Using Multi Tenant Real Estate to Lower Your Taxes
One benefit that makes property a unique investment is the tax advantages passed on to investors.
While many syndicators and real estate companies focus on the passive income, dividends, and equity of investment real estate, they often overlook the tax benefits, which can sometimes be more beneficial than the cash flow itself.
With such high inflation and a high marginal rate in the upper tax brackets, it's easy to see how quickly money is disappearing from the bank accounts of American families back to the Government—making tax minimization an intelligent strategy. So if you're considering investing in real estate, don't forget to make tax benefits part of your real estate investment criteria.
In this blog, we'll look at the tax benefits of investing in a multi-tenant investment, some changes to the tax code, and a leading multi tenant investment company offering real value to its investors.
The Power of Depreciation
Depreciation is an accounting and economic principle that dictates that some tangible assets, such as cars or real estate, decrease in value over time.
Generally, real estate decreases in value due to wear and tear, maintenance issues, general usage, and outdated appliances.
While you may think this is a negative, real estate is unique in that the value of land generally increases over time which makes real estate such a potent vehicle for investment. While the property will age, the general understanding is that the land will increase or hold its value unless an unforeseeable event occurs, such as contamination.
Real estate investors can claim tax benefits on this wear and tear. The depreciation time frame for commercial property is 39 years and 27.5 for residential. However, how the depreciation will be administered will depend on the type of real estate investment structure.
If, for example, you invest in a 5 million dollar property and the property decreases to a 4 million dollar valuation, then the cost basis for tax purposes is only going to be applied to that 4 million dollar amount. The IRS permits investors to deduct from their taxes to offset this decrease in value.
Innovative real estate investment groups will depreciate multi tenant real estate investment property on their books to help investors reduce their tax obligations while participating in the investment.
The cost basis is determined with the formula gross income - deductions = adjusted gross income.
Changes To Depreciation Rules in 2023
Accelerated bonus depreciation was part of the 2017 Tax Cuts and Jobs Act (TCJA) to boost investment in small businesses. It permitted purchasers to deduct 100% of the asset's cost on the first year of purchase until 2022. This contrasts the standard depreciation strategy of extending this depreciation across several years or the 'life' of the asset.
As of this year, the system is slowly being phased out in the stages below:
80% for property placed in service in 2023
60% for property placed in service in 2024
40% for property placed in service in 2025
20% for property placed in service in 2026
What is going to happen next? It will depend on policymakers. However, the plan will likely go forward unless Congress decides to extend the extraordinary measures.
1031 Exchange Deferral On Capital Gains
A 1031 tax deferred exchange is a strategy to defer capital gains when real estate investing. The name is taken from the relevant IRC statute in which investors can defer capital gains tax from the profits of a sale if the profits are reinvested into a subsequent investment considered a like-kind investment.
The new property must be located within 45 days of selling the previous property, and the deal must be closed within 180 days. In addition, the property's value must be equal to or greater than the last property.
This means property investment groups can delay capital gains tax (theoretically) indefinitely.
Long-Term vs. Short-Term Capital Gains Strategy
Capital gains tax can be a real sting at the end of a successful investing cycle.
At Kenwood Management, we look for long-term investment options for multi-tenant properties. Short-term asset investment holdings are subject to a capital gains tax that aligns with the investor's income tax rate. At the same time, assets help for a year or longer and are taxed at a lower rate depending on their tax status. This will be at a rate of 0%, 15%, or 30%, depending on tax bracket status.
Therefore, investing in longer-term projects is more beneficial to access this tax benefit for our investors!
Consider Multi Tenant Real Estate For Great Tax Benefits
The great thing about investing in private real estate investment groups like Kenwood Management is that we structure the deals to give you the best possible tax advantages as an investor.
Reach out to the team to discover how our investment strategy for multi-tenant properties, investor-focused approach, and long-term outlook have created 7-8% annualized dividends and tax benefits for investors from all over the country.
Learn more about the benefits of choosing commercial multi-tenant property investments when downloading our free resource, "Why Multi-Tenant Commercial Real Estate Is a Good Investment!"