If you’re a high-earning professional or seasoned investor, you’re probably already familiar with the phrase “It’s not what you make — it’s what you keep.” And when it comes to keeping more of your investment gains, real estate offers a powerful advantage: tax efficiency.
Unlike many other asset classes, real estate delivers not only consistent income and long-term growth — but also a set of tax benefits that can significantly boost your after-tax returns.
Depreciation: A Paper Loss That Lowers Real Taxes
One of the most powerful tools in real estate investing is depreciation.
Even though a property may be appreciating in value, the IRS allows you to deduct a portion of its value each year as if it were wearing out — a concept called depreciation. For residential real estate, that means deducting the value of the structure over 27.5 years (or 39 years for commercial property).
What this means in practice:
- You may receive cash distributions from your investment
- But your taxable income is often significantly reduced — or even eliminated — by depreciation deductions
In a well-structured deal, it’s possible to earn income while reporting a paper loss. That’s especially attractive to high-income investors looking to offset other gains.
Capital Gains: Favorable Tax Rates on Growth
When an asset like a stock is sold, the profit is often taxed as a capital gain. The same applies to real estate — but with added advantages:
- Long-term capital gains tax rates (0–20%) are generally lower than ordinary income tax rates
- Passive real estate investments held over time can benefit from appreciation plus tax deferral
- And with cost segregation and bonus depreciation, some investors can accelerate deductions early in the hold period, further minimizing taxes
This allows real estate investors to build equity and wealth more tax-efficiently than many traditional investments.
1031 Exchanges: Keep Your Gains Working for You
A 1031 exchange is one of the most effective tools for deferring capital gains taxes.
Here’s how it works:
- When a property is sold, instead of taking the profit and paying taxes, the investor reinvests the proceeds into another like-kind property
- The gain is deferred, allowing 100% of the equity to be rolled forward
- This can be repeated over time, allowing wealth to grow tax-deferred — potentially for decades
For passive investors, check if your investment is structured in a 1031-friendly manner.
Bonus: Step-Up in Basis at Death
For long-term investors, there’s one more tax perk: the step-up in basis.
When real estate is passed to heirs, the cost basis is typically “stepped up” to the current market value — effectively erasing all deferred gains. This means:
- No taxes are owed on decades of appreciation
- Heirs can sell with minimal or no tax liability
- It’s a powerful multigenerational wealth strategy
Who Benefits Most from These Advantages?
Real estate’s tax benefits can be especially appealing to:
- High-earning professionals looking to offset income
- Investors in high-tax states seeking better after-tax returns
- Near-retirees planning for income that won’t spike their tax bracket
- Multigenerational families with estate planning goals
At NC Capital Group, we work with investors who want to grow and protect wealth — not just on paper, but in reality, after taxes.
Final Thoughts: Build Wealth the Smart Way
Real estate is one of the few asset classes that offers consistent income, long-term appreciation, and generous tax advantages. It’s why so many high-income and wealth-building investors choose to include passive real estate in their portfolio.
With depreciation, capital gains treatment, and 1031 exchanges, real estate lets you keep more of what you earn — and keep it working for you.
Win Coleman, CCIM, is a graduate of East Carolina University where he received his bachelor’s degree in finance. He holds both North Carolina and South Carolina Real Estate Licenses and was awarded the prestigious CCIM (Certified Commercial Investment Member) designation in 2008.
Win served on the board of directors of The Triangle Apartment Association (TAA) where he co-chaired The Independent Rental Owner’s Council (IROC). He is a member of the International Council of Shopping Centers (ICSC), the Triangle Commercial Association of Realtors (TCAR) and the Raleigh Kiwanis Club.
While a specialist in site identification, evaluation and acquisition for investors and businesses, he also has extensive experience in brokerage, leasing, property management and investment sales.
Win assists in managing The Coleman Group, LLC, which owns a portfolio of investment properties, and he is a member of our acquisitions committee. He has lifelong experience and love for historic properties including the one he restored and where he resides in Historic Oakwood in Downtown Raleigh.