Do you understand what bonus depreciation is? Did you know that you could receive a tax loss of 50% or more by investing in Multifamily properties?
Learn The Tax Law
My grandfather told me when I was a child, hire a tax guy to help you minimize taxes. I was young. I didn’t know what he meant by this. It stayed in my head but I never went looking to research what I could do about it. I made good money. Part of me felt proud I could afford to write large checks to the government and part of me was frustrated that so much money was coming in and going right back out.
When I was working on a bank trading floor, trading large loan portfolios, I remember reviewing one investor’s tax return. This gentleman had a net worth over $20 million and he paid less than $20,000 in taxes. I was amazed. Amazed but still did not do anything about it.
It wasn’t until I met other real estate investors that started to educate me on on the tax law and pointed me in the direction of how I can take action to reduce my taxes.
The first step was recommending a book to me by Tom Wheelwright called “Tax Free Wealth.” I read the book and it opened my eyes. It talked about all the incentives the government provides to invest in certain areas of the economy. Why wasn’t I already taking advantage of what the government wanted me to do? I wish I had started earlier but I told myself I’m for sure going to start now.
Learn Then Put A plan In Place
Learn then put a plan in place. When you find something new that’s exciting and can help you progress forward and meet your goals faster, be sure to put a plan in place and take action!
What is Cost Segregation?
When you buy a multifamily property, you can depreciate that asset evenly over 27.5 years. The tax code has allowed for the owner of a property to hire a third party company to perform a cost segregation. This study breaks out the cost of the property into different buckets. Basically different buckets with different useful lives. The buckets would typically fall into 5, 15 and 27.5 year buckets. The purpose for completing this cost segregation study is to identify components of the property that will depreciate quicker than the actual structure of the building. For example, the appliances will depreciate quicker than the building structure so these assets should be depreciated in a shorter timeframe than the straight line method of 27.5 years. The end result of the cost segregation study provides that the owner of the property can depreciate more in the earlier years.
What is Bonus Depreciation?
The tax law of 2017 basically allows for something called bonus depreciation. The value of all the assets in the 5 and 15 year buckets can be depreciated in the year of acquisition. This provides for a massive tax benefit. Back of the envelope, approximately 1/3 of the asset can be depreciated in year 1.
What’s the Impact to Investors?
What’s the impact to investors? Most investors will see a tax loss on their year 1 K1 of anywhere from 50%-100% of their investment. To put another way, if someone invested $100,000 into one of these multifamily syndication deals, they would most likely receive a K1 with a tax loss of $50,000 or greater.
Can Everyone Take Advantage of The Tax Loss?
The tax loss will offset other passive income on your tax return. It will help shield taxes on distributions received from this investment and other passive investments. It will also offset other passive income such as rental income on other properties the taxpayer may own. Any tax loss that the tax payer can not offset, such as W2 income, will be carried forward to future years.
What Additional Advantages To Real Estate Professionals?
If you or your spouse qualifies as a real estate professional for tax purposes, then all the depreciation loss can be offset against any and all active income for the married couple. This is a massive benefit to anyone that qualifies. For example, if one spouse is a high income earner as a W2 employee and the other spouse is a real estate investor or realtor that qualifies as a real estate professional, the depreciation can be offset completely against the other spouse’s income. I’ve seen couples where they have saved six figures in taxes per year by having one spouse focus on investments and receive much depreciation while the other spouse focuses on earned income. When they combine the two, the result is a massive tax savings.
Realtors & Real Estate Investors – Are You Aware of These Tax Benefits?
I’m guessing there are many people that still do not know they can take advantage of these tax laws.
There is also something called depreciation recapture. When the property is sold, the portion of depreciation that should not have been realized thus far is basically recaptured for tax purposes. I believe the benefit of deferring and possibly completely avoiding taxes outweighs any recapture that occurs several years down the road.
Please Seek Advice of CPA
I’m not a practicing CPA and I’m sharing the knowledge I’ve learned. Everyone’s tax situation is different. Please seek the advice of your CPA, just make sure it’s a CPA that is knowledgable when it comes to real estate investments.
Why do I share this story with you?
I believe there are many people that don’t even know this law exists. The new administration may let this law sunset. Learn about and take action while you can. It may only be available for 2021 and 2022 and then begin to phase out.
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