As a real estate investor, taxes aren’t the most exciting aspect of real estate investing, but they’re important to understand nonetheless.
As a real estate investor, it’s much more fun to focus on great returns and upgrading your lifestyle, but you must be sure to not overlook taxes completely.
As a passive investor in a real estate syndication, your sponsor team will guide you through tax season and help you ensure you’re getting the tax benefits you deserve. The beauty of investing in real estate is that your investments lower your tax obligation rather than increase it, unlike some other investment vehicles, such as mutual funds and stocks.
Any time you’re investing your hard-earned money, you should do your due diligence to gain a working knowledge about how you may be taxed as a result of your investment and explore the best strategies to decrease your tax bill.
There are different kinds of tax strategies, and knowing the best one will give you a great advantage and savings as a real estate syndication investor.
How does Depreciation and Cost Segregation work?
Wear and tear on a property over time is expected and you’re allowed to write off the depreciated value of an asset over time. You’re allowed to write off the value of residential rental assets over 27.5 years and commercial properties can be written off for 39 years.
Depreciation affects you, as the investor, because when you earn cash-on-cash returns, the tax on the amount you receive is deferred. This means you aren’t required to pay taxes on the earnings from the asset until it’s sold. You also have the option to elect bonus depreciation, if you choose, which can even further maximize your tax benefit.
Cost segregation amps up the tax advantages even further. In typical real estate syndications, the property is held for around five years. With straight-line depreciation, properties held for many years receive the most benefit. By utilizing cost segregation, you’re able to take into account the various aspects of the property that will depreciate at a quicker rate. For instance, the signage of an apartment complex is expected to deteriorate quicker than the roof. Cost segregation can speed up depreciation benefits, so investors can have further tax advantages even within five years’ time.
Tax Benefits Of Investing In Real Estate
By investing in real estate, either actively or passively, you can qualify for significant tax advantages. You can use the deductions earned from real estate investments to offset your other income and ultimately greatly decrease your tax bill each year.
In order to build wealth, it’s not enough to earn income, you also have to know what strategies can best help you maximize the tax benefits available to you. Investing in real estate syndications gives regular people the chance to build wealth quickly and sustainably, while also mitigating risk.
As always, be sure to consult your CPA or tax advisor to assess your personal situation and determine what strategies best fit your needs and financial goals.