td> <td>9.81</td> <td>6.43</td> </tr> <tr> <td>3-Year</td> <td>6.13</td> <td>8.50</td> <td>8.62</td> <td>6.80</td> <td>6.83</td> <td>7.15</td> </tr> <tr> <td>5-Year</td> <td>16.64</td> <td>18.17</td> <td>12.83</td> <td>16.25</td> <td>14.71</td> <td>9.72</td> </tr> <tr> <td>10-Year</td> <td>9.63</td> <td>10.49</td> <td>5.91</td> <td>7.08</td> <td>5.38</td> <td>5.31</td> </tr> <tr> <td>15-Year</td> <td>12.33</td> <td>13.02</td> <td>10.49</td> <td>10.10</td> <td>9.53</td> <td>9.72</td> </tr> <tr> <td>20-Year</td> <td>10.86</td> <td>12.31</td> <td>11.81</td> <td>11.34</td> <td>10.97</td> <td>10.09</td> </tr> <tr> <td>25-Year</td> <td>10.73</td> <td>13.17</td> <td>12.73</td> <td>10.79</td> <td>10.23</td> <td>10.69</td> </tr> <tr> <td>30-Year</td> <td>12.01</td> <td>14.15</td> <td>12.95</td> <td>NA</td> <td>11.36</td> <td>9.67</td> </tr> <tr> <td>35-Year</td> <td>10.26</td> <td>13.16</td> <td>10.97</td> <td>NA</td> <td>8.91</td> <td>7.60</td> </tr> </tbody> </table> ¹ Price only returns.
Highest total return for the period in bold.
Total returns expressed in percent.
Data for periods ending December 31, 2007.

Dang, that looks really good.

Isn't an REIT basically just a stock for real estate?

If so, it eliminates most of the problems mentioned here. Although it doesn't have all the tax advantages, right?

 

[Denny Crane]

Dang, that looks really good.

Isn't an REIT basically just a stock for real estate?

If so, it eliminates most of the problems mentioned here. Although it doesn't have all the tax advantages, right?

It's a trust for real estate, and you DO get the depreciation benefits passed on to you in the form of a "return on capital" which is not taxable.

The beauty of the things are that they're liquid and pay a high dividend. The downside is that they may have to sell income property to meet the dividends, lowering their book value over time.

 

[Denny Crane]

Speaking of REITs, I once modeled a sort of REIT in the form of an LLC. A small number of partners would have put up $9M in cash, which would have bought 20-30 vacation rental condos in Hawaii. At 50% occupancy and including the depreciation and $300K annual expenses (renting them out, management, maid service, repairs), the estimated ROI was close to 18%. All the condos would have been bought for cash. Extending it would be to buy on other islands or in other vacation areas (ski resorts, etc.).

Turns out if I had found the investors to fund it, the properties would have (and did) double by appreciation, and the occupancy rate would have been about 90%.

Some REITs focus on commercial properties, others on rental homes, and so on.

 

[blazerboy30]

Its a total of 2 years within a 5 year period

That is to get the 500k tax exemption. You must live in the home for 2 of the last 5 years.

tlong is talking about how long an investment property must remain an investment property after a 1031 exchange before you can make it your primary residence, and as far as I know, he is correct: 2 years.

 

[Dumpy]

I believe that the reason for the $500,000 exemption is to not impose constraints on people that want to move. If for example, you bought a house for $250,000, watched it appreciate to $400,000, and wanted to then sell it and move to another state, you would be unable to purchase a simlarly-valued house. This, in turn, would constrain interstate commerce, by preventing people from finding jobs where they would be more productive and effective, and force them to stay in the same area when they didn't want to . . . which, theoretically, would probably bring down the demand for houses to begin with. Everyone who considers themselves upwardly mobile would just want to rent.

One of the better advantages, though, is that you can turn a taxable debt into a tax-deductable debt by taking out a home equity loan when the value of your house exceeds what you paid for it. For example, if you buy your house for $300,000 and watch it increase in value to $350,000, you can get a home equity loan for $50,000 secured by the house, and use it to pay off a high-interest, non-deductable car or student loan. Heck, you can use it to pay off a credit card. That $50,000 loan would then be tax deductable.

Advantages like that is why it is difficult to accurate value the advantage of owning a house.

Still, though, all that is ancillary to the primary purpose of owning a house, which is having a nice, stable place to live.