Multifamily investment is often considered to be a fast track to untold riches. However, those who have been around the block a few times are quick to preach the importance of caution in this regard. After all, the extra income might be wonderful but the process is not all gumdrops and candy canes.
Renting out a wide range of units brings in a greater level of income, for sure. Unfortunately, more money is always going to lead to more problems. How can the tax burden that is created in these instances be alleviated?
Cost Segregation Advantages
This is a common tax planning strategy for multifamily real estate investors. When investment planning is taking place, it is important for investors to take a closer look at the advantages that they will be gaining. For starters, cost segregation allows for the acceleration of depreciation when it comes to certain areas of the property.
In turn, this decreases the level of expense that the investor experiences down the line. When tax liability is decreased, the investor’s cash flow decreases. If cost segregation does not take place, the depreciation takes place in a more linear fashion. Conversely, it is in the best interests of the investor to make sure that the depreciation occurs on a faster track.
Examining The Eligible Components
Of course, there will always be some small level of confusion when it comes to eligible components. The parking lot, lawn sprinklers, carpeting and kitchen stove are among these elements. These simple adjustments lead to a sizable amount of savings over the long haul. For example, an apartment complex that would cost $800,000 to purchase will provide hundreds of thousands in savings with the use of cost segregation.
This makes a massive difference, doesn’t it? It is important to note that these additional deductions cannot always be used right away. The more impatient investors should always take the time to consult with the proper authorities.
A Practical Example
Let’s stick with the original $800,000 figure, shall we? If this is what was spent on the property (once land costs are deducted), a real estate investor can expect a straight line depreciation in the years to come. Once the gross rent, operating expenses and loan interest are removed, the investor is left with a net operating income in the $25,000 range.
Instead of paying further taxes on this income and being left with a much smaller amount, cost segregation lets the real estate investor enjoy a much larger level of profit. A property of this size could lead to an additional $300,000 worth of deductions. This income offsets future expenses.
Real estate investors must prepare themselves for the eventual rainy days that are going to come. Utilizing the financial benefits that are associated with cost segregation is a major part of that equation.
The real estate investor must also take the time to examine the effect that this decision is going to have on their entire portfolio. If they are able to enjoy these types of savings on one property, there is a very good chance that the savings can also be applied to various other properties in their portfolio.
A tax preparation expert also provides their clients with access to additional savings. In many instances, real estate investors can be designated as real estate professionals. Once this designation has been made, the investor is entitled to use the cost segregation gains to offset their average income.
At the end of the day, the best piece of advice that can be offered to any prospective real estate investor is a simple one: be sure to enlist the right professionals for assistance. A tax professional is able to guide the investor through the steps of the multifamily process and provide the necessary tools for getting the most out of cost segregation.
No investor should ever make the mistake of trying to handle this process on their own. Cost segregation is simply too valuable and assumptions should never be made. Otherwise, the investor could fall into the trap of believing that they do not need any help. Those who are truly experienced will always preach about the importance of enlisting tax professionals to make sure the process goes smoothly. Of course, we also recommend to use a multifamily property analysis software to evaluate every potential investment!