Tax season is in full swing, and although the IRS moved the filing deadline for individuals to May 17th due to COVID-19, many are still scrambling to file after the crazy year. Tax season can be stressful, but less so if you’re an investor in multifamily real estate! Here is what you should know about multifamily investing and taxes:
What is a K-1?
A Schedule K-1 is an IRS tax form issued to member investors in a partnership, such as a residential apartment building managed by Metonic Real Estate Solutions.
A K-1 tax form reports each investor’s share of the property’s earnings, losses, deductions and credits from the partnership and any contributions or distributions made throughout the year. A K-1 is essential for those individuals involved in a partnership because it reflects the member’s ownership percentage and how much of the property’s earnings or losses the individual needs to report on their personal tax return.
What are the tax benefits of investing in multifamily real estate?
Real estate investing is a great way to potentially decrease your tax burden.
Because the IRS considers partnerships “pass-through” entities, earnings or losses are not taxed at the partnership level but to the individual member owners. There are several potential tax breaks the IRS grants to those involved in multifamily residential investments; including cost segregation of the various asset groupings found in an apartment unit resulting in accelerated depreciation, potential for energy efficient tax credits, investment deductions, and the possibility of deferring tax through the use of 1031 exchanges.
Depreciation – What makes multifamily investing unique from other real estate is the life period over which the IRS allows building improvements to be depreciated. Multifamily apartment buildings are depreciated over 27.5 years, where most other types of real estate (office, retail, etc.) are depreciated over 39 years. This shorter depreciation period allows for increased annual depreciation expense and therefore less taxable income with no effect on cashflow.
1031 Exchanges – Under Section 1031 of the United States Internal Revenue Code, taxpayers may defer the payment of capital gains and related federal income taxes on the exchange of certain types of real property. You can read more about 1031 Exchanges here.
Multifamily investing provides many benefits when it comes to reporting annual taxable income. If you’re interested in multifamily investing or have any questions, please reach out or visit our website at Metonic.net.