When considering the best real estate loophole strategies to save money and limit your tax burden, it makes sense to look to America’s elite 1% for best practices. Delaying taxes, finding opportunities to allow wealth to grow and expand, and playing real estate ‘roulette,’ if you will, can often mean the difference of hundreds of thousands of dollars in your bank account. Being privy to these secrets may improve the performance of your portfolio, strengthen your financials, and lead you towards more extraordinary long-term achievements in the investment arena. Whether you are an experienced investor or just getting started, knowing about these escape clauses can give you an edge over others and assist you in making wiser choices on how you invest your money overall. Read below for the 4 real estate loopholes the rich are using in 2024.

1. Buy, Borrow, Die

The “Buy, Borrow, Die” method is a sophisticated tax technique that the rich use to enhance their wealth and ensure it lasts generations. This approach begins with purchasing high-value assets, such as real estate or stocks, expected to appreciate significantly over time. Rather than selling these appreciating assets and incurring substantial capital gains taxes, investors borrow against the value of these assets. The borrowed funds are not taxable income, providing investors access to liquidity without triggering any tax event. Upon the investor’s death, the accumulated assets are transferred to their heirs on a stepped-up basis. This means the heirs inherit the assets at their current market value, eliminating any capital gains tax liability accrued during the original owner’s lifetime.

This strategy allows the wealthy to leverage their investments for cash flow while still alive and ensure that a more substantial, untaxed estate is passed on to their descendants. The “Buy, Borrow, Die” method thus combines tax efficiency with strategic wealth management, enabling affluent families to preserve and grow their financial legacy over generations.

2. Opportunity Zones

Opportunity Zones are places specifically designated by the government to give investors substantial tax advantages. Their primary aim is to stimulate economic growth and reinvigorate underdeveloped areas. Investors can defer capital gain taxes by reinvesting their income in the businesses or properties within these locations. If the investment lasts at least ten years, there will be no capital gains on new assets. Tax deferral combined with potential tax elimination makes this strategy highly advantageous from a financial viewpoint. This method promotes economic development and employment in struggling areas and attracts foreign and local investors.

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3. 1031 Exchange

Deriving its name from the Internal Revenue Code, a 1031 exchange is a powerful tax-deferral strategy widely used by real estate investors. A 1031 exchange allows investors to sell a kept property, reinvest the proceeds in other “like” properties, and defer these taxes, increasing their investment. Without it, investors could lose a significant portion of their taxable gains, which they might otherwise reinvest in new assets. This protects their capital for future investments and provides more substantial potential for stable long-term growth.

Deferring taxes can benefit a fast-moving real estate market where a quick reinvestment can yield significant returns. 1031 exchange also has tons of flexibility; investors can use this strategy to diversify into new asset classes or geographies, making it a versatile tool for private investors looking to change their portfolios.

4. 721 Exchange

A 721 exchange, also taking its name from the Internal Revenue Code, is when a real estate investor can transfer property into a Real Estate Investment Trust (REIT) in exchange for REIT shares. In a 721 exchange, the investor also realizes benefits that cannot always be fully realized through a standard 1031 exchange. The first of these benefits is called capital gains tax deferral. Essentially, investors transfer their property into the REIT. While they might incur some of the capital gains tax that would otherwise be due, they do not have to pay any capital gains taxes on any pre-existing capital gains they otherwise would have to pay if they had engaged in a 1031 exchange.

The second advantage is additional liquidity – the shares issued by the 721 exchange to an investor in return for the property would be tradable in the public markets, whereas trading real estate takes longer. An investor can realize the value of his shares more easily and perhaps more quickly. Notably, the additional liquidity means that an investor can access his cash faster and respond more quickly to market events.

In addition, a 721 exchange allows greater portfolio diversification: owners of REIT shares share ownership with other investors in a much more extensive, professionally managed portfolio of properties. Such diversification operates to eliminate the risk that one owns a single property with features that might reduce its market value and to allow it to benefit from the abilities of the REIT’s professional management team to make improved management and operating decisions for the portfolio of properties. The single property is gone, replaced by professionally managed properties in multiple venues. So, a 721 exchange becomes a tax-efficient way for investors to swap their real estate holdings for more liquid, diversified assets.

Conclusion

These 4 best practices of America’s elite investors will help save thousands of dollars in real estate loopholes. Navigating the real estate market with clever strategies is essential, allowing you to boost profits and slash taxes, multiplying your portfolio. As investors, we can step up our game by learning and implementing these tactics—allowing us to build upon current assets and leverage wealth into the future. If you want to keep your money working for you and continue to re-invest, it’s wise to stay on top of the current rules and regulations in real estate and always check in with your favorite tax professionals.

Have more questions? Reach out to Hayden Goldberg, local real estate expert, here.

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