Reduce your tax burden and maximize multifamily investment returns
Investing in multifamily properties in Florida presents lucrative opportunities for wealth generation, but understanding the tax implications is crucial to maximizing returns. By leveraging strategic tax planning, investors can minimize liabilities, optimize cash flow, and preserve capital. Continue reading to learn the top ten tax-saving strategies every multifamily investor should consider.
1. Maximize depreciation deductions
Depreciation is one of the most significant tax benefits available to multifamily investors. The IRS allows investors to deduct the cost of a rental property over a 27.5-year period. However, by utilizing a cost segregation study, certain property components (such as appliances, flooring, and landscaping) can be depreciated over shorter periods (5, 7, or 15 years) [1], accelerating tax deductions and increasing cash flow.
Related resource:
Tax minimization, lifetime income, and charitable benefits: A conversation with David Blain
2. Utilize the Qualified Business Income deduction
The Qualified Business Income deduction, introduced under the Tax Cuts and Jobs Act, allows eligible pass-through entities (LLCs, S-corporations, and sole proprietorships) to deduct up to 20% of their rental income. [2] Structuring investments appropriately can help investors take full advantage of this deduction and lower taxable income.
3. Leverage 1031 exchanges to defer capital gains taxes
Per Section 1031 of the U.S. Internal Revenue Code (IRC), a 1031 tax deferred exchange allows investors to postpone paying capital gains taxes and depreciation recapture on a property if the proceeds are reinvested in similar property as part of a qualifying like-kind exchange. [2]
“A 1031 exchange is insurance that you can find a property that you want to exchange into after you sell yours to defer the taxes,” says Joe LaFleur. “Instead of having to pay depreciation recapture plus the capital gains taxes, you’re able to use that to purchase another property to generate the same or greater income for you as the owner and investor instead of paying the money to the IRS.”
This strategy allows investors to grow their portfolios tax-efficiently. To qualify, investors must:
- Identify a replacement property within 45 days
- Complete the exchange within 180 days
- Reinvest in a property of equal or greater value [2]
Learn more:
What advantages does a 1031 tax deferred exchange offer multifamily investors?
4. Differentiate between capital improvements and repairs
Understanding the distinction between capital improvements and repairs is essential for tax purposes:
- Repairs: (such as fixing a broken window or repainting walls) are deductible in the year they occur.
- Capital improvements: (such as installing a new roof or upgrading plumbing) must be depreciated over time. Proper classification can help investors optimize tax deductions while ensuring compliance with IRS regulations.
5. Offset income with passive activity losses
Multifamily investments generate passive income, which can be offset with passive losses from real estate activities. Up to $25,000 in rental losses may be deducted against non-passive income if the investor actively participates and has a Modified Adjusted Gross Income below $100,000. Unused losses can be carried forward to future tax years. [4]
6. Tax advantage of energy-efficient tax incentives
Investing in energy-efficient upgrades can yield valuable tax benefits while reducing operating costs. Investors can claim credits and deductions for installing energy-efficient HVAC systems, LED lighting, solar panels, and water-saving fixtures. The 45L credit provides up to $5,000 per unit for energy-efficient new construction or substantial rehabilitation, while the 179D deduction offers tax benefits for commercial building upgrades. [5] [6]
7. Conduct cost-segregation studies
A cost segregation study identifies property components that can be depreciated more rapidly, accelerating tax deductions and improving cash flow. A survey of a 48-unit apartment complex in Florida revealed that over 32% of the property’s value was reclassified into shorter depreciation periods, significantly boosting upfront tax benefits. [7] This strategy is beneficial for newly acquired or renovated properties.
Related resources:
What are the benefits of cost segregation for multifamily properties?
8. Utilize self-directed retirement accounts for real estate investments
Investors can acquire multifamily properties using self-directed retirement accounts (Solo 401(k)s or self-directed IRAs), allowing for tax-deferred or tax-free growth, depending on the account type. This can allow investors to diversify their portfolios while minimizing tax liabilities on investment gains.
Learn more:
How to win at retirement from self-managed property ownership
9. Keep detailed financial records
Meticulous record-keeping is essential for tax optimization. Investors should maintain organized records of:
- Rental income
- Operating expenses
- Property improvements
- Mortgage interest
- Tax filings (Accurate documentation ensures compliance with tax laws, maximizes deductions, and reduces the risk of audits)
10. Work with experienced tax professionals
Real estate tax laws are complex and frequently change. Partnering with tax professionals specializing in real estate can help investors:
- Optimize tax strategies
- Navigate deductions and credits
- Ensure compliance with tax regulations
- Plan for future tax law changes
Related resource:
How to build a successful multifamily investment portfolio
Maximize your multifamily investment returns
Implementing these tax-saving strategies can significantly enhance the profitability of multifamily investments. From leveraging depreciation and 1031 exchanges to optimizing passive losses and energy incentives, investors have various tools to reduce tax burdens and build long-term wealth. Staying informed, keeping thorough financial records, and working with professionals will ensure continued success in the ever-evolving real estate market.
Looking for further advice on your multifamily property investment?
At 100Units, our team of highly skilled and passionate multifamily brokers will meet all of your multifamily property needs by analyzing trends, market conditions, and local competition to ensure your investment success.
Contact our team today at 866.GO.UNITS or fill out the form here.
Source:
1: Internal Revenue Service (IRS) | Publication 527 (2024), Residential Rental Property
2: Internal Revenue Service (IRS) | Like-Kind Exchanges Under IRC Section 1031
3: Internal Revenue Service (IRS) |Qualified Business Income Deduction
4: Internal Revenue Service (IRS) |Publication 925 (2024), Passive Activity and At-Risk Rules
5: Warren Averett | Understanding the 45L Tax Credit
6: Energy Communities
7: Engineered Tax Services