Active Real Estate Investments: Holding Strategy

Abstract

Chapter 7 investigated the acquisition and holding decision for active, owner-occupied real estate. In addition to the issues surrounding owner occupancy, investment real estate involves actual rental revenues and tenant management, as opposed to imputed rent. Depreciation expense is included in the economic calculation of returns to investment, owner occupied or not. If tax laws permit accelerated depreciation at a rate greater than the economic depreciation rate, real estate provides an additional source of cash. Accelerated depreciation either reduces tax payable or, typically in early years of an investment, creates or increases tax losses, generating a source of cash from tax refunds. The rate of return depends on tax policy, including the permitted depreciation schedule, asset life over which depreciation expense is claimable, marginal tax rates, and the extent to which losses on real estate investments are deductible against other income.