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Explained: Tax Incentives for Multifamily Real Estate Investors

Updated: May 22, 2023

One of the biggest draws of investing in real estate is tax efficiency. Investors enjoy significant savings from tax breaks and advantages, which give them the purchasing power to continue investing and building their wealth.

Are you interested in knowing about the tax benefits in real estate, specifically in multifamily Real Estate? Continue reading this article to get up to speed.

What are Multifamily Properties?

Multifamily properties are rental units that form an apartment or a series of units within a complex. It is well-known as a low-risk investment with a high potential to scale through passive investing.

Who is it for? This type of investment is an excellent choice for investors who prefer stable incomes and cash flow but also like having the option to scale their investments.

What’s great about taxes for multifamily income?

The simple answer is: the tax advantages offered for multifamily investments are plenty and significant enough to put a dent in your tax dues.

In some cases, declared expenses like depreciation can go beyond the income posted for that period, reducing your payments to almost zero. The money saved or the amount deferred then goes back to the investor’s bank, giving them more freedom to spend on their next investment.

Listed below are some of the tax strategies investors apply to make the most out of their multifamily investment:

Applying for All Business Expenses

As with any business, those involved in real estate can account for all expenses related to operations to offset their income. Preparing an exhaustive list, which accounts for ordinary operating expenses and more strategic costs like advertising and legal fees, can ensure you maximize your returns on your investment. One key area to look at is depreciation. This amount accounts for any assumed decline on the property. While this doesn’t necessarily impact the actual value of your property, the state recognizes that there is “paper loss,” which you can file as an expense.

Under depreciation, investors can apply for the predetermined ‘decline’ divided over the standard 27.5-year property lifespan or file for ‘accelerated depreciation’ which can reach up to 50% in the year the property was bought.

Defer Taxes through Like-Kind Investments There is also merit in considering deferred taxation. The 1031 Exchange Rule has benefited many investors by allowing them to defer tax payments as they reinvest their earnings from a previous sale into a property of the same or higher value. This gives them added traction to continue building up their portfolio and money on their banks. Read this article to learn more about the 1031 Exchange Rule.

Explore Favorable Income Classification

As the structure of the organization changes, so do the tax dues. Passive income, for example, is comparably lower than regular income tax. Organizations like a Limited Liability Company (LLC) also offer some protection for investors in avoiding double dues (for your investment and as an income) through “pass-through taxation.

Knowing the pay structures and their impact on your investment can help you select the best option for your real estate investment.

Are you keen on maximizing the tax advantages in multifamilies? Do you need help navigating apartment investing? Speak to our team at Makaan Investment Group to land the passive investments in Texas that suit your needs. Call/text us at 281-500-8554 or leave us a message to get started on your multifamily investments.

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