BACKGROUND

Want to pay fewer taxes?

Not only that, but want to learn how you can pay fewer income taxes while also making more money every year? 

It’s no secret that elite investors know how to work their investments to protect their income from taxation (just like protecting your income from INFLATION). 

Here’s one of the least understood benefits of investing in one of our multifamily opportunities passively. 

When you invest in multifamily as a limited partner, you’re able to actually claim a loss of income during the year, even though you make money from the investment, here’s how: Depreciation.

DISCLAIMER: Please consult your CPA, figures used here are general rules of thumb, every tax situation is different and you should not take action soley based on the information provided in this article.

WHAT IS DEPRECIATION

Depreciation in commercial real estate is what we call a “phantom loss”, meaning it’s only a loss in the eyes of the IRS, you aren’t actually losing money. 

As buildings age, there are expenses that accrue over time, such as roofs, carpets, paint, plumbing, and anything else you can think of that is needed to maintain and upkeep the property. 

The IRS will allow you to take these losses over time, as opposed to all at once when it’s time to replace these large expenses. This steady “loss” is known as depreciation. 

HOW DOES DEPRECIATION IMPACT YOUR TAXES?

Since depreciation is considered a loss in the eyes of the IRS, you’re able to take this loss off of your taxable income, here’s how this would look: 

Let’s say you make $75,000 per year at your W2 job. Now, let’s say you save up $100,000 and invest it passively into one of our properties that produces an 8% cash on cash return. This means in the first year, you’ll make $8,000, bringing your total income to $83,000.

But…

On average, passive investors are able to depreciate 35% of their investment amount the first year, meaning you’ll be able to claim a $35,000 “phantom loss” on your taxes. Taking your taxable income down from $83,000 to $48,000. At the time of this blog post, the federal tax bracket you'd be in is 22%, meaning these tax benefits brought your annual tax bill from $18,260 down to $10,560 - a $7,700 savings.