Familiar with the American Revolution? This was a revolution that was largely a tax revolt against Great Britain where Americans felt as though they were paying unfair taxes. Luckily, nowadays there are many advantages of tax benefits when it comes to multi family real estate investment. Here at Luxe Crowdfunding, we are here to inform and show individuals how to invest in real estate. You can count on us, Chicago.
What are the Tax Benefits When Learning How To Invest in Real Estate?
- Of all the great tax benefits for multifamily real estate investors, the first and perhaps best is depreciation.Multifamily properties often rise in market value over time. And, with proper maintenance, their useful lives are practically unlimited. However, without proper maintenance and capital spending, buildings will eventually become uninhabitable. Money spent on capital items comes from after-tax dollars, which owners might be reluctant to spend. So to encourage multifamily real estate owners to undertake necessary capital spending, the government permits them to take a depreciation deduction against current income equal to 1/27.5 (or 3.6%) of the building’s value at purchase each year.
- The ability to undertake a cost-segregation study is another great benefit of multifamily real estate investment. While the government considers the useful life of a multifamily apartment building to be 27.5 years, it considers the useful lives of certain items on the property, like cabinetry, appliances, and fixtures, to be much shorter – as little as 7 years or less. A professional cost-segregation study will separate these items out from value of the building, meaning you may realize even greater tax savings from the depreciation deduction.
- Passive Income Tax Treatment
- Another great advantage of multifamily real estate for investors is passive income tax treatment. As long as you are not a “real estate professional”, your income from an investment in a multifamily real estate is taxed at passive income rates, which are not subject to employment taxes and therefore are lower than current income tax rates. Thus, even if there is taxable income left over after the depreciation deduction, it will be taxed at the lower passive income tax rate. In addition, appreciation is taxed at capital gains tax rates, which are lower than current income tax rates.
- Section 1031 Like-Kind Exchanges
- The depreciation deduction discussed above is subject to “recapture” on sale. That means your gain on sale is increased by the amount of depreciation deductions you took earlier. However, the government lets you defer taxes on the recaptured depreciation through what’s commonly known as a “1031 like-kind exchange,” after Section 1031 of the US Tax Code. On sale, your gain is calculated by subtracting your “basis” in the property from the sale price. The “basis” is the purchase price minus the accumulated depreciation over the life of the investment. The government allows you to defer paying these taxes by using the proceeds for the purchase of a more expensive, higher-basis property within a set period of time. Though your basis in the next property is reduced by the amount of the taxable gain that was deferred, you are permitted to repeat this process as many times as you wish until you die.
Are You Looking For A Multi Family Real Estate Investment
If you are interested in a multi family real estate investment and the tax advantages it comes with, we have all the information you need. Luxe Crowdfunding is here for you. Call or contact us today for more information. We are a great resource, Chicago. We know all the facts when it comes to learning how to invest in real estate.