Updated: Apr 13
The majority of people think getting into multifamily investments is a get-rich-quick scheme. A shortcut to those Lamborghinis, Ferraris, and ultra-luxury villas, right?
Multifamily investing seems easy until it is explored. But, it is worth the struggle as passive incoming coming from multiple units is much more than that of single-family homes.
On the other hand, the more profit you earn, the more taxes you have to pay! So, how do you take the edge off of the tax burden?
We often see people crying about how the rich don’t pay taxes. They actually think it is sort of an evil tax system that benefits the rich exclusively, which is not true. In fact, anyone can use it and benefit from it.
One doesn't have to be rich to benefit from this system. All you need to do is to educate yourself and then learn how to use this strategy to pay little to no taxes as a real estate investor.
The strategy we are talking about is called cost segregation.
Benefits of Cost Segregation
What is Cost Segregation?
It is a strategy for tax planning that speeds up the depreciation of some constituents of the units. Real estate investors can use this strategy to their benefit by lowering their tax liabilities.
In general, the multifamily rental property takes up to 27.5 years to depreciate. But if one uses cost segregation, the depreciation process can speed up for some components. It drops from 27 years to as low as 5 years.
Here are a few components you will find in Multifamily that are qualified for cost segregation.
Parking lots and lawn sprinklers drop to 15 years and carpeting and kitchen stoves drop to 5 years.
Let's take a practical example and see how cost segregation can create a difference
Assume you purchased a complex two years ago for $900,000. Take $100,000 off of the total price for the land. You are left with $800,000. This remaining amount is liable to depreciation in 27 and a half years.
You let each unit for a thousand dollars a month and the property have a total of eight units. It will bring 96 grand a year in gross rent.
You have to manage the property and pay interest on loans. Take 32 grand and 38 grand for each of those two.
You are left with 26 grand and that is your NOI.
Let us calculate the taxes.
Depreciation deduction = $3,636
Total = $22,364
If you fall in the 22% Tax Bracket
Tax = $4,920
But if you make use of cost segregation, in depreciation deductions you can pick an extra amount of $311,986
You can run this analysis for your income and loss on your whole portfolio. That being said, you can do the same for your other properties and capture a good amount in deductions.
It is highly recommended to make use of cost segregation. Please mention this to whoever is taking care of your taxes to make sure you benefit from cost segregation.
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