Owners purchase income-producing properties for two main reasons: 1) Investment 2) Speculation.
Investors in real estate often have a longer holding period then those who buy for speculation. The primary opportunities for investors are A) Periodic return (cash flow) B) Capital preservation (safety) C) Capital appreciation (hedge against inflation) D. Leverage (other people’s money) E. Income Tax Advantage (tax shelter). When you make an investment in real estate, such as apartment buildings, hotels, offices, or storage units, the real estate capital gains tax rates in 2018 are either 0%, 15% or 20% if held for more than one year. If held less than one year, capital gains tax rates correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
Speculation in real estate is most often defined by a short-term holding period with higher risk and potentially higher reward. Their return is achieved at the time of sale and is realized on the profit made on the sale of the property. For short term holders, buying at the right price is extremely important. For speculators who determine after buying a property they paid too much, changing their strategy from short to long term may help mitigate the risk with ongoing property cash flow.