Real estate investing is considered by many to be an excellent addition to an investor’s portfolio1. However, there are many avenues you can take when looking to invest; multifamily investing is one.
While many investors will leap at the chance of earning income from multiple tenants in a single location, there is also a bevy of potential tax advantages that can augment their tax investment strategy. In this article, I’ll break down some of the tax benefits of multifamily investing so that you can better understand whether or not multifamily investing is for you. I’ll also explain how Canyon View Capital can help if you find that taking advantage of these tax benefits may be too complicated.
Understanding Multifamily Investing
There are multiple types of real estate investment, each with its quirks and characteristics. Multifamily investing differs from real estate investment strategies, such as single-family or commercial.
Multifamily investing entails acquiring and overseeing residential properties comprising several individual units within a single complex or building. Examples include apartments, duplexes, and condominiums.
Incorporating multifamily investing into your portfolio can prove advantageous due to its unique benefits for investors. However, like any investment, it comes with inherent risks and necessitates substantial hands-on effort to ensure profitability and adherence to investment and tax regulations.
Nevertheless, there exist avenues through which investors can relish the advantages of passive multifamily income without necessitating the typical time commitment for profitability. This approach can enable them to savor a portion of the numerous tax benefits that multifamily investments offer.
What Are the Tax Benefits of Multifamily Investing?
Getting laser-focused on the potentially lucrative nature of rental income is easy, especially from larger properties that can house hundreds of tenants. But there’s more to why multifamily investing can be a boon for some investors.
The tax benefits of multifamily investing can be a significant component of why multifamily investing can embolden a portfolio, especially when investors are able to proactively plan for potential tax liabilities.
While these benefits can be advantageous, savvy investors can use some of the tax benefits of multifamily investing in tandem. Let’s look at an example.
Tax Benefits in Action
- You own and manage a multifamily property you purchased for $2 million and have been renting it out for several years while claiming depreciation.
- The property generates $150,000 in rental income in one year but incurs $50,000 in expenses such as repairs and maintenance.
- You are a sole proprietor and qualify for a pass-through deduction under the Tax Cuts and Jobs Act.
You can potentially utilize the following tax benefits together:
- Depreciation Deduction: You can calculate the annual depreciation based on the value and useful life of the property. The land is deducted from the purchase price and then the building component is depreciated. For example, if the property has had a useful life of 27.5 years, the deduction would be around $72,727 ($2,000,000/27.5).
- Property Expenses: Deducting the $50,000 in annual expenses from your rental income would reduce the taxable income from $150,000 to $100,000.
- Pass-Through Deduction: Since you’re a sole proprietor in this scenario, you qualify for a pass-through deduction, which means you can deduct up to 20% of your qualified business income. If your income from the property is $100,000 after deducting expenses, you can deduct an additional $20,000 (20% of $100,000) from your taxable income.
This is just one specific micro-example of how the tax benefits of multifamily investing can be woven into an investment strategy. There are many other situations where some benefits would not apply and vice versa.
Understanding that tax laws and regulations are complex and constantly in flux is crucial, so investors should always consult with a tax professional or financial advisor to ensure they receive the most accurate and up-to-date tax and investment advice.
Target Passive Income and the Tax Benefits of Multifamily Investing with Canyon View Capital
There will be nuances, complexities, and responsibilities associated with any type of real estate investing. However, understanding the potential tax benefits of multifamily investing can help you identify if it’s right for you.
Here at CVC, we offer ways for investors to enjoy the benefits of multifamily investing—including tax advantages—without having to bog themselves down with property management. Backed by our conservative “buy-and-hold” strategy in stable markets, our multifamily properties are intended to provide passive rental income to investors with the potential for large depreciation deductions and passive losses.
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For over 40 years, CVC has managed, owned, and operated real estate valued at over $1B2. Our buy-and-hold strategy, concentrated in America’s heartland, is designed to provide consistent investment returns. To learn more about the tax benefits of multifamily investing, call CVC today! Get Started
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1Chris Roberts, “Eight Reasons You Should Consider Real Estate Investing,” for Forbes, Feb. 17, 2021, Forbes.com. Accessed Aug. 2, 2023.
2$1B figure based on aggregate value of all CVC-managed real estate investments valued as of March 31, 2023.
Eric Fisher, Chief of Staff
Eric joined Canyon View Capital in August 2021 with 15 years of hotel management experience grounded evenly between Property & Corporate Operations, and Business Development & Acquisitions. After $500M+ in hotel acquisitions, Eric uses his nuanced understanding of the acquisitions and transitions processes to support CVC real estate investments. His professional versatility makes Eric an invaluable resource for the President and Executive Team in all business functions, including Investments, Operations, and Strategy.