Taxes Are the Worst Part of the Game

Real Estate Investing 101
Yannik Cudjoe-Virgil

Paying taxes is certainly something we all feel like crying about from time to time. After all, a large chunk of our earnings is earmarked for tax obligations, whether we like it or not. For example, the capital gains tax on proceeds from the sale of a property can run as high as 20%.

Savvy investors, however, have been able to considerably reduce their tax bills by simply taking advantage of the tax breaks provided by the Internal Revenue Code.

Let’s look at the tax benefits available to multifamily investors below.

  • Property Depreciation: The useful life of residential properties is considered to be 27.5 years, and the IRS allows owners to claim an annual depreciation expense equal to the value of the property, divided by 27.5.

  • Cost Segregation Analysis: A complete inspection of the investment property can be conducted by an engineering firm in order to separate the various building components into depreciation schedules of 5, 7 or 15 years - which can maximize depreciation deductions.

  • Bonus Depreciation: Since 2001, bonus depreciation has allowed business property owners to deduct a percentage of the acquisition costs of qualified assets. The bonus depreciation percentage was increased to 100% with the Tax Cuts and Jobs Act for qualified properties purchased after September 27, 2017.

  • Operating Expenses: Multifamily owners can write off operating expenses like any other business such as mortgage interest, property insurance and taxes, management fees, maintenance costs, and utilities. These deductions significantly reduce the total taxable income generated by the property.

  • Cash Out Refinance: Refinancing a property that has increased in value could allow owners to extract a significant amount of cash tax-free. This money is tax-free because it is not considered income. It is simply the proceeds of a loan.

  • 1031 Exchanges: According to Section 1031 of the Internal Revenue Code, a property owner is allowed to use the proceeds of an asset sale to purchase a “like kind” asset, while postponing the payment of capital gains taxes. There is no limit to the number of times you can swap properties under this law.

Using these tax breaks can help you maximize the total rate of return on your investment, and allow you to continue growing your profits tax-free. You should consult with your CPA for further information on the applicable tax laws.