If you’re looking to generate passive income through investing, one crucial factor to consider is how much you’re required to share with Uncle Sam.
The taxes you pay vary quite a bit from one asset class to another, with multifamily emerging as the clear winner.
So, what are the tax benefits of investing in apartment buildings? And just how much more will you owe the government come April if you choose the stock market as an alternative?
In this video I share with you the extraordinary tax benefits of multifamily investing.
What I’m presenting to you I learned from Tom Wheelwright, author of the book “Tax Free Wealth” – a must-read BTW if you haven’t read it already.
I walk you through the US tax laws, explaining how they work in our favor as real estate investors.
Then I evaluate two equal investments, one in the stock market and another in multifamily, calculating the taxable income in each scenario.
Spoiler alert: real estate wins hands-down … but do you know why?
Watch the video below (or continue reading).
If you’re looking to generate passive income through investing, one crucial factor to consider is how much you’re required to share with Uncle Sam. The taxes you pay vary from one asset class to another, with multifamily emerging as the clear winner. So, what are the tax benefits of investing in apartment buildings? And just how much more will you owe the government come April if you choose the stock market as an alternative?
Let’s say you invest $1M in the stock market and earn a 10% return of $100K. You will pay $20K in capital gains taxes, leaving you with $80K (a net gain of 8%). Not bad, but $20K is a considerable chunk of change.
Playing by Different Rules
Tax law allows real estate investors to play by a different set of rules. The IRS lets us depreciate the value of a building over 27½ years, writing off that year’s portion of the depreciation as an expense and effectively reducing our taxable income.
Multifamily investors get an even sweeter deal: We are allowed to accelerate that depreciation, itemizing each component of the building separately via a cost segregation analysis. That means an engineer comes out to analyze the parts (from the carpet to the landscape to the roof) and create a custom depreciation schedule.
The bottom line? We can depreciate up to 90% of the building’s value over 7 years! That’s powerful stuff.
Let’s take a look at how these rules work in the context of an example. If you put $100K in a deal with a cash-on-cash return of 10%, your earnings that year would total $10K. But when you receive your K-1 statement, it will not show a $10K gain. Instead, it is likely to reflect a loss of about $4,600. Why? The accelerated depreciation offsets your income (about 3.65% of the value of the property to be exact!).
Better yet, the most recent tax reform bill allows us to depreciate the entire value of a building in Year 1 (this is called “bonus depreciation”). This gives us the opportunity to carry our passive losses forward until we sell the property, using those passive losses to offset our capital gains.
Pale in Comparison
Getting back to our original example, let’s take that same $1M you invested in the stock market and put it in multifamily real estate instead. We apply the tax deduction of 3.65% of the value associated with the building—which translates to $146K.
With that same cash-on-cash return of 10%, you once again earn $100K. But with a tax depreciation of $146K, your show a taxable LOSS of $46K on a GAIN of $100K!
And when you’re not sharing your passive income with the US government, you can achieve financial freedom that much faster. Without a doubt, when you consider the tax code, there is no better investment than multifamily real estate!
Final Thoughts …
By the way, I have been working with Tom Wheelwright’s company (Wealthability), and they have saved me tens of thousands in taxes. If you’re an active or passive real estate investor, it might be a good idea to schedule a call with them to see if they can help you save in taxes (if you do schedule a call, please tell them that I sent you). They’re not cheap, but whatever you pay you get back the first year and every year after that is pure gravy.
Speaking of investing, we are currently looking for accredited investors (only) who might be interested in investing in our upcoming investment opportunities. If you’re looking for consistent returns (in any market), cash flow, and less taxes, I’d like to submit for your consideration scheduling a call with us. Please go to our investor portal at Nighthawk Equity and click the “Join” link to start the conversation.