In a letter to the shareholders of Berkshire Hathaway (NYSE: BRK-A), Chairman Warren Buffett, considered by many to be the greatest investor in history, detailed how the unpaid capital gains taxes from the company’s stock holdings were essentially a loan provided by the United States Treasury.

 Buffett explains that this phenomenon results from the massive tax bill, measuring in the billions, that Berkshire Hathaway would have to pay if it sold its massive stock holdings. That would result from the huge profits that are still on paper, but would have to be paid if the securities were sold. If Berkshire Hathaway ever did sell its billions in stock holdings, the tax bill would be enormous. Needless to say, that would have a detrimental impact on the company’s earnings, and most likely the share price.

Through the act of buying and holding stocks for the long term, Berkshire Hathaway does not have to pay the significant capital gains taxes that others do who sell securities for a profit. For investors looking to realize similar benefits provided courtesy of the United States Treasury, holding rental real estate in a retirement account provides this tremendous competitive advantage that is unmatched.

This results from any income or profits resulting from real estate held within a retirement account such as an individual retirement account or a 401(k) being tax free. If the property owned is rented, the income received is not taxed. Should the property be sold, there are no capital gains taxes…so long as it is part of an individual retirement account.Who's watching over your real estate investments? EquityBuild is!

By holding real estate in a retirement account, even Buffett, “The Oracle of Ohama,” is topped. Berkshire Hathaway must pay taxes on the dividend income it receives from the shares of companies it owns such as Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT). As many of the securities owned are preferred such as those from the Bank of America (NYSE: BAC), the tax bill is high due to the amount of the dividend yield. But the income earned in an individual retirement account from renting real estate is tax free for the investor.

The owner of the real estate in the individual retirement account can also sell for profit without having to worry about capital gains taxes. There is no such benefit for Berkshire Hathaway and its portfolio. This capital gains levy can be very high. By not having to worry about paying capital gains taxes, the investor with real estate in an individual retirement account has much more flexibility.

Warren Buffett, who is worth over $50 billion, likes to state that when investing, long term for him is “forever.” But Buffett has sold many investments for profit over the decades. And in real estate, there is much to be made in flipping homes or selling property for a profit to redeploy the proceeds elsewhere. With the real estate held in an individual retirement account that can be done tax free. And until the property is sold, any rent collected is tax free, too. Individual investors should take advantage of opportunities that allow for an edge over Warren Buffett such as owning real estate in a retirement account as it is very difficult to best The Oracle of Omaha.

by, Jonathan Yates: EquityBuild News Contributor

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