What is Investment Property?

Investment property is real estate that an individual or entity owns without the intention to directly use it, but rather to benefit from its ownership.

Investment property is not directly used or inhabited by the owner. Its purpose is to provide income through rental or lease, or to be sold at a later time after the property has appreciated. Sometimes this involved building upon the property, or otherwise renovating or improving it. The property might be commercial or residential, with multiple tenants or a single one.

Sometimes people form LLCs or other entities to invest in properties together, but people can also invest in REITs (Real Estate Investment Trusts), which have a lower initial investment cost, in general, and allow investors to participate in an entire portfolio of real estate investment properties.

Like LLCs, REITs are pass-through entities. It is possible to hold investment property within a self-directed IRA, but there are guidelines which must be followed, and often the red tape deters those who might have been interested.

Generally investment properties that pay income will be taxable to the investor year after year, but when properties are sold, it is possible that they are eligible for a 1031 exchange, which allows them to defer taxes on the gains if they immediately invest in another substantially similar type of property.

What is Residual Income?
What is Income Property?