Most wealthy individuals invest in real estate for one primary reason: taxes.
And to be clear, that logic isn’t flawed. Real estate can be an extremely effective tax-planning tool. Depreciation, income deferral, and long-term capital gains treatment can meaningfully improve after-tax outcomes when structured properly.
The issue isn’t that people use real estate for tax purposes.
The issue is that many don’t fully understand the rules, or how those rules apply to their situation.
Tax Benefits Don’t Equal a Strategy
Real estate’s tax advantages are real, but they are not automatic.
How much depreciation you can use, when losses can offset income, and whether the investment actually improves your overall tax picture depends on factors like income type, participation rules, holding structure, financing, and coordination with the rest of your plan.
Without that context, real estate becomes a tax assumption rather than a tax strategy.
And assumptions are expensive.
The Hidden Costs of Illiquidity
I saw this play out recently with a client who bought a commercial property last year.
On the surface, the decision made sense. His friends were investing in real estate. His CPA recommended it for tax reasons. The numbers worked on paper.
But a year later, he told me something that caught my attention:
“I really wish I hadn’t bought it.”
Not because the property was failing, but because he realized he didn’t actually want to own real estate at all. He wasn’t interested in managing it, thinking about it, or having another illiquid asset in his life. The investment fit a tax narrative, but it didn’t fit him.
That disconnect is more common than most people realize.
Where Investors Get Tripped Up
Many high-income earners rush into real estate because:
- Someone they trust said it was “smart”
- They heard depreciation eliminates taxes
- Everyone in their circle was doing it
But real estate doesn’t exist in a vacuum. It impacts cash flow, liquidity, complexity, and optionality. And once you buy, reversing the decision isn’t always easy or inexpensive.
Tax efficiency should enhance your life, not complicate it.
Start With the Plan, Not the Property
Before investing in real estate, the better questions are:
Why am I doing this?
What role does this play in my overall plan?
Do I actually want to own this asset long-term?
When real estate is implemented intentionally and with accurate advice, it can be incredibly powerful. When it’s done reactively, it often creates friction and regret.
The Bottom Line
Real estate is a tool, not a requirement.
Used correctly, it can help wealthy individuals reduce taxes and build long-term wealth. Used impulsively, it can lock you into assets that don’t align with your goals.
Don’t rush into real estate just because someone told you to.
Make sure it fits your plan first. If you don’t know if it fits your plan, schedule a call with one of our advisors to see how this decision plays out in the whole picture.