One of the many advantages of investing in multifamily real estate is its tax efficiency. From depreciation to the capital gains tax to other tax efficiencies, explore the various tax-related benefits of multifamily real estate.
Depreciation
Of the various multifamily real estate tax efficiencies, depreciation is the most significant. Simply put, you can deduct depreciation from your taxes. Under the tax code, properties are considered to lose value over time due to wear and tear. This means that you can claim a tax deduction for a portion of the property's value each year, which can help to reduce your taxable income.
You can take advantage of this depreciation to offset the passive profits from not just the real estate investment, but any investment or passive income. If you own your own business or practice, your CPA can help you structure your income to take maximum advantage. And if the losses are greater than your passive income, you can carry them to the next year.
If your spouse is a real estate professional, you can even speak to your CPA about using depreciation to offset active income.
We always perform a study with engineers called a “Cost Segregation Study.” This allows us to frontload the depreciation into the first years of the investment. This combined with bonus depreciation provided for in the Tax Cuts and Jobs Act provides significant offsets to your taxes in the year you make the investment. Multifamily deals typically see 50-60% of the equity as a depreciation expense on their taxes under the current law.
Mortgage Interest Deductions
Multifamily property investors, just like owners of any other property, can deduct mortgage interest on their taxes. This is especially helpful for the first few years of your investment, as the majority of your initial mortgage payments will pay off interest, not the principal.
Sales Taxed as Capital Gains
When you sell multifamily real estate, it is taxed as capital gains, not regular income. This is important because the capital gains tax rate is lower. Additionally, if you held the property for over a year, you have an even lower tax rate as it is considered a long-term capital gain. Considering we always hold for long periods, the appreciation and equity gain from the sale will be taxed in a much lower bracket.
Postponing Capital Gains via 1031-Exchanges
Thanks to 1031 exchanges, you can also delay paying your capital gains tax. Instead, you get to reinvest your profits into another investment that is similar in kind. If we do sell a property, we always offer our investors the opportunity to roll forward their investment in a 1031 exchange with us. This defers capital gains and allows everyone in the investment to trade up into a bigger and better asset.
If you take full advantage of this, you can keep delaying paying your capital gains taxes while earning equity and compounding your equity into a huge position without paying taxes.
Refinancing
Refinancing lets investors take advantage of that equity in a tax-advantaged way. That’s because refinancing is not a taxable event. Through our investing strategy, we purchase properties, improve them, and refinance based on increased value and cash flow. This refinance event allows us to recapitalize the deal and provide returns of capital to our investors without incurring taxes. We generally hold our deals for 10 years or more so multiple refinance events can provide multiple opportunities for this.
Legacy Transfers
For longer-term, multi-generation real estate investments, you can also take advantage of legacy transfers to pass your investment property to your heirs. Upon death, depreciation recapture taxes and capital gains taxes are eliminated. This is an excellent tax benefit for heirs receiving the property.
Conclusion
Multifamily real estate has multiple tax efficiencies, including depreciation, being taxed as capital gains, and 1031 exchanges. It is one of the most tax-efficient investments that investors can make, allowing them to potentially save thousands of dollars in taxes each year while also enjoying the benefits of owning rental property.
* Please consult your CPA on all tax-related matters. These are suggestions to start a conversation. We are not tax professionals and this information should not be relied upon to file tax returns.
Multifamily real estate is a popular choice among real estate investors due to its potential for steady cash flow and long-term appreciation. These types of properties, which include apartment buildings and duplexes, offer the opportunity to generate income through rental income and potential appreciation. One important aspect to consider when investing in multifamily real estate is the location of the property. Properties in desirable locations with strong job markets and population growth are more likely to generate higher returns.
Carbon Real Estate Investments is a company that specializes in multifamily real estate investments. They have a team of experienced professionals that are skilled in identifying and acquiring properties that have the potential for strong returns. They also have a strong track record of successfully managing and repositioning properties to maximize returns for investors. Carbon Real Estate Investments also provides investors with a wide range of multifamily properties to choose from, including niche markets such as student housing and senior living, providing investors with a diverse range of options to fit their investment objectives.
In conclusion, multifamily real estate can be a great way for investors to generate income and potential appreciation. Carbon Real Estate Investments is a company that has a proven track record in this area and offers investors a range of opportunities to consider. By utilizing the expertise of Carbon Real Estate Investments, investors can feel confident in their multifamily real estate investment decisions and have peace of mind knowing that their investments are in good hands.
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