If you want to pay the most amount possible in taxes, please stop reading here.
If you’re looking for a way to ethically pay the lowest amount possible, read on.
You see, the government has this strange infatuation with real estate investors and the tax laws reflect that. It almost seems as if they want to encourage people to provide abundant and affordable housing (despite what you are currently seeing in the marketplace).
Full disclosure, I’m not a CPA and not giving legal advice here, yet here are three big ways that investing in multifamily properties can help you shelter your income and save big on taxes:
1. Bonus/Accelerated Depreciation. When you invest in a multifamily property, you may be eligible for bonus depreciation, which allows you to write-off a portion of the cost of the property in the year that it is purchased. In the last few years, it wasn’t uncommon to invest $50,000 in a deal and then get a K-1 with a tax deduction for $40,000 to be used against the income on that property moving forward. While this is phasing down starting in 2023, it’s an awesome benefit worth exploring with your CPA.
2. Lower Tax Rate. Because rental income is taxed at a lower rate than other forms of income, you can save money on your taxes by investing in income-producing rental property.
3. Tax Advantaged Methods. There are a variety of methods of mitigating your taxes via the way you invest the funds and depending on your individual situation. These include:
- Self Directed Roth IRAs (funds invested through your ROTH IRA can grow to infinity with zero tax liability; though you do have to pay taxes on the money going into it first… yet it has a lower contribution limit.) You can choose from a variety of custodians, yet select one that has experience with using self-directed IRAs for real estate. If you are going to invest in a multifamily syndication be certain they have experience with that process. A few examples include Quest Trust, UDirect IRA, IRA Club, Provident Trust Group, and others.
- Solo-401Ks also called eQRPs (if your business qualifies; Has a higher contribution limit.) Quest Trust Company has experience with the process.
- Overfunded Whole Life Insurance Policy (…Sort of acts like a SDIRA on “enhancers” that comes with life insurance and uninterrupted compound interest arbitrage when you borrow against it.) Consult a certified IBC consultant to structure it correctly.
Also, if you would prefer to just “kick the can down the road” on your capital gains on an investment property, you just sold, there’s the 1031 Exchange which allows you to invest in a deal (albeit a little differently than in the other methods), and then roll those capital gains tax into the future.
Just understand that many deal sponsors require the amount to be pretty significant (close to 7 figures) in order for them to consider accepting a 1031 partner on their deal.
Each has it’s advantages and disadvantages. Yet, they tend to carry more benefits than just investing funds from a personal checking/savings account.
So if you’re looking for ways to save money on taxes, investing in multifamily is a great option and can produce a great rate return on your investment. Just be sure to consult with your accountant or financial advisor to be certain that you are garnering the advantage of all tax benefits that are available to you.
If you’re interested in learning more about this topic, click here.
If you are interested in future investment opportunities, click here.
By Kelsie Mans-Ray
KMR Multifamily Acquisitions / Syndicator
NOTE: This information is of a general, educational nature and may not be construed as tax, financial, or legal advice pertaining to a specific offering, exemption or situation.
