Investment Property - Leveraging Rental Property Equity

Owning investment property is a tremendous wealth building strategy. Thousands upon thousands of individuals have amassed great wealth by investing in rental properties.

Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in the residential property market. These fluctuations can wipe out or severely reduce equity positions in property.

Housing Boom To End?

There is little doubt we are coming to the end of a huge boom market in residential properties. For the last four years, properties have appreciated at unheard of rates. The question, of course, is what happens when the market cools off? Will we simply see a price plateau or an actual drop in prices? While nobody is sure, the clear consensus is property owners should move to preserve equity while they can.

Protecting Equity Gains

Protecting equity gains in your investment property requires careful planning. This leveraging strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to the investment property tax strategy. You will need to contact us to learn more.

The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.

Scenario 1 - Without Tax Strategy

Assume you purchased a rental property in 1999 for $250,000 with nothing down. As of July 2005, the combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed wealth, but all of it is at risk. If prices drop twenty percent over the next year, you will lose $100,000 of your equity in the rental property.

Scenario 2 - With Tax Strategy

We are going to use the same exact scenario. It is July 2005, you have $250,000 in rental property equity, but all of it is risk. You decide to implement the investment property tax strategy and the following occurs.

Our goal is to protect the $250,000 in gain on the rental property while also maximizing tax reductions. The first step is to refinance the property with, typically, an interest only loan. A percentage of the equity gain is taken out of the property and placed into an equity index insurance product. The equity percentage is arrived at by determining the payment amount you can afford on the loan. Typically, it is tailored to match your current loan payment amount.

Going back to our scenario, what happens if property prices pull back 20% over the next year? You do not suffer the loss of $100,000 because the gain is sitting in your equity index insurance product. Essentially, it is a wash and you have protected the capital gains while capturing a stock market-based rate of return.

Ah, but it gets better.

Equity Index Insurance

The investment grade insurance product isn't just any policy. Instead, the policy we use is tied to a stock market index. What if the stock market suffers a loss? Not to worry, this policy carries a guarantee that you will never lose a dollar, even if the market crashes. If the stock market did crash, the policy would simply credit you with nominal growth for the year in question. In all other years, the policy would grow with the stock market. On top of all of this, the money in the insurance product grows tax-free.

So, what has been accomplished? First, you have protected your rental property equity gains from home price fluctuations. Second, you have leveraged your equity into two growth channels, the stock market and appreciating house prices. Third, you have converted taxable growth [property appreciation] into tax-free growth [insurance].

With housing markets ready to cool down, this strategy effectively locks in your profits. Preserving equity gains should be a primary goal of any investment property owner.

Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for overpaid business taxes. Visit http://www.businesstaxrecovery.com/articles for more tax strategies and articles.

There is something emotionally charged about the buying and selling of New York high-end real estate. How else to explain the juggernaut of reality TV shows about high-end brokers?

After 30 years of marriage, Sharon and Michael Newman decided it was finally time to move from the Catskills to New York City.

On blocks near Kissena Park streets are quiet, houses are small, and the electricity that charges the atmosphere in downtown Flushing is nowhere to be found.

A five-story, seven-bedroom house in Brooklyn Heights has sweeping views of New York Harbor and the Manhattan skyline.

Demand is so intense that there are waiting lists in some buildings, and a few landlords report that eager renters are even bidding up rents.

Sales at the very high end of the market barely missed a beat in the recession. But that prosperity hasn’t yet trickled down.

A Flatiron condo, a Midtown South co-op and a Brooklyn Heights carriage house.

A four-bedroom ranch in Montclair, N.J., and a four-bedroom colonial Cape in Babylon, N.Y.

For a century, Roosevelt Island housed a grim penitentiary. It was demolished in the 1930s.

More borrowers are opting for fixed-rate loans with terms other than the standard 30 or 15 years, especially when it comes to refinancings.

Two more glass skyscrapers are added to a group of towers on the waterfront of Long Island City.

Insurance coverage for a co-op unit; when a tenant is ‘blacklisted’; a co-op is smaller than estimated.

The market for $500,000-to-$600,000 houses in Westchester has become especially active.

A shaky real estate market means more sellers are providing buyer concessions, from gift cards to help with paying property taxes.

Houses of worship are adaptable to residential and other uses as congregations dwindle.

The settlement reached last week over questionable mortgage practices by major American banks hardly cracks the iceberg that is the foreclosure mess.

Under the settlement, nearly two million Americans could benefit from mortgage relief from the nation’s biggest banks.

A cold war-era satellite relay station is for sale in California after a Silicon Valley mogul gave up on plans to turn it into a weekend home.

How can I make my front porch more appealing to buyers?

Court hearings meant to protect New York homeowners from foreclosure are hopelessly slowed by endless paperwork and requests for additional information.

The Bay Area and Silicon Valley expect the windfall from the Facebook stock offering to make their in-demand region even hotter.

The house, designed by the architect Eric Fisher, looms over the street like a big industrial arm.

A town house in Dallas, a midcentury modern in Rhode Island and a Tudor in Denver.

Prices in some parts of the country are still off by as much as 25 percent from their 2007 peak.

Trinity Church is the largest landlord in Hudson Square and is part of the effort to rezone the area to residential from manufacturing.

Rising oil prices and a boom in shale exploration are leading companies to add office space in the Houston area, most notably Exxon Mobil.

Ms. de França is the president and chief executive of Douglas Elliman Development Marketing, which focuses on new residential developments.

Meet the real estate broker’s interns: an ambitious group willing to do anything, earn nothing and wake up early on a Sunday to fluff the couch cushions at open houses.

A Flatiron condo, a Midtown South co-op and a Brooklyn Heights carriage house.

A four-bedroom ranch in Montclair, N.J., and a four-bedroom colonial Cape in Babylon, N.Y.

Homes in Dallas, Rhode Island and Denver.

Compare the cost of renting and buying equivalent homes.

For recently divorced men, a new breed of decorators offers help navigating a strange new world.

Plants that light up the winter garden can be found at Broken Arrow Nursery in Connecticut, which has long been a favorite of gardening geeks.

A sister in need drew the painter Beverly McIver back home to North Carolina, unaware that a new beginning was in store for both of them.

A jewelry designer finds striking new objects for storage.

Timothy Sakamoto and Jochen Repolust are part of the small but growing niche making mobile apps focused on specific works of architecture.

To promote an auction of 20th- and 21st-century design, the interior designer Stephen Sills has created a preview exhibition in an apartment at the Apthorp.

Fishs Eddy now sells plates acquired from the archives of the now-defunct Syracuse China Corporation, many more than 100 years old.

The designer Russell Greenberg creates custom baby rattles with ends shaped like profiles of mom and dad.