How to Save Money by Investing Passively in Real Estate

The multifamily real estate market is booming, and it’s time for you to invest! What makes the multifamily market so appealing is that it typically has lower risk levels than single family homes. This means that your investment will be more secure in the event of a downturn in the economy. Additionally, there are many tax benefits available for investors who qualify. These include depreciation deductions which can reduce your taxable income significantly. In fact, many investors pay no taxes, legally! 

What are the tax advantages of passively investing in real estate?

Let’s talk about depreciation. Depreciation is a deduction that allows investors to recoup some of their investment by reducing their taxable income. In fact, many people pay no taxes on passive income from multifamily properties!

How does depreciation work in real estate? I’m not a CPA or tax professional so please be sure to consult your team to find out what you can do. However, here is my understanding of how it works.  Depreciation allocates a portion of the purchase price over 27.39 years for residential rental property, 39.26 years for nonresidential real estate or 15 years if any part is used as an office. This deduction is available to reduce your taxable income by deducting some of your expenses each year on Schedule E.

Depreciation is a paper loss  or expense that is recorded on a property’s books for tax purposes. Depreciation occurs when the cost of an asset drops due to wear and tear. The amount of depreciation depends on how long you own your commercial real estate investment, its initial value, and the government’s prescribed rate (which typically declines over time).

When you invest passively in multifamily, you can often take this depreciation. Ask your sponsor team who is bringing you the deal how much you will get in depreciation so you can share that information with your accountant and tax team.  Essentially, you are making paper losses but still earning incredible returns on your initial investment. For high net worth individuals, who are in the highest tax bracket, this depreciation can help offset the returns they make in real estate. You can turbo charge those results if you are a real estate professional. But that’s for another article.

For now, I want to show you how the math works.

Say you invested $100,000 into a passive real estate investment.  The general partner or sponsor team who runs the active part of the investment offers you the limited partner a set return, for example 8%.   That means you will get a return of $8000.  If the property is depreciating by say, 20% that year or $20,000 then your total investment statement might show a loss of -$6000 which would be more than offset by the depreciation on paper and thus provide significant tax benefits to high net worth individuals who can take the deduction. I’m not a tax advisor so be sure to consult your own time before making any investment.

This type of passive investment can often help high net worth individuals, such as physicians, attorneys, engineers and sales people, cut down on their taxes while making a passive return on their money.

If you would like to find out more about investing passively in real estate, feel free to join our free, no commitment investor club.  Inside that group, we offer free educational material and you get access to our deals.

Remember to consult your own team of investing professionals as we do not provide tax, legal, or investing advice.