High-income entrepreneurs have dramatically changed how they approach wealth over the last decade. It’s no longer only about creating and growing companies and investing. Many high-income entrepreneurs today are starting to use real estate as an asset class because of its ability to provide them with the most flexible tax planning strategy and create long-term equity.
This trend is so much more significant than simply lowering your overall tax burden. Entrepreneurs want to invest in assets that work differently from a stock or a cash position, or operate businesses.
Real Estate provides you with leverage, income generation through rental, appreciation potential, and tax benefits simultaneously. This combination can be very challenging to find elsewhere.
Why Business Owners Need Smarter Tax Planning
As an entrepreneur’s business grows, so does the potential for increased revenue, profit margins, and higher tax liabilities. Often, by the time that happens, a successful entrepreneur’s financial structure has not developed to the same level of growth as their business. The result is large annual tax bills.
Eventually, traditional tax planning methods will hit a ceiling. For example, retirement account contributions are limited. As businesses grow and mature, it becomes increasingly difficult to justify legitimate business expense write-offs. By that time, many successful Entrepreneurs begin to look for investments that inherently generate tax benefits rather than aggressively use accounting techniques to achieve those results.
One type of investment that is most beneficial from the standpoint of tax savings is real estate due to the fact that the US tax code favors property ownership. Real estate investors can take advantage of both mortgage interest and depreciation. Depreciation allows you to spread the cost over the useful life of your property while reducing taxable income each year. Other expenses, such as maintenance, utilities, insurance, and repairs, may also be deductible against net rental income. Therefore, these types of deductions may even help offset taxes owed on other passive income streams.
The Appeal Of Depreciation
A large number of wealthy investors purchase real estate for the opportunity to take advantage of depreciation. Although the owner of a piece of real estate may see an increase in the value of the property as it appreciates in value, they are allowed to depreciate certain components of the property on their tax return. This creates a unique situation where, many times, the investor will be collecting rental income on the same property and showing a loss on their tax return. The difference in reported cash flows can greatly enhance the after-tax cash flow. Many investors use cost segregation and bonus depreciation strategies to rapidly deduct portions of the property, generating greater cash flows from the investment.
Real Estate Creates More Control
High-income business owners are accustomed to having control. Investing in public markets leaves them with almost no ability to positively impact their investment performance. Real estate is unique. Business owners can make changes that will increase cash flow and profit from a property (e.g., improving property conditions, increasing rent rates, refinancing existing loans, etc.), as well as make operational decisions such as repurposing underutilized space within a building. This degree of control appeals to entrepreneurs because it is familiar. They are not simply waiting on an investment to produce results; they are taking action to create those results.
Cash Flow Matters More Than Headlines
A lot of wealthy entrepreneurs are no longer interested in investing in ‘flashy’ investments that generate attention but little consistency.
Entrepreneurial income is subject to many different factors, including economic downturns, client demands, and seasonality. So, rental income provides a great deal of stability in this type of environment.
Real estate investments offer a high degree of optionality. The investor can choose to refinance their property at any point in time, using the equity as needed, without having to sell the investment. Appreciation in value can be used as collateral for future acquisitions or to fund new projects/ventures.
Building Wealth That Lasts Beyond Business Cycles
Entrepreneurial success is rarely built upon making short-term financial decisions. Most high-income entrepreneurs typically view their financial decision-making through the lens of decades. The long-term nature of tax benefits from owning real estate aligns perfectly with this type of thinking.
Many underestimate the compounding effect of combining business income with strategically selected real estate investments. Ambitious high-income investors are attracted to the potential of developing a financial ecosystem by using different asset classes to enhance the performance of another.
Buying assets is not just about saving money on taxes. These high-earning people are focused on establishing a structure designed to build wealth and allow them to remain flexible and enable continued growth over the long term.