Tax Strategies and Benefits for Multifamily Real Estate Investment

Multifamily real estate investments are among one of the most effective ways to build wealth. It’s not as simple as buying properties and collecting rent. The real advantage comes from understanding how to use tax strategies.

Many investors miss out on these opportunities because they’re unaware of the tax benefits of multifamily properties. Let’s explore how smart tax planning can make multifamily real estate investments even more rewarding.

Depreciation

Depreciation is one of the most valuable multifamily tax benefits. The IRS lets you depreciate a multifamily building over 27.5 years. You can only depreciate the building’s value, not the land. Investors can do this even if the property’s market value is rising.

This multifamily tax deduction lowers taxable income without impacting cash flow. Effectively, it increases profitability.

This is how it works:

• You buy a multifamily property for $1,000,000.

• The land is worth $200,000, so the building’s value is $800,000.

• If you divide $800,000 by 27.5 years, you’ll get $29,091.

• You can deduct $29,091 from your taxable income each year for 27.5 years.

• If your property earns $100,000 in rental income, you subtract the $29,091 depreciation.

• You now only pay taxes on $70,909—lowering your tax bill.

HUD Multifamily Tax Exemption

The HUD multifamily tax exemption gives property tax relief for new multifamily real estate developments. These developments must provide affordable housing. HUD designed this exemption to encourage building and maintaining affordable units.

This is how the HUD multifamily tax exemption works:

1. You must offer a percentage of units at affordable rental rates.

2. Local or state levels manage this program with varying guidelines.

3. This multifamily tax exemption typically lasts 10 to 20 years, reducing or waiving property taxes.

4. Your must maintain affordable rents and meeting inspection requirements.

Qualified Business Income (QBI) Deduction

Multifamily real estate investments generate passive income, which can qualify for special tax benefits. The Qualified Business Income (QBI) deduction is one of them. Eligible real estate investors to deduct up to 20% of qualified business income with the QBI deduction.

This multifamily tax deduction works like this:

• You must treat your multifamily real estate investment as an active business. This would include managing tenants and maintaining the building, etc.

• 250 hours of rental services annually may be required under the IRS safe harbor.

• Income limits apply to this tax deduction. Phaseouts start at $182,100 for individuals.

Mortgage Interest Deduction

As an investor, your mortgage payments are a major expense. The good news is that mortgage interest is fully deductible. You can hold onto more of your rental income with this multifamily tax deduction.

This is how it works:

• You make a $1,000,000 multifamily real estate investment with an $800,000 loan at 4% interest.

• You pay $31,500 in interest in the first year, which is fully tax-deductible.

• Total rental income for the year is $90,000, with $25,000 in other expenses.

• The interest deduction lowers taxable income from $65,000 to $33,500.

• You reduce your tax liability with this multifamily tax deduction.

Operating Expense Deductions

Expenses related to operating a multifamily property are also deductible. This includes costs like:

property management fees

• repairs

• ongoing maintenance

• insurance

• utilities

These costs add up over time, and claiming them helps reduce your taxable income. Deducting them can improve your profit margins. Make sure to keep detailed records of operating expenses to make the most of this multifamily tax benefit.

1031 Exchange

You can defer capital gains taxes when selling property and reinvesting the profits into another with this method. This multifamily tax benefit gives you the flexibility to grow your real estate portfolio. You won’t have to immediately pay taxes on the capital gains from a sale. Here’s how it works:

• When you sell your property, you would typically owe capital gains taxes on any profit made from the sale. You can defer those taxes if you reinvest proceeds into another qualifying property.

• The replacement property must be of equal or greater value than the one sold.

• You must identify the new property within 45 days of selling the original property.

• You must complete the sale within 180 days.

• By reinvesting the profits into another property, you defer paying capital gains taxes, so you use the full amount of your proceeds for your next investment.

However, the rules are strict, and failure to meet deadlines can result in losing the tax deferral.

Find Your Ideal Multifamily Investment

Ready to find the perfect multifamily real estate investment? Whether you're looking to grow your portfolio or start your investment journey, our team can help you find the right opportunity.

View our offerings for multifamily real estate investments now!