In this blog, we’re gonna talk about what has changed, how it will affect your investing, and ask the question: Is multifamily still a good deal going into 2023?
Let’s jump in!
1. How Depreciation Has Worked in Multifamily Deals
In 2017, Former President Trump started passing laws to accelerate and do bonus depreciation.
This means you’re able to bring forward the time frame of a lot of tax benefits.
Instead of being beneficial over 10 to 30 years, they’ll be beneficial in year one.
We’ve covered it in a few videos that you can check out here.
Once you’re done doing that (or maybe you already knew!), we can talk about something called a cost segregation study, which goes in and looks at the property in four parts:
Land, land improvements, building, and equipment.
Cost segregation basically separates them.
They have different depreciation schedules.
Some are 5 or 10 years.
Some are 30 years.
Currently, the laws in place bring forward a lot of that depreciation to year one.
You can effectively have 70% to 90% of the amount invested in something like multifamily syndication.
$100,000 invested typically would have a passive tax loss of $70,000 to $90,000 year one.
Why would somebody want to do that?
With cost segregation, you are able to offset other income, like from a property you sold.
There are ways you can use that depreciation to help to lower your taxable income.
That’s pretty awesome!
I went from paying about a 25% taxable rate to about 1%.
I did it through using these depreciated things and becoming a real estate professional.
You get a big passive tax loss – typically 70% to 90% during year one.
Then when you sell a handful of years later, whatever years you didn’t use (up to 30 years sometimes!) you almost have to pay back.
Now, you’re not necessarily paying back.
You took the taxable benefit, so if you don’t have other depreciation to cover that, then you’d have to pay it back.
This led to a game of how much depreciation you can store up.
If you can store more and more, it doesn’t really affect you quite the same way.
I know brothers who own a medical practice.
They use this method to pay almost zero taxes on a $5 million sale.
Now the question is: What’s changed in 2023?
Why is it not like this anymore?
2. What Has Changed?
We’re in 2023 now.
The law has changed.
From 2017 to 2022, there was a 100% bonus or accelerated depreciation.
Now that cap is at 80%.
With the old law, if I received $90,000 of passive loss, I can take all of that year one.
If I put $100,000 and get $90,000 of a loss now, I can now take 80% of that year one.
That would mean instead of a $90,000 passive loss, it’d be $72,000.
Still pretty good, but it’s not as good as it was.
But that’s not all!
The law actually is going to make that percentage lower over time.
The cap begins at 80% in 2023 but it will be 60% in 2024.
It phases down.
The old law can potentially be extended, but it depends on who’s in office.
Let your politicians know that this would be something that would benefit you!
The previous high was in 2020 when Americans had $1 trillion in savings.
What’s gonna happen with that money?
I think once rates start coming down again, a lot of money will flood into assets such as multifamily.
It’s a great time to own stuff.
I won’t lie, it does look interesting right now because a lot of the debt cost is eating into the cash flow.
In summary, I think it’s a great time to be a multifamily investor because of the high demand.
Even with 50% or 35% down, we’re still able to get decent loans for multifamily.
The deal just has to make sense.
I’m a huge fan of value-add deals.
I’m not as big a fan of Class A or stuff with no value to add.
Those types of assets don’t have what Warren Buffett calls a margin of safety.
That means if something doesn’t go exactly the way you want, then you still have some sort of buffer so you’ll be okay.
We’re still doing deals here at Bronson Equity.
We’re doing deals right now in the ATM machine space, which is the most consistent cash flow investment I’ve ever seen.
We’re also doing stuff in the energy space.
Now I want to hear from you!
What do you think about depreciation changing for 2023?
Let us know in the comments below.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
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