So you’ve put a tremendous amount of effort into your career. You’ve strived hard to be the best at what you do and you have become very successful in your field. You feel great about your profits and your income.
Then, tax time rolls around.
So many of us experience the harsh reality of the government taking way too much of our hard-earned money. What’s the point of working so hard and keeping such a small portion of what you’ve made?
Well, there are some out-of-the-box thinkers that know a few major ways to keep a lot more of that money in your bank account. And I’m going to share one of the biggest with you.
If you have been successful in your career, usually part of that success can be attributed to wise investing.
What is considered “wise investing?” Well, I’m glad you asked.
The stock market is the standard for many. Of course, we all know that real estate is a great investment. But what is the best investment/tax shelter where you can have the best of both worlds? What investment option will give you the best returns AND reduce your taxes significantly?
The answer is Multi-family investing. Specifically, the best investment option is multi-family investing through apartment syndication. I will tell you why.
When you invest in multifamily (large apartment complexes) through apartment syndication, you get the benefit of the depreciation of the asset.
So what is apartment syndication?
Apartment syndication is the pooling of money from numerous investors that will be used to buy an apartment building and execute the project’s business plan. It is a tool that wise investors use to leverage their investment opportunities.
There are three features that are unique to multi-family investing that can help you save significantly on your taxes.
All aspects of the initial construction of the building: the plumbing, electrical, roofing, air conditioning units, etc. all deteriorate with time and are expensed as depreciation on the income statement and serves to reduce the property’s net operating income which in turn reduces the tax liability.
The IRS rules dictate how much depreciation can be taken in any given year and state that a multifamily property can be depreciated over 27.5 years.
For example, a property worth $1 Million could take $36,360.00 in depreciation per year which is significant, but… what many people don’t know is… by utilizing something called cost segregation, that cost (TAX) savings can be significantly increased.
A cost segregation analysis can be performed on the property by an expert consultant or engineer. They take into account numerous factors not included in normal depreciation. In their extremely thorough analysis, they break everything into 4 major categories, personal property, land improvements, building structures, and land.
With that classification, the depreciation can be accelerated over a shorter period of time.
For example, personal property (the carpeting, flooring, light fixtures, etc.) can be depreciated over 5 or 7 years, while things like paving and sidewalks could be depreciated over 15 years. The end result being the allowable depreciation can be significantly increased yearly, resulting in significant tax savings.
So what happens when the property is sold and I have to pay all those capital gains taxes?
One of the great benefits of investing in real estate is something called a 1031 Exchange. This allows you to reinvest that money into another property of equal or greater value and pay which allows you to defer those taxes over an indefinite amount of time.
Section 1031of the Internal Revenue Code allows a property owner to defer capital gains taxes on a profitable sale by reinvesting the proceeds into another property of “like-kind,” and there is no limit to how many times it can be done. Essentially, there could be a successive series of exchanges that defer capital gains taxes indefinitely, which allows an investor’s income to grow tax-free over a long period of time.
Like the cost segregation study, the rules of a 1031 exchange can be complicated, but there are several key points to remember:
- The new property must be “of the same nature or character” as the old one.
- The new property must be “identified” within 45 days of the close of the sale, and the purchase transaction must be completed within 180 days of the sale.
- The price of the new property to be purchased must be equal to or more than the property sold. If there is a difference, it is known as “boot,” and it becomes taxable.
- The new property and the old property must be titled similarly.
(These rules are very specific and iron-clad so it is extremely important that you work with experienced professionals, to ensure that everything is done correctly.)
Intelligent investors know that there is far more to successful investing than just cash flow-driven metrics such as internal rate of return or cash-on-cash return. While these are extremely important issues to consider, there are key factors that separate a good investment from a great one.
Proactively managing an investment’s tax liability by maximizing depreciation through cost segregation and deferring capital gains taxes through 1031 exchanges can magnify returns and allow profits to grow tax-free over time.
This is why investing in multi-family assets through apartment syndication is an extremely wise and attractive investment option.
When you add in the fact that multifamily investments typically outperform the stock market almost 2 to 1 in returns, and are considerably less volatile, it truly makes it one of the best asset classes for any savvy investor to consider.