Here are the top seven ways that we’ve found are great for tax-saving strategies. Now, just to inform you, I’m not a CPA. I’m just sharing our experience we’ve had with investors, and investing ourselves, in multifamily properties.
The first tax benefit you get from investing in a multifamily property is the fact that it’s passive income. Passive income gets taxed in a different bracket, in a different method, as opposed to earned income from your job on a W2. This passive income is generated from the rental income that comes in. Earned income (w2) gets taxed anywhere from 30 to 40%, but here, passive income, you can get taxed at 15 to 20%. Passive income is great at building wealth, and the difference in how it’s taxed is a big reason for that.
The second tax benefit is depreciation. Now depreciation is amazing because normally you can depreciate a property over 27 and a half years. As the property is becoming more and more depreciated in value, you can take that against your earnings and save on taxes that way.
This brings us to the third method, which is accelerated depreciation. When a property is being held for, let’s say five to seven years, before it gets sold, we can actually accelerate the depreciation. So instead of waiting 27 and a half years, normally, we would do the entire depreciation over the whole period of five to seven years. And this is amazing because this is going to allow you to reduce and almost obliterate the amount of taxes you would have to pay for whatever earnings and capital gains that you received. If taxes have caused frustration for you before, you’ll love multifamily property investing.
The fourth method is long-term capital. This one goes out to all my house flippers and single-family flippers, and day stock traders. That short-term capital gain gets taxed as regular income, and it’s high. This as opposed to if you held it over a year, then it turns into long-term capital gain. So a property that an investor invests in is held for five to seven years. Therefore, any capital gains count as long-term capital gains because this investment was held over a year. That’s a smart investment.
The fifth tax strategy our savvy investors take advantage of is a 1031 exchange. This is great when you sell a property, or a property gets sold, and then all the capital gains you can put into another property without having to pay it, and this is a great way to defer your taxes.
Another strategy is sell or finance. Let’s say if I had a property I wanted to sell, instead of selling it all at once, I can sell or finance it to somebody who’s then paying me the mortgage. This is great because any profits that I have, and that I’m going to make from all the years and years of appreciation, it only counts on a year-by-year basis. It gets spread out over a 10, 15, or 20-year period. This is a great way for me not to have to pay all the taxes all at once from one sale in one year.
And the seventh way is to do a self-directed IRA. A self-directed IRA is great because if you have income on a 1099, or sometimes even a W2, you could have a self-directed IRA, a 401K or a Roth IRA, to put the money in. Then you can use that money to invest in a property. And that allows me to defer my taxes from my earned income to invest in the property and get passive income, and eventually years and years and years down the line, I will pay those taxes, but it’ll be all deferred, and at that stage I’ll be in a completely different tax bracket, so I won’t pay nearly as much, which may even be obliterated by the depreciation anyway.
There are many smart tax strategies that you can use with multifamily property investing. And we have great CPAs working with us to help you meet your goals.
Give us a call, our number is (646) 671-9252, or you can email us at MFEpartners1@gmail.com.
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