Perhaps one of the wisest bits of advice you'll hear from any experienced investor is to keep a diversified portfolio. However, not every kind of asset offers the same tax benefits and long term value as prime real estate, especially in a metropolitan hub like Washington DC.

If you're interested in decreasing your taxable income while making smart financial decisions for the future, we have a few helpful pointers that can help you start your journey in real estate investment.

Discuss Your Options with a Professional

making a deal

Before you start looking for the perfect property, it's best to sit down with a team of professionals to craft an investment strategy. Your real estate agent, lawyer, or financial planner can help you outline your options and select the best type of property and tax benefits to suit your needs.

Washington DC offers many different residential and commercial properties that can help you generate passive income. To start making an immediate profit, you can rent out your property to tenants. However, you can also use your investment as a legal tax shelter, which can help you decrease your overall taxable income. 

Take Advantage of Tax Benefits


Using real estate as a tax shelter is easier than you might think. Be sure to talk with a tax professional about any potential deductions or strategies that could help you reduce your taxable income. Some common techniques include borrowing cash with tax-free loans or taking advantage of depreciation deductions.

Typically, multi-million dollar investors also own more than one property in order to take advantage of a 1031 exchange. This exchange allows investors to buy a second property without paying tax on the sale of the first property. However, both investments must be similarly priced and defined as "real property," which includes land and buildings. If you combine a 1031 exchange with depreciation deductions, you can avoid taxes on the cash flow and gain money in the event of a sale.

Invest Outside of the Box


There are a few more creative ways to invest your hard earned cash into real estate that you might not have considered. Many investors also choose to put their property portfolio into a self-directed IRA, which allows you to avoid paying taxes on your investments. For a lower risk option, you can also use your IRA to take a loan against real estate or purchase local property tax liens, which come with fewer restrictions.

Some investors choose to never sell their real estate to avoid the pitfalls of recaptured depreciation or capital gains taxes. This could be largely beneficial to your heirs, who won't have to pay for the capital gains taxes on your property if they sell it. Another interesting tax sheltering technique involves investing in "Opportunity Zones." Properties located in these designated areas are eligible for a temporary deferral of capital gains taxes or a permanent exclusion of your taxable capital gains when you go to sell.

Ask Plenty of Questions

discussing investments

Even the most experienced real estate investors often have a team of professionals at their side. If you ever have any questions about investing, don't hesitate to reach out to a qualified expert for advice. There are many regulations that come with creating a tax shelter, but if you do it the right way, you won't run into any legal issues and can enjoy some pretty amazing financial benefits.