Preparing for Next Year’s Taxes: Multi-Family Financial Incentives

This year’s belated Tax Day due to the COVID-19 pandemic is now officially one for the history books, but it’s never too early to begin thinking about tax benefits for 2021, 2022 – and beyond. In general, real estate is full of tax incentives. However, multi-family real estate has even more tax benefits that aren’t typically found among single-family rental properties.

For example, multi-family investors can benefit from a depreciation tax break regardless of whether their property is depreciating. In most cases, apartment communities gain value, but this tax law, which is based on aging U.S. buildings, applies to all apartment homes.

On top of that, for property fixtures that don’t hold value for as long – including amenities like cabinetry and light fixtures, investors may benefit from cost segregation tax benefits.

At Rastegar, one of our favorite tax policies is the Opportunity Zone. This newer law, passed in 2017 through the Tax Cuts & Jobs Act, applies to property and land located in areas regarded as “economically distressed.” The majority of opportunity zones are located in communities with a poverty rate at or above 20%. The tax law is designed to help grow economies in troubled areas, allowing investors to get tax deferrals and credits, based on how long they own a property within a designated opportunity zone. The amount of tax breaks an investor receives, depends on each individual property, but a hypothetical example would be an investor in an Opportunity Zone receiving a return of 12%, whereas an investor in a traditional zone may receive an 8% return.

Repair versus capital tax benefits play a large role, as being able to deduct costs for repairs is beneficial for any investor. Inevitably, a property will need maintenance and repairs. In addition, there are always costs associated with finding and retaining tenants. However, through this multi-family tax incentive, those costs are tax deductible.

Versatility is an option under 1031 Exchange tax benefits. This tax law allows investors to swap rental units with little or no capital gains tax obligations.

Lastly, passive income tax benefits are something the majority of our investors can benefit from. Those who spend less than 500 hours on their businesses will pay passive income tax instead of normal income tax.

Regardless of which property an investor chooses, multiple real estate tax incentives are available. The opportunities from multi-family properties surpass those of single-family properties, due to certain tax codes, along with the high demand for multi-family properties during any type of economic climate.