“Elections should be held on April 16th- the day after we pay our income taxes. That is one of the few things that might discourage politicians from being big spenders.” —Thomas Sowell
Taxes. Taxes. Taxes.
I have spoken with over 1200 investors, and this is one of their top concerns.
I understand! Where I live in California, the top tax rate is 50.3%! That’s a lot of your money that you will never see…
And I’ll let you in on a little secret.
Not all investments are created equal when it comes to taxes.
Gains made from short-term stocks, for example, are taxed at 37% plus the state tax. And the long-term stock tax rate is 20%.
I can only assume you are a high earner, and you are wanting to protect your money the best way that you can.
Well, here is the next secret, and this one can save you tens of thousands of dollars or more.
By investing in multi-family syndication you qualify for a unique tax strategy that can be used to actually reduce your taxes and possibly even pay close to or actually zero dollars in taxes.
Now that sounds great, right?
That sounds like everything you could want out of an investment to me.
But I do want to give a disclaimer. This is all meant for educational purposes. I’m not your CPA or your financial advisor. I can’t know your specific situation, and this is not to be taken as personalized advice.
But the more information you are equipped with, the better.
So let’s get into it.
Multifamily Real Estate – Cost Segregation
We all think of taxes as complex, but this strategy is pretty simple.
When you invest in a multi-family deal, there are a few things that happen in the background.
One of the things that happens is that we get an engineering firm to take a look at the property and break the property down into four parts.
The land, land improvement, the building itself, and then equipment and fixtures.
Then we take the last two of these parts, the building and equipment, and look at the depreciation of its value over the time of the deal — somewhere between 20-30 years.
This ends up being 65-85% of your total investment into the property.
From there, we front-load that depreciation to year one as a loss.
This means that any gains that you get year to year from the property are weighed against this loss. The taxes are offset by this loss, and you don’t have to pay taxes on that income. Some of these taxes are written off completely and some are deferred.
So with your $100K investment, that would be $65-85K of paper losses that you can offset against.
When the property sells later on, your profits will overreach that initial loss. When that happens, that depreciation may be recaptured, and you will owe taxes on that money as standard income.
But there is more you can do to prevent this!
You can actually roll over this same investment into another multi-family deal and use cost segregation on that deal as well. This way, you add more depreciation, and the income is measured against that loss.
Basically, you are deferring your taxes down the road.
If you are familiar at all with single-family renting, this is similar to a 1031 exchange tax strategy, where you take all your gains from selling one property and invest it into another.
But this only reduces your taxes right? How do you get to pay zero dollars in taxes?
Real Estate Professional (SECRET)
This is what I call the advanced strategy. It is a little more difficult to manage than simple cost segregation, but if you can manage it, it is worth it.
The real benefit? It can wipe out all the taxes of your ordinary income and you will pay zero dollars in taxes.
How does this work?
Firstly, you have to be what is defined as a “Real Estate Professional”
But what is that?
It’s simpler than it sounds.
You have to spend 750 hours and at least 51% of your documented work time in real estate work.
The key is that it needs to be documented. You have to be able to show that you spend over 51% of your time looking at deals, being a passive investor, going to real estate events, and in general working in real estate.
This can be difficult for some people who work a lot of hours in their day job.
But there is still another option, your spouse!
If your spouse meets the criteria of a real estate professional, then you as a couple can qualify.
The benefit of doing this strategy is the same as the cost segregation plan above, but with one major difference.
You can leverage your real estate losses against your ordinary income.
So if you are a doctor who also qualifies as a real estate professional, you can also leverage your depreciation losses against your salary and pay less in taxes.
And if you continue to get into more and more deals, you can defer taxes indefinitely.
But again, this is a more advanced strategy. This is something I would suggest you talk with a tax professional who specializes in real estate about.
So as you can see, these strategies can help any high earner looking to lower taxes, especially those who can qualify as real estate professionals.
That is one of the many reasons I say that multi-family syndication is the perfect investment. Just look at the benefits!
And if this has made you curious to learn more about multi-family, then you have come to the right place!
Check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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