5 Tax Benefits of Multifamily Investments for High-Income Earners
Are you a high-income earner stressing out about high tax payments? You might feel
like the tax benefits of multifamily investments are out of reach. However, this is not
true. With a little research and some help from a professional tax preparer, you will be
able to get tax benefits from several aspects of Multifamily Real Estate investments
When you invest in a multifamily property, you’re investing in more than just the
structure itself; there are many tax advantages that come along with it, too
These can help you reap profits in the short term and the long term.
In this article, we’ll examine how you can take advantage of the five tax benefits of
multifamily investments. Let’s get started!
1. Depreciation write-offs
One of our favorite tax benefits for high-income earners is depreciation. The
depreciation allowance is a great feature of owning rental property in general; however,
it can be better in multifamily investments. The allowance gives you a break on your
taxes by reducing your income by the amount of the property’s depreciation expense.
It’s possible to write off a portion or even all of your real estate investment over its useful
life. For example, you could purchase a multifamily property for $1 million and plan on
holding it until it appreciates in value. Depreciation could be a good reason to treat that
property as an asset with an expected return—and one worth buying.
In addition to depreciating your building over 27 1⁄2 years (39 years if you have
commercial property), you can also depreciate any equipment and fixtures you
purchase within a year. However, those are capped at $25,000 total per asset category.
Many investors realize significant deductions right away but neglect to capitalize on
For example, if your investment property is worth $200,000 and you make a 20% down
payment (which will be tax-deductible), that means you’ll owe taxes on an adjusted
value of $160,000. But if your capital cost allowance (CCA) rate is at least 35%, that
means you’ll get to write off around half a year’s worth of rent ($8,500) in one year
As long as it is used productively for business purposes like commercial rentals or
home-based office space, there are few limits on what you can claim.
2. Rental income deductions
Your rental property will have immediate deductions in such areas as depreciation,
mortgage interest, and real estate taxes. This is because these items are considered
ongoing expenses and must be paid whether or not you collect any rent.
This is a huge perk—and it’s not just limited to wealthy investors. For example, if you
rent out a room in your home (and you meet certain conditions), you can deduct related
The amount of deductions you can claim on rental income depends largely on the type
of property you own. For many high-net-worth investors, the most valuable deductions
are found in apartments and co-ops. When you rent out these types of properties, they
come with a load of deductions that you can take advantage of.
These same deductions are available to anyone who owns an apartment or co-op,
whether or not they receive any income from the property. That means there doesn’t
have to be a tenant occupying that room while you write off those costs against your
profits from other investments or business income.
However, should you realize any losses on that investment later down the road which is
a common occurrence for startups, those non-business deductions could offset any
taxable gains when sold at a loss.
3. Passive income tax deduction
The tax benefits of investing in multifamily housing investments begin when you hold an
ownership stake in a multifamily property. This means that you get to deduct passive
losses associated with your investment, such as those on interest and depreciation.
These deductions come from things like depreciation, mortgage interest, and
management fees. Because you’re receiving money from continuing to own the
property, rather than from an annual paycheck, these types of deductions are only
available for passive income earners.
Your passive income tax deduction is separate from active losses, which are more
closely tied to your real estate holdings and are not deductible under current law.
So, for example, if your property suffered $100,000 in operating costs but only brought
in $50,000 in rent during a given year, you’d be able to write off that loss against other
income sources outside your real estate business—for example, from a job or interest
income generated by further investments.
4. Capital gains tax deduction
If you’re going to invest in real estate, it can help to get a handle on how depreciation
works. Once you understand that concept, you’ll be able to use it as a tax-deduction
strategy with your own multifamily properties.
Say you spend $50,000 buying an apartment building and then sell it after five years for
$100,000. Your taxable income would be reduced by $50,000 due to depreciation. The
amount of the capital gains deduction depends on how long you’ve owned the property
and how much profit you pull out when you sell it.
As long as you hold onto the property for more than one year—and remember that if
you pass away during that time period, there may be different rules involved—you could
receive full benefits from capital gains and depreciation deductions at tax time.
If you acquire a property and sell it in less than ten years, your profit may be subject to
capital gains tax. This can be especially beneficial if you’ve invested in a real estate
market increasing in value.
Since all investment profits are taxed as ordinary income, there’s another benefit. Under
current law, long-term capital gains rates (which max out at 20%) are lower than
standard income rates (which range from 10% to 39.6%).
5. Property Deductions
Wealthy investors in real estate are eligible for a few special tax deductions that aren’t
available to other types of taxpayers. One of these is property tax deductions, which can
be used to lower your annual tax bill. Property tax write-offs are an essential perk of
multifamily real estate investing—but they’re not always easy to claim.
If you don’t itemize your deductions on your taxes, property tax is just one more
expense that reduces your profit. To save yourself some work, seek out information on
property tax deductions as early as possible and keep these essential facts in mind.
For example, if you own a single-family home or condo, any property taxes you pay will
likely be fully deductible. However, if you have several buildings (or lots) and pay
multiple levels of taxes between those properties and local government—not all of it
may be deductible from your taxable income.
Investing in real estate has its benefits: favorable capital gains tax treatment,
depreciation deductions, and others. However, as with any investment strategy,
understanding your tax burden is critical to overall performance.
Hopefully, this list serves as a starting point for your multifamily investment tax planning.
As with any asset class, multifamily real estate offers some unique advantages not
present in other investments.
As always, don’t forget to consult with a professional before making any financial