Tax Benefits of Investing in Real Estate Syndications

The benefits of passively investing in real estate syndications has major appeal for real estate investors. Not only do they receive cash flow and appreciation from the asset, but when tax season rolls around, they know that even though an asset is healthy and has made a profit, they’ll be able to utilize what is called a “paper loss” to offset their taxable income.

You might be wondering why real estate investing comes with so many tax benefits that allow for these paper losses. The government provides these benefits in order to incentivize people to participate in activities that will put money into the economy; activities such as starting a business and investing in real estate. Real estate investors are in the unique position to provide housing and commercial spaces for businesses, while simultaneously receiving cash flow, capital, and the tax benefits associated with doing so. It truly is a win-win situation.     

So, what exactly are these tax benefits that we keep mentioning? We’ve all heard of tax write offs, or deductions, that reduce taxable income. Real estate comes with a number of tax incentives and benefits that accomplish just that, including the following.

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- Depreciation

- Capital Gains

- Refinancing

- Deductible Expenses

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Depreciation

Depreciation is the decrease in an asset's value due to the defined useful life of its components. One of the most lucrative tax benefits of investing in a real estate syndication is that of depreciation deductions. They allow investors to write off the depreciation of an asset incrementally over the length of its useful life, reducing taxable income. It's important to note that only the property itself depreciates, not the land that it is on.

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Capital Gains

When an asset is sold, the profit that is received is referred to as a capital gain. Long-term capital gains are those profits from assets that have been held for one year or longer, and are taxed at a lower rate. Short-term capital gains, on the other hand, are profits from assets that are held for under a year. Short-term capital gains are taxed higher as traditional income. Real estate syndications have the advantage of lower taxation since hold times are typically over one year.

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Refinancing

Real estate investors can also take advantage of tax benefits by refinancing an asset that has gained equity. For example, an asset is purchased for $700,000 and after improvements, increased rents, and appreciation, the asset is now worth $1,400,000. This property can be refinanced and the $700,000 in equity cashed-out and leveraged in order to purchase another asset, tax free.

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Deductible Expenses

Some of the necessary expenses associated with owning an asset are also able to be deducted, lowering taxable income. Some of these deductions include mortgage interest, property taxes, property insurance, HOA dues and management fees.

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These are some of the most common ways that tax incentives and benefits can save real estate investors money at tax time, making multifamily syndication an appealing investment strategy.

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Disclaimer: The information provided in this post is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.