“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.” — Russell B. Long
Multifamily depreciation has changed significantly in 2023.
Some of the tax laws that Former President Trump put in place have changed.
These changes have significant impact for you and your real estate investing.
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.
Sounds pretty great, right?
It has been pretty great!
According to the Institute of Taxation and Economic Policy (ITEP), 23 different corporations saved $50 billion in tax breaks thanks to this policy.
A lot of large institutional groups have really benefited from this as well.
There’s some talk of the policy extending.
But right now, the benefit is not quite what it was from 2017 to 2022.
We’re going to talk about that, but first:
What is depreciation?
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!
3. Is Multifamily Still a Good Deal?
With all of that in mind, the question becomes:
Is multifamily still a good deal?
With these changes in depreciation, is it still worth investing in multifamily?
For a while, multifamily has been an absolute rockstar.
We’ve had a golden era of multifamily with low rates and depreciation so you don’t pay taxes on things.
We’ve seen an incredible demand for apartments – which is still there!
It has changed a little bit.
Currently, in early 2023, loans are very challenging.
The Fed keeps raising interest rates.
Banks don’t want to give out loans.
They know if they give out a loan now, while rates continually rise, they will suffer by having loans out at lower rates.
We’re currently seeing a lot of apartment loans now at 35-50% loan to value (Jan 2023).
That means we have to put half the money down to buy a property.
Before we were putting 20% to 25% down.
That significantly changes how those deals work.
Not only are we putting more money down, the interest rates are higher.
I recently interviewed Ken McElroy and he said that the pencil is down.
It’s challenging to look at deals right now.
He’s still looking at deals, but some are just not penciling.
What is going to happen next?
My friend Jeff Clark says that once the Fed first raises rates, the average is five months before they start cutting rates.
This trend has continued over the last 100 years.
The longest they’ve ever gone from the time of the first hike to the time of the first cut is 13 months.
The reason for that longer timeline comes down to recession.
We’re getting close to a year as of the time of this blog.
Within the next three to six months, there will be some shift in course.
They’ll raise rates to cool off inflation and the economy.
If the economy cools down too much, they can lower rates to help the economy as well.
What happens when that all goes down?
Bloomberg claims that Americans currently have $5 trillion in savings.
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.