Trouble in the housing market is creating some solid opportunities for good prices. Add low interest rates and you have great ingredients for the purchase of some solid real estate rental properties.

Tax law favors real estate investing over investing in stocks and bonds in the following ways, among others:

With planning the investor can avoid the passive loss rules and obtain government subsidies for rental property losses.

If the government subsidy does not work out, the investor can realize ordinary income tax deductions through the release of suspended passive losses at the time of sale.

The real estate investor can defer taxes on a sale by utilizing the Section 1031 exchange.

Of course, the sale of your real estate rentals like the sale of stocks and bonds can qualify for tax-favored capital gains.

When we analyze real estate investments, we always use the after-tax adjusted rate-of-return formula (also known as the modified internal rate-of-return formula). We discovered this formula during the heyday of the tax shelter business. This was the only formula that would allow us to truly compare an investment in an equipment leasing tax shelter with an investment in a rental property, an oil and gas well, or a stock.

The after-tax rate-of-return formula is included in most real estate analyzing software. It is also available at most residential and commercial real estate offices. We absolutely love this formula because it produces a number you can relate to (like an interest rate). The formula works like this:

Take all the after-tax cash that you will invest and put that in today’s dollars (present value), using your safe investment rate of return.

Take all the after-tax cash that you will receive and put that in tomorrow’s dollars (future value), using your safe investment rate of return.

With the two steps above, you now have two numbers: (1) ... Log in to view full article.