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Originally Posted On: https://jlmrealestateinc.com/blog/multifamily-real-estate-tax-benefits-explained/

 

The stock market may not be a great form of investment for many because of its very volatile nature. Therefore, many are investing their hard-earned money in real estate. This is also an ideal form of investment for those who want to actively participate in growing their money instead of earning passively while someone is managing their fund.

There are several things you will love about investing in multifamily real estate.

One of these is that you can use multiple strategies effective for growing your investment.

 

Is It Worth It To Invest in A Multifamily Property?

Many investors are investing their money in a property for different reasons. Rental property investing is popular among venture capitalists who want to have a monthly source of profit while maintaining a constant appreciation of portfolio value.

If you plan to invest in residential real estate, you can invest in multifamily or single-family properties. Single-family real estate properties refer to buildings with a single unit for rent. On the other hand, multifamily residential buildings have two or more rentable places, like apartment complexes.

Most of you may think that a single-family property is ideal than a multifamily one because it takes lesser requirements. However, it is essential to keep in mind that investing in multifamily real estate is an excellent idea.

Investing in multifamily residential real estate can provide significant tax benefits for investors and tenants. You can offset much of or even eliminate your income taxes by investing in rental property. This can also be a great way to diversify your investment portfolio, reducing your risk and improving returns.

Tax Benefits of Investing in a Multifamily Real Estate

Like other forms of investment property, Multifamily real estate comes with tax benefits. Understanding these benefits will enlighten you on how paying differs from saving some bucks from your annual taxes.

Investing in multifamily real estate comes with several tax breaks. However, here are the three most notable benefits:

 

1. Reduced Taxable Income Through Deductions

One of the best things about multifamily real estate investing is its tax deductions. Generally, tax deductions reduce your tax burden and earn more income.

If you are still unfamiliar with tax deductions, these are the expenses deducted from your rental property taxable income. Tax deductions enable you to cut off the costs you spent repairing, maintaining, and managing your multifamily real estate property from your overall taxable rental income.

Therefore, tax deductions enable you to lighten your tax obligations by deducting your rental property expenses from your taxable income. Some payments you may indicate include marketing costs, utilities, property interests, fees associated with property repair and maintenance, management costs, and insurance premiums.

 

2. Depreciation

A multifamily property consists of a more complicated physical structure, including mechanical systems, such as roofing, air handling, plumbing, and electricity. These systems undoubtedly will cost you a considerable amount upfront but can serve for longer years. However, their physical condition may worn out eventually because of exposure to external factors.

Depreciation is a concept that enables multifamily property investors to “expense” part of the system’s annual value and account for deterioration. This depreciation expense will show on your annual income statement. Moreover, it can also deduct the real estate’s yearly income, leading to reduced tax liability.

Generally, depreciation serves as a non-cash expense. In other words, it can reduce your overall property income but does not affect the available amount for cash distribution. If you manage to have more depreciation annually, you will enjoy significant tax benefits.

 

3. Capital Gains

Capital gain refers to the income you make by selling an asset. It is worth noting that capital gain and regular income are taxed differently. If you hold a multifamily property for longer than one year before selling it, it is more likely to be a long-term capital gain.

The good thing about long-term capital gains is that they are taxed lower than short-term capital gains. Therefore, you can enjoy a higher income while reducing your tax burden.

 

Final Thoughts

Investing in a rental property can provide a steady stream of income. But unlike investing in stocks or bonds, which can produce a profit or loss based on the performance of the actual investment, rental property investing is all about generating tax benefits.

For example, the IRS allows investors to write off the depreciation expenses they incur when they make significant repairs to their rental property. This reduces their taxable income and reduces their rental property taxes as well.

If you are interested in investing in multifamily real estate, a San Diego Multifamily Agency  like JLM Real Estate can be your best choice.

 

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