Tax Savings With Real Estate Investing are some of the big benefits that are hard to find in other types of investments. Did you know that multifamily apartment investments have some of the highest tax benefits in real estate investing? Join us today for a quick overview of the top 3 tax advantages of multifamily investing!
Tax Savings With Real Estate Investing are some of the big benefits that are hard to find in other types of investments. Did you know that multifamily apartment investments have some of the highest tax benefits in real estate investing? Join us today for a quick overview of the top 3 tax advantages of multifamily investing!
Key Takeaways
Steven Pesavento 00:00
What are some of the key tax benefits that you get as investing in multifamily real estate? We're going to get into that and more in this short episode.
Steven Pesavento 00:12
This is the Investor Mindset podcast and I'm Steven Pesavento. And for as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:34
Welcome back to this week's mindset minutes on the Investor Mindset podcasts. And I'm Steven Pesavento. And each week, I share mindset tips and investing strategies that can help take your investing career to the next level. And this week, we're going to be focusing again on multifamily apartments and diving into some of the tax advantages. They're specifically available for multifamily real estate investors.
Steven Pesavento 00:55
And if you like this, and you want to dive deeper, I strongly encourage you to hit that subscribe button. And even more, we've put together a growing list of resources on multifamily investing at the investor mindset.com. So with that, we're going to be talking today about some of the tax benefits on the investing front when it comes to multifamily investing. And so there's a ton of different tax benefits when it comes to investing in real estate. And a lot of them we're gonna find in each of the different asset classes, whether we're talking about single family, whether we're talking about multifamily, whether we're talking about commercial storage, industrial, anything in between. So what is different about multifamily, I'm going to talk a little bit about what's different. And I'm going to share a lot of what are some of the benefits in general, because, you know, frankly, what I found is, you know, a lot of real estate investors, whether they're just getting started, they've been in the game for a while, they don't recognize that some of these advantages are available. And so I would love to share about some of the things that we've been learning about, and that we take advantage of ourselves.
Steven Pesavento 01:58
So one way that I like to look at the tax code is that it's a giant map. And the government draws out this map every single year. And they put different updates and different incentives in place, driving people towards different treasures. And commercial real estate is one of those treasures real estate in general is one of those treasures. And what you're going to find is that if you get a hold of this map, and you work with a qualified CPA, somebody who can really help you understand exactly how to navigate all the twists and turns that are built into this map, called the IRS tax code. And you can figure out exactly what the government wants you to do. And by following their directions, their guidelines, they're telling you essentially, hey, well, we'll allow you to pay less taxes, as long as you are following the directions as long as you're doing what we want you to do. And so commercial real estate and multifamily in particular is something that they absolutely want to incentivize. So they give special benefits to real estate investors in this space. So before I continue, I have to say none of this should be construed as tax or legal advice. And all of you listeners should consult with your CPA or your attorney to understand how these may impact or apply directly to your specific situation. So with the legal disclaimers out of the way, let's dive right into it. So multifamily investing has multiple different tax advantages. And I'm only going to cover three of them right here. And there's many more we can dive into and in future times together. But you know, one of the first and foremost that so many investors know about is something called depreciation. And so depreciation is a core tax benefit of investing in multifamily. And depreciation is the process used to deduct the cost of buying income generating property over many years, right. And so it works differently than other types of depreciation. And one of the big things that you want to look for is that when you're figuring out what you're going to how you're going to depreciate that asset, it's going to depend on the depreciation schedule.
Steven Pesavento 03:59
So for residential real estate and commercial residential, it's a 27 and a half year depreciation schedule. For other types of commercial, it's a 39 year schedule. And that might change depending on when you're listening to this. But as of right now, that is the schedule that is available and who knows why they separated the two out but clearly they wanted to incentivize residential investing because they made their appreciation schedule shorter, meaning you're depreciating more of the asset each year. So there's some different ways to figure out how you're gonna come up with that number. But the the primary Of course, the simple way is, you know, subtracting the land value minus the asset value of the property itself and you can only depreciate the asset you can't depreciate the land because land theoretically doesn't degrade in value, even though of course, sometimes it can but the government doesn't allow you to write that off. So as we get deeper one of the next things that's a benefit of multifamily investing and you know, commercial investing thing in general is, is this idea of cost segregation, we can actually accelerate the depreciation by breaking up each of the different areas of that building or each of the different types of fixtures according to their depreciation schedule. So all different types of fixtures, let's call them in a building have a different depreciation schedule. So you know, some things are appreciate over five years, some things are appreciate over seven, some things are appreciate over 15. And so what we do is we actually go through the entire building with a professional, a cost segregation study is what it's called. And we go through, and we segregate all of the different items throughout the whole building, and we break those down into those different buckets. And then we're essentially able to depreciate those at a faster rate than the building itself on its own. So that allows us to take more depreciation each year earlier, because we're taking each of those different pieces broken up instead of just taking it all in the 27 and a half year thing.
Steven Pesavento 06:03
So one thing to underline here, it costs a little bit of money to do the study, most of the time, because we're looking at large commercial assets, it's well worth the money invested to figure out what that schedule is going to be because one of the benefits, of course of this is that when we're depreciating, we're reducing our taxable income. Therefore, in theory, we're reducing the amount that we're going to pay in taxes. And when we sell the building, of course, we're going to have to pay back that depreciation. But oftentimes, more often than not, depreciation is recaptured at a lower rate, and it's capped. So you're actually going to pay back, but you're going to end up saving quite a bit on what is actually paid back. And again, you got to consult your CPA, because everybody's situation is going to be different. And so one of the cool things, one of the things that is beneficial about the 2017 tax cuts and job act, that came out was that they allowed investors to take the majority of the lifetime depreciation upfront, in year one. So what does that mean? That means that instead of waiting 27 and a half years, or instead of waiting the five, seven and 15 years, and breaking that up, a large portion of the depreciable value is actually able to be taken in year one, right? So we're able to take it right after rebuy it, we're able to have a huge amount of depreciation. And that can be really big both for operators and for passive investors. So an example, again, these are example numbers, everybody's situation is different. But one example is that I've seen a number of different properties that have gone through this, this process, and the number, or the percentage of their original investment, that a passive investor was able to take under this cost segment study and accelerated appreciation range anywhere as low as 40%. Oftentimes, it's closer to 60 to 80%. And I've actually seen it where the number exceeds the original investment amount, meaning that on that year one, you invested $100,000, and you're receiving, you know, 4080 100 120, maybe even more back in depreciation, reducing your tax liability that year, by a pretty huge degree. And so this is a huge, huge benefit of investing in commercial real estate and specifically multifamily. So it's something that if you're not already doing, you definitely want to consider looking at what are some of your options, investing in commercial real estate, whether that's on the active side of taking on the responsibility and the liability and, and you have the expertise to go out and buy and manage these properties yourself or whether you're going on the passive side. And you're simply doing the due diligence upfront, understand what makes a good investment, and what operators am I going to invest in so that I can receive some of these benefits, and of course, the returns that come along with them in the end.
Steven Pesavento 09:01
So one of the other big things that should be noted is that as a general rule of thumb, passive income and capital gains are taxed at a lower rate than the earned income rate. So as a fix and flipper, I've been paying the highest rate the same rate as a W two or self employed persons gonna pay versus when I'm a multifamily operator or I'm a passive investor, I'm actually receiving a lower rate for that money that's being made, right? Because whenever we're talking about a capital gain, the government is typically taxing that at a lower rate. And so what this means is that not only are the returns that you're receiving, are you getting all these other benefits, but you're actually paying a lower tax on whatever that money is that you would have to pay in taxes if you did indeed have to pay anything because what I want to tell you here that is so wild and surprising is that because of real estate investors and multifamily passive investors and operators following the math of the government outlined in the IRS tax code. A lot of them are not paying any taxes, including our president. Now, some people can argue whether that's wrong or whether it's right. But it is the law and it's the way that it's written. And so as long as we do it with the right CPA, and we follow all their guidelines, and we don't construe something on a podcast as tax advice, and we actually go to our professionals and figure out exactly the path to follow the map, we're able to end up getting some pretty, pretty big returns for investing that money. You know, not only in that asset, but also with our, you know, our tax and our legal professionals, the other big thing that I want to underline here, then it's gonna apply to some people, and it's not gonna apply to others.
Steven Pesavento 10:44
So, you know, if you're a real estate professional, and there's a lot that you're gonna want to look into, if you're, if you're not familiar with this term, but there's a term called a real estate professional. And that's anyone who works in real estate over 750 hours, which essentially comes out to about 36% of, you know, a typical working week, if somebody was actually only working 40 hours a week. What that means is that, you end up having a really big tax benefit for real estate professionals. So, you know, oftentimes for folks, what that could mean, is taking their tax bill from 35%, down to 15%. Or, if we look back to that cost segregation, study that we talked about that depreciation, being able to take a huge amount of that depreciation directly against your earned income, or the income that you're receiving from these properties, meaning that you're able to lower that tax rate. So if you're working in a full time job, and you're not spending, you know, the 750 hours a year doing real estate, then you're probably not gonna be able to qualify, it's something you want to talk with your tax professional about. But, you know, just in summary here, you guys, there's obviously a lot of benefits to investing in real estate. And the government has put together this map. And they've essentially said, hey, where do we want people to invest their time and effort in productivity? And where do we want to invest their money? And how do we want to incentivize people to do that? Well, they do that through tax benefits. And so some of those benefits we talked about, obviously, was the depreciation. We talked about the cost segregation, we talked about the ability to
Steven Pesavento 12:24
accelerate that depreciation, under the tax cut, and Jobs Act of 2017, which does expire, by the way, so depending on when you're listening to this, you want to check in and see exactly when we're working on that step down period. And then finally, we talked a little bit about the passive income tax rate and some of those benefits, and some of the benefits that come along with being a real estate professional. So all of that and more are some reasons why it's worth it to consider and get educated on investing in multifamily real estate, and especially whether you're looking at doing it from an active or passive side, having an education is one of the best ways that you can figure out hey, how am I going to make sure that my money is able to work for me, because at the end of the day, financial freedom in my terms is defined as that my cash flow or my income, on a consistent basis, out, outweighs or is more than my expenses, meaning that if I stopped working, my expenses are covered. And that's what we all want to get to. And, you know, these are some great strategies, if if we can figure out how to be more tax advantaged, and make investments that give us some of those benefits, then theoretically, we're able to accelerate, you know, the timeline to be able to get to that point where we do reach financial freedom, and we can make sure that we're only working on things that really do fill us up. So that said, I really encourage you guys to join us next week, because we're gonna be diving into more topics on multifamily and other asset types. And if you miss some of the previous ones, I encourage you definitely to dive into those as we dove into some really great things on some of the, you know, the growing demographic benefits that go along with multifamily, some of the economies of scale that go along with it, and we've got more coming. And if you're interested in learning more, and taking advantage of some of these free resources, you can head over the investor mindset calm as we're filling that page with more free resources all the time. So you can just hop right over there, dive into some articles, some videos, some training and figure out hey, well, is this something that I want to take on from an active perspective? Is this something I want to consider from a passive perspective and learn a little bit more so that you can be educated and really start getting your life to the place you want to be from an investing perspective? So I want to leave you guys the same way I always leave you with a big fat thank you so much. For all the support we've been able to grow so huge in such a short amount of time interviewing amazing people like Chris Voss and and Jay Pappas and and so many others, and I want to encourage you guys to live a life worth inspiring others and you can do so today. by taking some action in your own life, to figure out hey, how can I work with my tax professional to be more tax advantaged in the investments that I'm making? How can I jump into these different types of investing spaces and asset classes so that I can start taking advantage of some of the income that I can receive from it, whether that's from an active or passive perspective, and I want to encourage you guys to definitely, make sure you hit that subscribe button. If you've been listening for a while and you haven't hit that subscribe really helps let the algorithms know that this is something worth listening to. And if you haven't already, please drop us a five star review on your favorite application, hit that thumbs up button. And you're still with us here. Drop a comment below and let me know if you yourself are taking advantage of any of these tax benefits and if so, which are some of your favorite? So with that said, I will see you guys on the next episode.
Steven Pesavento 15:55
Thank you for listening to the Investor Mindset podcast. If you like what you heard, make sure to rate reviews, subscribe and share with a friend. Head over to the investormindset.com to join the insider Club, where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.