Investors of all stripes have to concentrate on two things: making money and limiting tax bills. Multifamily real estate investing has the ability to accomplish both goals. The U.S. tax code favors real estate investors in a number of ways.
Operational Tax Advantages
Like any other business, landlords have operational expenses. Any individual multifamily property owner may deduct taxes, insurance, and maintenance costs. Real estate investments orchestrated through a limited liability company or partnership have access to additional expense write-offs, including advertising, office space, travel, and professional services. 
Depreciation describes reduced value over time attributed to wear and tear on a physical asset. The tax code recognizes that even the sturdiest building materials degrade as the years go by and require maintenance or replacement.
In the view of the Internal Revenue Service, real estate owners of residential property, including multifamily housing, can expect 27.5 years of usefulness or profitability from their investment. For this reason, rental property owners can calculate annual depreciation by dividing the property's value by 27.5. For example, a $600,000 property experiences $21,818 (600,000/27.5) in depreciation each year. In this scenario, if a hypothetical tax bill of $90,000 is owed before depreciation, it would be reduced to $61,182 (90,000 - 21,818).
As a result, depreciation represents one of the largest tax advantages of investing in multifamily real estate. Of even greater importance is the fact that a property that appreciates in value still qualifies for depreciation tax benefits. 
A method known as cost segregation accelerates tax cuts related to depreciation on multifamily housing by factoring in shorter lifespans for fixtures, cabinets, and appliances. Federal tax code acknowledges that these items wear out faster than a building, which allows the building owners to write off their depreciation in 7-year periods.
The depreciation of the fixtures, appliances, and cabinets may then be added to the building depreciation deduction. This reduces tax liabilities even more. The result is a boost to cash flow in the near term, which could increase profits or allow for more upgrades. 
However, the IRS only accepts deductions for cost segregation if the builder owners pay for a cost segregation study. An outside party, like an engineering firm, would need to inspect the buildings and prepare a report about the value of certain segments of the building that are expected to depreciate more rapidly than the structure itself. For this reason, the expected benefits of cost segregation must have a greater value than the cost of the study to be worth pursuing. 
The IRS taxes different forms of income at different rates. The three income categories are ordinary, investment or portfolio, and passive. Passive income is defined as income earned without active participation or the trading of time, and it is taxed at the lowest rate. Real estate investors who have managers take care of all or the vast majority of day-to-day tasks often qualify as recipients of passive income from rents because they are passively collecting earnings. 
Taken together, all tax strategies available to multifamily real estate investors improve returns on investment. To achieve the greatest tax advantages, investors rely on careful accounting of the purchase, operating expenses, revenue, and proceeds from a sale.
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