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Our goal is to protect $250,000 in gain on rental property while also maximizing tax reductions. The first step is to refinance property with, typically, an interest only loan. A percentage of equity gain is taken out of property and placed into an equity index insurance product. The equity percentage is arrived at by determining payment amount you can afford on loan. Typically, it is tailored to match your current loan payment amount.
Going back to our scenario, what happens if property prices pull back 20% over next year? You do not suffer loss of $100,000 because gain is sitting in your equity index insurance product. Essentially, it is a wash and you have protected capital gains while capturing a stock market-based rate of return.
Ah, but it gets better.
Equity Index Insurance
The investment grade insurance product isnít just any policy. Instead, policy we use is tied to a stock market index. What if stock market suffers a loss? Not to worry, this policy carries a guarantee that you will never lose a dollar, even if market crashes. If stock market did crash, policy would simply credit you with nominal growth for year in question. In all other years, policy would grow with stock market. On top of all of this, money in insurance product grows tax-free.
So, what has been accomplished? First, you have protected your rental property equity gains from home price fluctuations. Second, you have leveraged your equity into two growth channels, stock market and appreciating house prices. Third, you have converted taxable growth [property appreciation] into tax-free growth [insurance].
With housing markets ready to cool down, this strategy effectively locks in your profits. Preserving equity gains should be a primary goal of any investment property owner.
Richard Chapo is with Business Tax Recovery - Obtaining tax refunds for small businesses for overpaid taxes. Visit article section to discover tax strategies and deductions.