We hope your 2021 is off to a great start! We had quite an eventful month and look forward to the rest of 2021.
With the tax season coming up, business owners and high-income earners often ask their tax professionals how to save on taxes. Real estate is often included in that conversation.
The tax code is written to encourage the population to do certain things. For example, if there is a tax credit for electric vehicles, people will be more inclined to buy that. Similarly, there are many tax benefits available to real estate investors. This encourages people to purchase real estate, create local jobs, renovate properties, and provide safe and clean homes for the community.
Below are our top reasons for investing in real estate syndications:
Top 3 Tax Benefits of Real Estate Syndications
1) Passive investors get tax benefits too!
This is a big advantage of passively investing in real estate syndications. Investors can get all the tax benefits of real estate without having to answer late night phone calls or fix leaky toilets.
As a passive investor, you own a percentage of the LLC that owns the property. Based on your ownership percentage, the tax benefits are passed on to you. During tax season, our accountants will divide the tax benefits and issue a K-1 form to all investors.
This should not be confused with investing in REITs. REITs are a public security and do not offer tax benefits such as passive losses via depreciation.
Real estate is considered a depreciable asset. While this sounds bad, it provides an opportunity for a lot of tax savings. It is a strategy used by many to pay a lot less taxes every year!
Normally, properties are depreciated over 27.5 years. If the value of a building is worth $27.5M, that gives off $1M per year of depreciation.
To make it even better, you can accelerate the depreciation using a cost segregation study and bonus depreciation. You can hire an engineer and a CPA to run a study on the property. Certain items can then be re-classified to depreciate within 5,7, or 15 year instead of 27.5 years. This provides more depreciation in a shorter time period.
So why is this so important?
Depreciation provides a paper loss, not a real loss. You can then use those paper losses to offset gains from other passive investments. If you have more passive losses than gains, it carries over into future years.
For example, let’s say you have $50k in paper losses in 2020 from real estate syndications. You also sold some stock for $20k gains, had $10k of cashflow from real estate, and another $10k from being a passive partner in a dental practice. That is a total of $40k in passive income.
The $50k of passive losses would OFFSET the $40k gains, resulting in a $10k paper loss for 2020. Better yet, the $10k would be carried over into the future years to offset more passive income!
3) Capital Gains
Similar to stocks, properties held for more than 12 months are subject to long-term capital gains (LTCG). This results in much less taxes compared to ordinary income rates.
For comparison, let’s compare the two tax tables.
Long-Term Capital Gains
The highest tax rate for long-term capital gains is 20%. That is MUCH better than 37%! Even paying 15% LTCG is better than 22%-35%.
Real estate can be a great addition to an investment portfolio. The tax benefits can help delay or eliminate taxes, keep more profits in your pocket, and allow your money to snowball.
Please consult with a tax professional regarding your specific tax situation and how these may fit in with your tax strategy.
We are excited to announce that we just closed on our latest acquisition, Villa De La Paz. This property now puts us at 577 units in the Phoenix market. This was an off-market purchase in Phoenix in an area poised for gentrification. Nearby properties are being sold for 10-20% more
Name: Haven on Thomas (Previously known as Villa De La Paz)
Size: 104 units
Price: $16,000,000 ($154K per unit)
Debt: $10.3M Freddie Mac, 10-year floater
Leverage: 64% LTV / 55% LTC
Expected Revenue Lift: $400 per unit
This property will have a similar renovation plan as our other properties. That includes new shaker cabinets with soft-close drawers, granite countertops, stainless steel appliances, paint, fixtures, and flooring on the interior, and upgrades to the office, pool, and other community amenities.