One of the many advantages of investing in commercial multifamily properties are the many tax advantages available to both, passive and active investors. Check out this article published on BiggerPockets.com, which describes some of these advantages.
Author: Michael Bishop, Austin, TX
I’d like to start with a disclaimer – I am not a CPA nor am I a tax strategist. The content that follows is simply my opinion based off of my experience and knowledge I’ve gained through extensive research. None of what follows is meant to server as advice to any who read it, and I strongly recommend that you seek the counsel of licensed professionals.
Now that we’ve gotten that out of the way… I briefly touched on the topic of the tax advantages of an investment in commercial multi-family (MF) in an earlier blog, but I will dive a bit further in to the topic here. This topic can be and is covered in great length through different platforms, there are entire books dedicated to it, but I’ve condensed what I view as the most powerful tax advantages of MF investing for a high level overview that any passive investor should understand.
Depreciation & Accelerated Depreciation
There are a number of possible expenses that you can write off on your taxes; property tax, loan interest, property depreciation, and many more. The biggest and most common depreciation deduction that can be made on a MF investment though, is depreciation on the physical property. The IRS has ruled that resident occupied real estate has a reasonable life span of 27.5 years and that land value cannot be depreciated as it theoretically has a life span of forever. So let’s look at an example of what your “paper loss” may show. Assume you own a MF asset worth $37.5M, of which the land accounts for $10M. That leaves the value of the physical property at $27.5M. Depreciated at 27.5 years, that equates to an annual deduction of $1M. Now assume your property has net operating income (NOI) of $800K. Your “paper loss,” the amount of income that you will pay taxes on, is then -$200K. Pretty powerful, right? It gets better.
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