Leveraging Tax Advantages and Forced Appreciation with Multi-Family Real Estate
With Percy Nikora, Co-Founder
The other benefit you get is the ... Like many of the real estate classes, you generally are using leverage, as well. So, if you are wise about leverage, and you use a good loan-to-value ratio, it could be a very powerful tool. So, by putting in a certain amount of capital upfront, you're actually leveraging the money from a lender for 70 percent, 75 percent of the rest of the value. This allows you to buy bigger asset classes and, again, get the benefit of that forced appreciation.
It also helps with the tax advantages, and there are some very unique tax advantages when it comes to multifamily; in particular, the depreciation. So, generally, multifamily is depreciated over 27.5 years. Now, these are assets that are tens of millions of dollars. So, just that, itself, on a yearly basis, is significant.
There's something known as a cost segregation study that can be done, where an engineer goes into each of the floor plans and essentially reverse-engineers what it takes to build that unit. So, you can say, "For this particular building structure, it has appliances that are depreciated over X number - a short, like three to five years; it has wiring that could be 10 years; it could be flooring that's five years." They really decompose that entire building structure, and they go from 27.5 years to a much shorter time frame for a lot of the building materials.
That allows you to accelerate the depreciation. Then, when you couple it with a recent 100-percent bonus depreciation that went through, there's a lot of stuff that you can write off in the very first year, itself. So, this has been a very powerful tool, especially in the last two years or so, that allows you to defer taxes that you have on any income- rental income you may have coming in during the holding period. Then, that- when you sell, there's some depreciation recapture, but generally that's also at a lower tax rate than most people are typically paying for regular income- earned income.
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