Real Estate vs. Internet Real Estate & Taxes

As any company grows & realizes some level of success (whether lasting or fleeting), the question arises - what do we do with the profit?

Conventional wisdom would have us investing in diversified stocks or (more likely) Real Estate. However, online marketers, as a group, can't accurately be labeled as conventional.

An investment real estate deal, in its typical structure usually provides minimal cash flow & requires YEARS earn your investment back. I am not talking about the no-money down crap that they hawk on late night infomercials or about flipping houses which is an art unto itself. With investment properties you usually keep the asset & someone else pays most of the mortgage. Cool. Now, as wonderful as all that sounds, it is really a get rich slow scheme. At best it is a sound, time-tested, & tax-advantaged way of building wealth. At worst, it is an albatross that saps productivity from truly profitable activities through distraction.

Still, something has to be done with the money. The idea of giving up to half of your earnings to the government to mismanage is enough to make anyone get creative & explore options which they would not have entertained under a less confiscatory tax code. It should be noted that living offshore isn't for everyone.

For those of us choosing to stay in the United States of Taxmerica, other tax-advantaged investments include domain names &/or purchasing entire websites. How these are 'expensed' for tax purposes could be debated, though. I have seen people who expense the entire purchase in one year - and other's (like us) who capitalize the expense according to contract length. Consult with your accountant - your mileage may vary. Even using the second method it is possible to 'expense' your domain purchases over a short period by focusing on purchasing those that are due to expire soon. Many domainers from whom you might purchase do not renew for more than one year so there are often several good names available for purchase in any given niche which are both available at an acceptable price & due to expire soon. Entire websites (inluding content) would probably be closer to intangible assets, which are capitalized over 15 years. Not much of a tax break there - but if the cash flow is right, this can be much more profitable than investment real estate, anyway.

Good domain names in the top extensions will appreciate over time. Real estate & domains are similar in that regard. Where they differ greatly is in liquidity. It has been reported that as few as 3-4% of the domains listed for sale actually change hands in a given year. What does this mean to you? It means you may not be able to sell it easily & that unlocking it's true value would be done through development. It means that any increase in value is theoretical until you have a check in hand or a way to effectively monetize the name. It means you may be the much fabled 'end-user'. It means it isn't a good investment vehicle for everyone.

It should be noted that, similar to real estate, any domain purchase expense which has previously been capitalized will have to 'recaptured' at the time of the sale. The only way to legally prevent a taxable event is to keep the asset... forever. That may not be such a bad thing vs giving your hard-earned profit to the tax man.

Sometimes it is just a matter of principle ;)