Real estate investments are a great way to grow wealth. And knowing the advantages of different types of real estate investments means you can get the best possible return. When it comes to residential real estate investment, many investors may be tempted to steer toward single family, but there are some tax advantages to putting your investment dollars into multifamily properties.
New Deductions
With the new tax bill that President Trump signed into law, there are some windfalls specific to real estate investment.
The biggest of all might be a new 20% deduction for all real estate income that comes through so-called pass-through entities. That includes entities like LLCs, sole proprietors, and S Corps. The bottom line is that it will be much more profitable to invest in income-generating properties like apartments.
Passive Tax Income
The government taxes income from multifamily investment properties at what’s known as a passive income rate. That means it’s not subject to employment taxes and is, therefore, lower than regular income tax rates. This is only true for investors who truly use real estate as a passive income stream, and doesn’t apply to anyone who is a real estate professional.
Depreciation
The U.S. wants multifamily property owners to invest in maintenance to increase the useful life of a property, and to encourage that, allows you take a depreciation deduction that equals just over 3% of the building’s value at purchase. You can take that deduction each year, and that depreciation resets each time a property is sold to a new owner, regardless of the overall age of that property.
Multifamily property owners may also be able to do a cost-segregation study, which separates certain items like fixtures and appliances from the value of the building. You then may be able to take an additional deduction based on the cost of those items.
Additional Benefits
Beyond taxes, there are plenty of features that make multifamily properties good investments, especially compared with single-family investment properties. Unlike single-family properties, a multifamily project puts multiple properties under one roof – which is easier to manage.
Multifamily properties also tend to hold their value better than single-family properties.