Taxes got you down? We often get questions regarding some of the ways you can reduce your tax burden while investing in multifamily real estate.
I want to begin by saying I am not an accountant and do not provide accounting advice. Please consult your tax professional for such advice.
I am an avid multifamily real estate investor and would like to share some of the knowledge I have acquired while in the real estate investing space.
When investing in real estate, depreciation can help reduce your tax burden on any passive income/gains.
SINGLE FAMILY VS MULTIFAMILY DEPRECIATION TAX BENEFITS Single family (defined as 1-4 unit residential buildings) properties are generally depreciated over 27.5 years. For example: You buy a house worth 200K with land value of 75K and building value of 125K. The depreciation expense that you take each year against rental income would be $125,000 divided by the IRS allowed 27.5 years of useful life for a depreciation expense each year of $4,545.
With larger multifamily properties we typically take advantage of cost segregation and bonus depreciation to realize much more depreciation resulting in more significant tax benefits.
* Cost Segregation studies identify and reclassify personal property assets to shorten the depreciation time for taxation purposes. The primary goal of a cost segregation study is to identify the assets that can be depreciated over a shorter period of time – typically 5, 7 and 15 years. * Bonus Depreciation The Tax Cuts and Jobs Act, passed in 2017 allows for “bonus depreciation” which allows for depreciation to be taken in Year 1 of acquisition.
In a typical multifamily syndication where we do cost segregation studies and claim bonus depreciation – we get a $70K – 90K depreciation for a $100K investment in year 1.
What this means is that you can potentially offset about $70-90K (for every $100K in investment) in passive income/gains with the depreciation which can be a huge bonus for investors that might have planned to 1031 but missed the timelines to do so. This would also assist passive investors in offsetting their tax burden on dividends and capital gains earned while investing in multifamily real estate.
As you can see the tax benefits for multifamily real estate investors can be quite significant. There are several other tax laws that benefit multifamily investors as well. We’ll get into those later.
So what are your thoughts? Would you like to earn additional passive income with little to no tax burden?
Use the link below to schedule a call at your convenience and let’s discuss how I can assist you in achieving your multifamily investing goals.