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September 23, 2024
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November 14, 2024Taxes Through the Ages
Key Tax Milestones for Investors
The world of taxes has changed a lot in the past few decades. The IRS has now collected almost $1 billion in past-due taxes from high-net-worth individuals in 2023 alone.
Taxes are very important in commercial multifamily real estate. Learning how to make sense of the world of taxation will help you maximize the profitability of your real estate investments. Learning how to take advantage of the tax code is even more important.
A Brief Overview of Taxation in World History
Many people wonder how taxes came to be in the first place. Who was the first monarch to set up this system and collect tolls from their subjects? Understanding the role of taxes through the ages will help investors better prepare for future tax reforms.
Taxes in Ancient Times
Taxation has existed since the dawn of civilization. Historians credit ancient Egyptians as one of the earliest civilizations to impose taxes on people. Egyptian monarchs and govt. official used these levies to fund public projects and support government operations.
This concept remains valid even today. In the US, the country's first income tax system came to be during the Civil War. It helped the Lincoln administration fund military efforts. Now, this was a major shift from relying on tariffs and excise taxes, which were the primary sources of revenue for the American government in the first half of the 19th century.
The Birth of Modern Taxation
That’s why we can call the 19th century the age in which the modern taxation system came into existence. While 1861's Revenue Act made the federal income tax a thing in the US, the 16th Amendment of 1913 gave Congress the authority to levy an income tax without the need to apportion it among the states.
Now, the federal government could collect taxes straight from the citizens (ergo, small-time investors) based on how much they were earning. The 16th Amendment serves as a major milestone in the history of taxes for real estate investors.
The Taxation’s Influence on Investors
When WWII was raging, the government introduced withholding taxes to make it easier to tax individuals and ensure a steady stream of revenue. Tax policies of the latter half of the 20th century showed a progressive approach toward tax collection for high-net-worth & millionaire-level individuals.
In short, folks with higher income brackets had to face higher tax rates. The government also introduced capital gains taxation that directly impacted investors. Real estate investments saw a surge due to long-term capital gains that were taxed at lower rates.
Tax Reforms and Economic Growth
In the '80s, the Reagan Administration brought the Tax Reform Act for tax code simplification. It aimed to reduce tax rates for laypeople and corporations. With lower tax rates, economic activity accelerated nationwide, and the real estate investment market flourished.
This Act became a case study for other governments. In the Tax Cuts and Jobs Act of 2017, a similar reformation boosted business investment and benefitted small-scale investors.
One massively valuable tool we received from this Act was the utilization of Bonus and Accelerated Depreciation. This allowed property holders to bring a majority of the deprecation they would normally see over a longer period time into the first few years of owning property.
Current Taxation Landscape for Investors
For modern-day investors, the landscape of taxation looks something like this:
- Capital Gains Tax: Long-term capital gains are taxed at lower rates (0%, 15%, or 20%) depending on your income level.
- Dividends: Qualified dividends are taxed at preferential rates, while ordinary dividends are taxed at the investor's income tax rate (often as high as 37%).
- Tax-Advantaged Accounts: Accounts like Roth IRAs & health savings accounts (HSAs) allow for tax-free growth to minimize tax liabilities for small-time investors like you.
5 Key Milestones in the History of Taxes
The world of taxes changed forever for US investors when the 16th Amendment was ratified in 1913, right on the cusp of WWI. This law established a permanent federal income tax system with progressive rates. Below are the five major milestones that drove adoption of taxation:
- Ancient Civilizations: We can argue that the first major milestone in the history of taxes was when an ancient Pharaoh began collecting a 20% toll from farmers on gain harvests (and laid the groundwork for the modern-day tax system).
- Roman Innovations: Like always, Romans made it better by introducing the first "sales tax," administered by Julius Caesar. The 4% sales toll remarkably parallels the current form of this taxation we say in the US.
- Medieval Ages: When the Magna Carta was signed in 1215, a law was put in place stating that the government couldn't levy new taxes without the consent of the populace. It was a critical concept that keeps empowering investors even today.
- Industrial Periods: The American Revolution came to fruition due to taxation issues. The Founding Fathers firmly believed in no taxation without representation. This belief holds true even today.
- 20th Century Developments: WWI and WWII made many countries establish proper systems for collecting taxes on people’s incomes. It made income taxes stable sources of revenue to support larger state functions and welfare programs.
Taxation remains a crucial source of government revenue today. We have different forms for taxes on income, property, sales, and tariffs. The structure & efficiency of tax systems continue to evolve. Global economic conditions and public sentiment towards government spending will also affect them. This is what an investor must keep in mind; understanding these milestones will help real estate investors maximize the profitability of their investments.
What Lies Ahead?
Keep in mind that passive income isn’t a get-rich-quick scheme. Don’t treat it like a quick fix for all your financial worries. Building a stable passive income source takes time, patience, hard work, and – most importantly –financial planning. But the reward is worth the effort!
There’s no one-size-fits-everyone approach to family bliss; what works for someone else may not work for you. You need to experiment and learn from your experience; find your strategy, something that aligns with your unique skills, goals, and interests. With creativity and tenacity, you can create a life that balances financial security with the joy of family.
Who is Gold MF?
Gold Multifamily is a Leading Real Estate Syndication & Investment firm that invests in premium and value-added multifamily properties. We offer expert syndication and lucrative real estate investment opportunities.
Come explore our comprehensive services in real estate syndication and property management, designed to maximize your investment returns.
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