Tax Benefits of Multi-Family Investments

I wanted passive income so that I could have time freedom, that’s what drove me to real estate.

I quickly realized, in order for that to happen, I would need to find the avenue that would provide the best passive income & the best tax incentives.

That’s what drove me into the multi-family sector. 

Tax incentives vary from asset class to asset class but I felt like multifamily was the clear front runner! I’m extremely grateful to have found this path and for the lifestyle it’s afforded my family and the families of our investing partners… which is why I feel obligated to share! 

WHAT I HOPE TO ACCOMPLISH

I will try my best to walk you through some of the US tax laws and explain how they work in our favor as real estate investors. I’m not talking about trying to cheat our way out of paying taxes, not at all. I’m talking about HOW to keep more money for you and your family, legally, ethically, and strategically by simply shifting your investment approach.

I’ll explain some of the benefits and also explain how those stack up against money you would make from a typical stock investment.

If you don’t care about the details and just want to see the comparison feel free to scroll down to “What does that mean and how does it compare.”

DISCLAIMER: HIRE AN ACCOUNTANT

I’m not an accountant, not even close! I’m trying to provide a high level overview so you know your options. That being said, you should absolutely hire a real estate focused CPA if you’re looking to dive into this amazing asset class. They can save you hundreds of thousands of dollars by showing you how to structure properly.

Baqir Ali out of Houston, TX is a great CPA if you need a referral. For the record, Baqir isn’t affiliated with MFCP and has no idea I’m writing this, he’s just a damn good CPA.

WHY TAX BREAKS EXIST

Multifamily housing plays a vital role in the housing industry and is viewed as one of the best and most affordable housing options out there. Apartments are the choice of residency for people at all stages of life though, not just those needing affordable housing.

In fact, the demand is so high that there is a constant shortage for these options, which is why tax incentives exist. The government will reward you as an investor, in the form of tax incentives, because you’re assisting in providing these housing options to people across the nation.

Reminder, any tax incentive that you get, translates into added revenues in your pocket. The more money you have in your pocket the quicker you can grow your wealth portfolio.

3 TAX INCENTIVES OF MULTIFAMILY

1- DEPRECIATION

Depreciation is an income tax deduction. In short, while real estate values generally appreciate, the physical components don’t. (Roofs, appliances, electrical, etc) The IRS understands and accounts for this by offering an income deduction for owning depreciating assets.

For example, let’s say we buy a commercial property for $10,000,000 and the tax assessor’s estimate the land value is $3,000,000. The land value doesn’t benefit from depreciation but the physical property value will get depreciated over 27.5 years, resulting in a tax loss of $254,545. ($7,000,000 / 27.5 = $254,545)

Important reminder that depreciation is a “phantom” expense, we’re not actually stroking a check for the $254,545.

This means that regardless of the amount of dollars received from cash flow during the hold period, the annual taxable gain will usually be net negative or very close to it! The result, positive cash flow each quarter while still claiming a loss at the end of the year.

In basic terms: Make more and keep more! It’s beautiful!!

2- COST SEGREGATION 

Multifamily investors also get the added benefit of being able to accelerate that depreciation through a cost segregation study. In short, we can hire an engineer to come analyze all of the components of the property separately and have them create a custom depreciation schedule.

The result being the ability to depreciate up to 90% of the building’s value over 7 years.

3- BONUS DEPRECIATION

The Bad News: When you sell the property for a gain at the end of the hold period there will be a tax based on the long-term capital gains rates, as well as a tax for depreciation recapture.

The Good News: The new tax reform bill allows us to depreciate the entire value of a building in Year 1, this is called “Bonus Depreciation.”

This means is we get to carry our passive losses forward until we sell the property and use those passive losses to offset our capital gains!!

WHAT DOES THIS MEAN & HOW DOES IT COMPARE?

Alright, even if all you’ve done is skip to this section, you’ll see WHY I’m passionate about the topic at hand and HOW it effects our bottom line.

STOCK MARKET VS MULTIFAMILY

Stock Market

Let’s say you invest $500,000 into the stock market and earn a 10% return of $50,000. That would equate to you paying $10,000 in capital gains taxes, leaving you with $40,000.

That’s a net gain of 8%. 

Multifamily

Let’s say we invest that same $500,000 into a multi-family deal with cash flow returns of 10% instead. Your cash flow earnings that year would equal $50,000, but when you get your K-1 at the end of the year, (the tax document you receive for investments in partnership), it wouldn’t show a gain of $50,000, it would show a loss.

Which means at a minimum your net gain would be 10%

Even though you made $50,000, there would be a tax depreciation of approximately $73,000. Which means you would be showing a taxable loss of $23,000…. on a GAIN of $50,000.

Let me break that down for you… 

Taxable Loss Breakdown

Let’s look at an example of what the taxable loss of $23,000 could equate to if the gross income was $515,000. With a taxable loss of $23,000 due to depreciation, the taxable income would be $492,000.

THATS A DIFFERENCE OF $18,350

THE BOTTOM LINE

The less money you have to share with the U.S. Government, the more money you have to enjoy, invest, create generational wealth, and accomplish whatever your individual investment goals are. Once again, I’m grateful for this amazing asset class and the opportunities I have to invest.

Interested In Investing?

We are currently accepting accredited and sophisticated investors who are interested looking at our upcoming investment opportunities. If you’re considering investing, we’d be honored if you’d consider us as partners.

Contact us for more information.