Updated: Jan 9
Every real estate investor wants to make money on his or her investments, and multifamily property investors are no exception. After all, why would anyone invest money in a real estate deal if profits were not the motivating factor?
It seems that everyone who makes profits on investments, whether the profits are from stock sales, commercial real estate or any other investment pays taxes. But thanks to the IRS, investors in multifamily property are able pay little to no taxes on their profits.
Let’s Take A Closer Look at Profits
Investors in multifamily properties receive two types of profits during the “hold period,” which is the time between the point when the property is purchased and the time when it is ultimately sold. They earn profits from income from the property, which includes rents, fees, etc., and profits from appreciation when the property sells. Remember, however that it us usually an LLC that owns the multifamily property, and investors purchase shares in the LLC. The profits are then distributed to the investors. Investors are able to use “pass-through taxation”, meaning 100% of expenses and profits go to the investors. At tax time, this is a great benefit.
Property income includes income from rents, fees and other monies generated by the property. Examples of fees might include premium or covered parking spaces, pet fees, in-unit washers and dryers, storage locker fees, premium Wi-Fi and other amenities.
The best way to increase rents and fees, and in turn income, is to purchase a value-add property, one that requires some repairs and renovation. By repairing and upgrading the exterior and renovating the apartments, you can begin to increase rents and charge additional fees for the new services and amenities you’ve installed.
Taxable Income from Proceeds from Property Sale
The second type of profit comes when the property is sold at the end of the hold period. This profit can often be substantial, assuming that the appreciation has met the original investment objectives. The appreciation is split among the investors, including the lead investor, or syndicator.
While nobody can guarantee appreciation on a multifamily property, there are many indicators that these properties will continue to appreciate over time.
Here’s why: there are currently about 75 million Baby Boomers who will be retiring soon, and many plan on selling their homes and renting. Trends show that a good number of Millennials are not buying homes or postponing their purchase, and renting instead. Some experts predict that many multifamily properties will be converted into retirement communities in the coming years. Finally, the cost to build new multifamily buildings is very expensive, helping to increase the value of existing properties now.
Tax Reduction Tactic #1: Operating Expenses