Investing in real estate is one of the best methods of generating passive income. There are different asset classes that one can invest in such as single-family, townhouse, and multifamily homes. If you are looking to maximize profits by paying fewer property taxes, consider investing in multifamily homes.
In this post, am going to demonstrate how real estate investors in the US enjoy tax benefits by investing in multifamily properties. I have also prepared podcast #20 that discuss more about multifamily investment tax benefits.
- Real estate depreciation tax
Depreciation is one of the best factors that gives property owners unique tax breaks compared to other investment vehicles. In real estate, properties depreciate over time due to wear and tear. As a result, multifamily property value decreases, and depreciation expense tax deductions are used to cover such progressive value loss.
According to the IRS, residential property is considered profitable for 27.5 years. Therefore, investors in multifamily homes are allowed to deduct depreciation expenses from their rental property income for such a period of time.
For instance, a multifamily property worth $500,000 would have a depreciation expense of $18,183 per annum which is a sizeable amount of tax savings.
In addition, the bonus depreciation allowance was increased to 100% from the previous 50% in the new regulations. It covers expenses for multifamily property and its improvements. Such incentives for items like appliances, mechanical equipment, landscaping, and other improvements amount to a sizeable amount in tax savings.
- Unique gifting and estate tax benefits
When an investor decides to gift an LLC interest of a real estate investment to a family member, the IRS law allows them to reduce the value of the gift by up to 30%. This is not the case when an investor in stocks or shares decides to gift a family member.
The 30% discount value is based on the assumption that the investor has limited control over the LLC interest.
- Real estate investment tax deductions
In real estate, a deduction is basically an expense that is written off from a rental property owner’s taxable income. In the USA, owners of multifamily rental properties are allowed by the law to deduct the amount of expenses that they incur when managing, maintaining, and repairing residential properties.
Some of these expenses that can help you save on your tax obligations include; Insurance premiums, mortgage interest, marketing costs, maintenance and repairs, utility costs, and management costs.
- 1031 Exchange Tax
Section 1031 of the Internal Revenue Code states that a real estate investor can swap their rental units with minimal or no capital gains tax obligations. However, certain rules dictate the threshold of enjoying the 1031 exchange tax benefits.
- The new property must have equal or greater value than the old one
- Both properties must be “like-kind”
- The investor must demonstrate that the swapped property will be used in a productive manner
- Cost-Segregation tax benefits
The concept is cost-segregation in real estate investment is quite similar to that of depreciation. The only major difference is the fact that it covers the value of depreciation of specific items in a multi-family property.
The IRS has categorized these items as those with a shorter lifespan such as interior fixtures, household appliances, and cabinetry. IRS allows real estate investors in multifamily properties are allowed to write-off their depreciation expenses for up to 7 years.
- Passive income tax benefits
Individuals who spend more than 750 hours on real estate annually are considered real estate professionals. However, if you spend less than 750 hours in real estate, you are required to pay passive income as opposed to the standard income tax.
Investors of multifamily homes fall under this category and they stand to gain a lot in terms of passive income tax benefits which are generally lower. In my podcast #27, I have discussed about the Passive and active apartment investing tax benefits. If the property appreciates, investors will be obligated to pay capital gain taxes which are also affordable.
Therefore, based on the above tax benefits, it clearly shows that investing in multifamily properties is one of the best strategies for reducing your tax obligations.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, please consult with your own CPA, legal, and financial advisor before investing.