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Real Estate Investing Tax Strategies for Apartment Syndication
Cash flow? Check. Capital preservation? Check. One of the more common reasons investors flock to real estate is to take advantage of real estate tax advantages that come with rental property - henceforth I giveth you real estate investing tax strategies for multifamily and apartment syndication.
Whoa, but first a heads up: As I am not a tax professional, this is for your information only. I’m a firm believer that investors are drawn to real estate due to the many tax advantages, from write offs to depreciation. For all tax-related real estate questions, please refer to your CPA or tax professional.
A Once Upon a Time Story Featuring Real Estate Investing Tax Strategies to Think About
Real estate investing tax strategies were illuminated to us during a real estate weekend get-away. Here’s how it played out. We got wind of a property owner in Tampa, Florida who wanted to sell his 50-unit building.
Sunny weather and beaches? To say we were interested is an understatement.
As the meeting was scheduled for Friday and the showing was scheduled for Monday, it made sense to make this a four-day trip. With our bags packed, we flew to Tampa for the long weekend.
Our CPA confirmed that we could deduct the 4-day excursion in Tampa, sand and sun included. Are we complaining that the sellers didn’t want to hang out with us over the weekend? Not at all. We enjoyed our time Saturday and Sunday checking out Clearwater and Sarasota. Plus, we got to meet with a property owner and scope out promising properties.
Who knew you don’t need to win Wheel of Fortune for an expense-paid vacation. You just need to invest in real estate!
While that may sound like an exaggeration, there are a surprising number of tax advantages to investing in real estate. As always, be sure to refer to your tax professional as your tax situation may be different.
Real Estate Investors Often Purchase in Towns Wherein they have Strong Ties
Many real estate investors purchase properties in strategic locations near family and friends. Common places where investors may buy are their hometowns, cities where their children or grandchildren live, or where their parents have retired.
The idea is simple: as they follow up on rental properties, they can spend quality time with their loved ones.
The happy-accident for many real estate investors that they may not have considered is that they can deduct travel expenses related to their real estate properties.
Yes. That. (That’s why I underlined it).
These tax advantages also include travel to/from real estate seminars or conferences and travel related to exploring properties as long as you embark with a serious motivation to buy.
These travel tax deductions include:
Air or train travel and associated baggage fees
Car expenses (mileage and depreciation)
Taxi, subway, bus, and ferry expenses
Real estate meetings
Overnight hotel or AirBnB stays
Room service, Wi-Fi, tips, and valet parking fees
Meals and entertainment (note that this is a 50% deduction so you’re left holding the doggie bag on that one, but still not too bad taxwise).
Just because you’re having fun while you’re checking in on your rental properties, attending seminars, or hunting for new properties doesn’t mean you can’t claim those travel expenses on your tax return.
A General Rule of Thumb: if the Primary Reason for Your Trip is Real Estate Related, then you can Deduct Associated Travel Expenses
And if the primary reason wasn’t real estate related? Say, your intent was to visit family but you happened to check in on a rental property while you were there, you can still write off some of your travel and out-of-pocket costs.
Bear in mind that the ability to write off travel expenses is good only as far as you can track those expenses. To claim expenses, you need a squeaky-clean log, with receipts, names, and dates.
I recommend finding ways to automate how you track travel-related expenses to ensure no expense falls through the tracks. It’s important that everything is above the line and would satisfy IRS approval if there was an audit down the road.
Of course, the tax advantages to real estate don’t end with travel. Passive investors can benefit from:
Let’s take a closer look at each item above so you can figure out how to maximize those returns and understand the full breadth of real estate investing tax strategies that are on the table.
The property owner can claim depreciation on an investment property. The amount that can be deducted from income each year is the “depreciable items” - these are the items the IRS classifies based on the item’s useful life, i.e. the number of years of use they have. The investor can deduct the full cost of the item over its presumed lifespan. In the case of real estate, the IRS deems the useful lifespan of real estate to be 27.5 years. This translates to an annual depreciation of an apartment building @ 1MIL over 27.5 years to be 36.4K per year. Not bad, eh? Note - only the cost of the apartment building structure, not the land, is considered to depreciate.
2). Cost Segregation
As the useful life of a residential building is presumed to be 27.5 years, a study must be performed to determine all property-related costs that can be depreciated over 5, 7, and 15 years. This study is called a “cost segregation” study. It serves to help real estate investors to increase cash flow by accelerating depreciation deductions and deferring income taxes. These studies must be performed by a cost segregation specialist. Their services may cost between $10,000 and $100,000, with their fee depending on the size of the real estate property.
3). Depreciation Recapture
The money you earn at sale is reported as income, yes? Yes.
However, with depreciation recapture one can assess whether the sale price of an asset exceeds the tax basis or adjusted cost basis. If there’s a difference between these two figures, then it is reported as income, thereby “recaptured” but at a lower tax rate.
4). Bonus Depreciation
For all properties purchased after September 27th, 2017, investors can claim 100% bonus depreciation on qualified property. Sounds pretty good, right? So why don’t more real estate investors know about this tax benefit?
5) Capital Gains
At sale, the property’s initial equity and profits are then distributed to the investors. This profit is deemed by the IRS to be long-term capital gain. Here’s a quick shortcut to determining capital gains tax:
Taxable income (individual or joint)
$0 to $77,220: Investor must pay 0% capital gains tax
$77,221 to $479,000: Investor must pay 15% capital gains tax
More than $479,000: Investor must pay 20% capital gains tax
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Yo, Delphine - will a 1031 Work for Syndication?
If you’ve been paying attention so far (which I know you have because all my readers are super awesome), recall that when you sell a real estate asset, you must pay a capital gains tax. NOW, this stands for multifamily syndications, however there is an option for a workaround called a “1031 exchange” a.k.a “like-kind” exchange.
While active property investors can leverage the 1031 and swap out their current investment property for another (within a set amount of time) and avoid the capital gains tax, it’s more complicated for passive investors in multifamily syndications.
As the LLC of the multifamily syndication is the purchaser of the property, the 1031 exchange must pass through the LLC. As an investor in the multifamily syndicate, the passive investor has shares of the LLC, and in effect is part-owner of the LLC. While the individual investor cannot do their own 1031 exchange, if they choose to stick with the sponsor for another multifamily syndication, then they can leverage the 1031 exchange via the LLC.
To underscore this fact - the individual investor cannot do their own 1031 exchange, they must abide by what the LLC does if they choose to move forward with that LLC.
Who knew real estate offered built-in vacation opportunities and a slew of tax advantages? From more well-known tax advantages, such as depreciation and cost segregation to write offs for travel and related expenses, the real estate investing tax strategies for the passive investor are numerous… and dare I say, potentially suggest one might branch off into a side hobby and write the next world-famous travelogue.
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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