It’s not what you earn, it’s what you keep.
Many investors assume that all income is taxed the same — whether it’s from a paycheck, bonds, or real estate. But that misconception can lead to missed opportunities. Real estate, especially when held passively through a syndication or fund, is structured to let investors keep more of what they earn.
(See 6 Myths About Passive Real Estate Investing)
Real Estate Income Isn’t Ordinary Income
W-2 income is taxed at your highest marginal rate — often 30% or more for high-earning professionals. But passive real estate income is treated differently.
Distributions from a well-structured real estate investment are typically offset by depreciation, meaning investors often receive cash flow while reporting little or no taxable income in the early years.
In other words, your property can pay you now — and the tax bill can wait.
Depreciation: The Quiet Wealth Protector
Depreciation allows investors to deduct a portion of the property’s value each year, even as that property may be increasing in market value. This non-cash expense reduces taxable income without reducing cash flow.
In larger investments, cost segregation studies and bonus depreciation can accelerate those deductions, helping investors shelter even more income early in the hold period. Over time, this simple accounting rule quietly protects a significant portion of your returns.
Tax Deferral: Growth Without the Drag
Unlike dividends or bond interest, real estate gains don’t have to be realized annually. In a private real estate fund or syndication, profits are typically realized at the sale of the property — often years after the initial investment.
That means investors benefit from tax-deferred growth throughout the hold period, while receiving regular cash flow that’s often sheltered by depreciation.
This combination — tax-deferred equity growth and partially sheltered income — helps investors build wealth more efficiently over time.
Lower Capital Gains Rates = More After-Tax Wealth
When a property is sold, profits are generally taxed at long-term capital gains rates, which are typically lower than ordinary income rates. For many investors, this can mean a 15% or 20% rate instead of 30% or more.
And when the time comes to transfer wealth, heirs may even receive a step-up in basis, eliminating accumulated gains entirely.
Why Tax Efficiency Matters
For professionals nearing retirement, every percentage point in after-tax return matters. Real estate’s unique tax structure — depreciation, deductions, and deferral — allows investors to keep more of what they earn, turning steady income and appreciation into a long-term wealth engine.
At NC Capital Group, we structure investments to take full advantage of these benefits — helping our investors build and preserve wealth efficiently, year after year.
Phil Neari, CPM, is a graduate of the University of Northern Colorado and has been active in the commercial real estate and property management business for over 30 years. He holds the prestigious Certified Property Manager designation (CPM) awarded by the Institute of Real Estate Management and is a Licensed Real Estate Broker in North Carolina, South Carolina, Virginia, Tennessee, and Texas. Phil is a member of the International Council of Shopping Centers (ICSC), Institute of Real Estate Management (IREM) and the National Association of Realtors (NAR). Phil is Broker in Charge of our Winston-Salem office and oversees property management and leasing activities. He also provides advisory services to select buyer and tenant representation clients as well as identifies potential investment and development properties.