3 Unbelievable Real Estate Tax Shelters of the Rich


It's no secret that the rich often take advantage of tax shelters and loopholes to minimize their expenses. But some tax loopholes offer a shocking advantage to those who have enough money to exploit them. Here are a few of our favorites.

Investments in Rural Land

Why go small when you can go big? If you can afford it, buy a few acres of rural land. All except one of the 50 states have what's called "use-value assessment," which allows land-buyers to purchase land and sell it at its assessed "use-value" rather than the fair market value, as with other types of real estate — as long as you comply with a few minor guidelines.

The IRS provision was originally created to help farmers hold on to their land. But according to The Nation, the rich are using it as a tax shelter. In 2011, Michael Dell reportedly qualified his $71.4 million 1,757-acre Texas ranch for the tax credit and brought its assessed value to $290,000. They say it takes money to make money, but that kind of tax savings seems more than a bit excessive.

1031 Exchanges

The rich can often offset real estate capital gains or losses with a 1031 Exchange. Section 1031 of the Internal Revenue Code is a provision that allows real estate investors to sell property, take a profit, and defer capital gains or losses as long as the proceeds are reinvested in similar use property.

Not all real estate transactions qualify for 1031s. In order to receive this special tax treatment, the property must be used for trade, business, or investment purposes. Most investors use 1031s to build long-term tax-deferred wealth. There is no limit on the number of 1031 Exchanges you can do. As an example, an investor buys Building A for $300,000. He turns around and sells it for $450,000. That's a profit of $150,000. At the time of the sale, he will owe taxes on the profit. But, if he were to do a 1031 Exchange, he can take the entire $450,000 and invest it in much more expensive Building B, without paying tax. He can again repeat this process for the purchase of Buildings C, D, E, and so on.

Dynasty Trusts

Dynasty Trusts are a form of irrevocable trust used by wealthy families to create generational wealth. With properly formed trusts, your descendants remain exempt from estate, gift, and generation-skipping (GST) tax for the life of the trust.

There are two ways to fund the trust — while you're alive, or upon your death. In either case, your assets, such as real estate property, stocks, bonds, life insurance, etc. are placed within the trust and protected by its provisions. The trust allows your assets to grow exponentially and into infinity in most cases, but are subject to income and capital gains tax either while you're alive or at your death, unless the trust is created in a state that does not impose these taxes — such as Texas, Nevada, or Florida, for example. That's where the possibility of huge tax savings occurs.

Individual states have their own rules governing Dynasty Trusts. If you're interested in transferring real estate and other assets to a trust, please be advised that these are complicated agreements and you should seek the services of an estate planning attorney.

If purchasing 10 acres of rural land, 1031 Exchanges, and Dynasty Trusts are not in your immediate pathway to wealth, but perhaps homeownership and real estate investing are. And as you're on your journey, remember these real estate tax shelters of the wealthy — you might need them someday.

Would you take advantage of these tax ruses if you could?

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