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K-1 Losses in Multifamily Investing
Disclaimer: I am not an attorney or CPA. My knowledge in this post comes from my own investing experience. Please consult your own attorney and/or CPA on your specific investments.
The tax advantages of multifamily investing, including K-1 losses, are what make this kind of real estate investment so attractive. A Schedule K-1 is a tax document that reports the income, losses, credits, and dividends of each investor’s share of the investment.
Each individual investor receives their own Schedule K-1. This is how it’s possible that multifamily real estate investors receive tax benefits, and not just the sponsor themselves.
Receiving a K-1 Loss from a Multifamily Investment
When you receive a K-1 Loss from your multifamily investment, you are able to reduce your taxable income by the total. This means if you have capital gains from another investment during the same year, you are taxed less on it. Completing a cost segregation study increases your personal tax advantage further.
A cost segregation study identifies the personal property assets that have been grouped with the real estate property’s assets, and separates them out. Instead of one lumped-together value of the property, the land, the carpet, the fencing, etc. are all broken into component parts.
By doing this, you accelerate the depreciation time and you can claim more of that “paper loss” on your taxes.
Just in case you forgot, depreciation is the decreased value of the multifamily real estate over time, which you can write off as a loss on your taxes. This is usually over a standard 27.5 year schedule, but by accelerating the depreciation you can shorten this time significantly. This further reduces your taxable income for the year.
K-1 Loss Benefits for High Income Earners
Thanks to tax advantages like K-1 losses, depreciation, and cost segregation studies, legislators have built the tax code to specifically incentivize real estate investors for the sake of the economy. These tax codes allow investors to invest more capital and sponsors to buy more buildings while taking advantage of lower taxes.
Compared to a high income earner, a real estate investor could be enjoying significantly more tax benefits. If you have a high W2 income from dentistry, the medical field, professional consulting, etc., then you are paying out from a much higher tax bracket. Having a multifamily real estate investment reduces your taxable income, meaning you could be making the same from your employment but using a K-1 loss to write off some of that taxable income.
This is possible when either you or your spouse are a materially participating real estate professional (MPREP) with 750+ hours in real property trades in a year and have passed one of the seven tests of MPREP.
Multifamily Investing K-1 Losses and Tax Reduction
Let’s illustrate the scenario above for a high income earner with a simple example:
- Without multifamily investing: A CFO makes $300,000 and pays out $105,000 in taxes per year. He has no real estate investment vehicles or other investments he can use to reduce his taxable income. After taxes, his take-home pay is $195,000.
- With an investment in multifamily real estate: The same CFO still makes $300,000, but is able to reduce his taxable income by using the K-1 loss from his multifamily real estate investment. The K-1 loss of $98,000 taxes reduces his taxable income to $202,000 and places him into a lower tax bracket. His taxes are reduced to $64,640. HIs take-home pay is $235,360.
These two scenarios, with the same high-income earner at the same job, shows a difference of $40,360 in tax payments through using the tax advantage of multifamily real estate investing. That difference could be what your family needs to start living a true life by design.
Disclaimer: Again, I want to remind you I’m not a CPA or attorney, and I’m just sharing what my own experience has been in multifamily real estate investing. I myself have gone from earning a high income and writing the check for a high tax payment one year, and then another year using my multifamily real estate investing to lower my taxes on the same amount of income. The boost in take-home pay was life-changing!
K-1 Losses from Multifamily Investments: Further Resources
You can use resources from the IRS to calculate your own tax advantages. Here is a link to the IRS website for Form 4952. Per the IRS website, Form 4952 is used “to figure the amount of investment interest expense you can deduct for the current year and the amount you can carry forward to future years.”
For more details on tax advantages, look out for my next blog posts in this series of ten advantages of passively investing in multifamily syndications.
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Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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