Multifamily home investing has its perks. You have far less risk of vacancy, the closing process is simple and there are tax benefits of investing in one of these properties. When it comes to any investment, the tax implications must be considered.
If you can cut back on your tax responsibilities, you’ll be able to enjoy a much higher return on your investment.
4 Tax Benefits of Investing in Multifamily Housing
Investments depreciate in value – that’s normal. The typical period of depreciation for a rental property is 27.5 years, which is considered the “useful life” of the property. Through depreciation, you’re able to deduct the “wear and tear” of the property.
Systems, such as the plumbing, roof and electric will age and can have their value depreciated.
A certain portion of the structure’s value can be deducted annually. Let’s assume that a property is valued at $250,000, you could deduct $250,000/27.5, or $7,272 per year.
Tax deductions are available, and every investor should be working with an accountant to ensure that they’re taking them each year. While all of the other points on our list may not be well-known, these basic deductions should be:
- Mortgage interest
- Management costs
- Insurance premiums
- Marketing costs
You’ll be able to reduce your total income by deducting each of these costs. Make sure to keep all receipts on these costs so that you can hand them off to an accountant that will deduct these items from your taxes.
Cost segregation is a means of advancing the depreciation of a property faster than the 27.5 period. This is a complex process where a professional can come and inspect the entire property to determine if certain home systems have lost their value.
Typically, the professional will create categories for the home:
- Land improvements
- Personal property
- Buildings and structures
In this case, it’s possible to depreciate items faster, like personal property that can have its value depreciated over a 5-to-7-year period.
There are immediate tax benefits to this method, but it’s a method that you’ll want to hire a professional to help you leverage properly.
Capital gains can be deferred, under the 1031 Exchange, which allows you to sell your real property and use the proceeds to put into another investment. You’ll be able to defer the capital gains tax so that all of the proceeds for the sale can be funneled into your new investment.
Through advanced tax strategies, such as buying a home for a higher price than the one sold and using depreciation again, you’ll be able to lower your tax burden.
The 1031-exchange is very complex, so it’s best to work with a tax professional on the matter.
There are tax benefits of investing, and you must leverage them to maximize your profits. Using the benefits above, you’ll put more money in your pocket and less into the government’s treasury.
While you may not be able to leverage all of these tax benefits, they are available to all multifamily home investors.