The multifamily real estate investing benefits are undeniable. The owners can easily take substantial write-offs like depreciation, mortgage interest, etc., to preserve the property’s cash flow. Thus investing in the CRE, no doubt will bring in great returns. However, there are a lot of barriers when it comes to entering. The majority of the investors do not have the required capital for purchasing the CRE, nor do they have the resources or the time to successfully operate the real estate property. For this reason, investments in real estate syndicates can be a great way of taking advantage of the tax benefits that are associated with owning a multifamily.
Advantages of multifamily property
Multifamily real estate investing can bring in a lot of advantages. It not only assures consistent cash flow but also provides a great means for the owners to get the returns that would work the best. However, this would require the person to have proper knowledge of how to make money in real estate, which can be quite difficult, especially for the newbies. Besides, there are major advantages that one can get with real estate investment. This will include.
1. Depreciation
As per the existing tax code, the investors can avail the benefits produced with the income-generating property annual tax deduction, which is also known as depreciation. It is the reasonable allowance meant for wear or tear or exhaustion. The rental properties typically depreciate for over 27.5 years which in general is considered to be the usual life of the residential building. However, there is a possibility of accelerating depreciation faster. It can be done through the cost segregation study.
The study is meant to help the person separate the personal property from the building improvements and land and then assign the useful life to each of the assets aggregated. For instance, personal property can easily be recovered in as little as 5 to 7 years. While the land improvements can be depreciated for about 15 years recovery period. No doubt, the cost segregation studies can be quite complex, but the investors can easily save thousands of dollars, especially during the first year of ownership.
No matter the investment type, one can utilize the cost aggregation study. Depreciation can be quite a useful tool for offsetting the positive cash flow that can be generated on an investment property. This can be true if the property is owned personally or in partnership. In both cases, the amount of income generated from the investment, would come with an appreciation that would help reduce the income. so you can easily reduce the tax you have to pay.
2. Tax rates
Generally, investments of any kind are subject to two forms of taxes, including capital gains tax and ordinary income tax. When generating revenue you are liable to pay the ordinary income tax. In contrast, the capital gain tax is paid on asset sales. Based on the tax bracket at the federal level, the ordinary tax can be as high as 37%, while the capital gain can be around 20%. Remember, the rate does not include 3.8% net investments that would apply to an investor who is passive in nature. Further, it would be applicable to both the gain from the sale and the rental income. Also, there can be some additional taxes that your state might impose.
The dividend-producing stocks and regular cash flow both are great examples of ordinary income properties. There is a certain difference between the two that makes real estate a lot more favorable asset class for the tax. Remember, the cash which you will get from the real estate can be offset through depreciation or entrance expenses. While the income that you get from the stock dividends cannot do the same.
This is a major reason why most of the real estate investors choose to hold direct ownership of the property. Further, the real estate investors get the heads off. Instead, it used to be the capital gain tax when it is sold based on the original basis. This clearly states multifamily real estate investing can be quite beneficial as you would get to save a lot.
3. 1031 Exchange
All of the taxes have a provision allowing real estate investors to defer any capital gain taxes payment. This is known as the 1031 exchange. It allows the investors to sell the property and then use the money to reinvest into a similar investment. Thus it differs from the capital gain tax. This can be particularly useful when the investors are the ones who owned the property for quite long to run out of depreciation but reinvesting the sale proceeds here would allow the investor to take on the lower tax on the new property, which typically represents that deferred gain. In case the new purchase is of higher value, then the investor would have additional taxes that can be deferred. But it would be the full cost of the new assets. The investors thus can perpetually defer taxes while they continue to build equity along the way.
In reality, it is quite an incredible capital preservation, but it can be complex. There is a deadline that the investors must meet for the trade to qualify. So having professional guidance is extremely important. If you plan to invest in multifamily real estate, then you can definitely take a step as it would bring great benefits.
Choose to get a professional support
If you are looking for professional support to invest in multifamily real estate property, then it would be helpful to contact Multifamily Mindset. We have got expert professionals who can help you with all of it. No matter if you are looking for a loan or any guidance about the industry, our expert would be there to make things easier for you and assure you put your money in the right place.
Contact us to know more.
