Real estate syndication has become increasingly common in recent times. The subject is discussed frequently during tax season, which doctors, business owners, and tech executives specifically dread. Most of these individuals are concerned about the percentage of income that goes away to taxes because they are in one of the highest federal tax brackets and they feel like they are getting crushed by taxes.
This can hurt even more if they live in a state with a high-income tax. If you’re struggling with the same problem, you should consider investing your capital in a more tax-efficient way.
One of the things that makes commercial real estate investing so attractive to the wealthy is the ability to create highly tax-advantaged income that doesn’t require you to trade your precious time for dollars. These tax advantages are not available to stock and bond investors, another strike for traditional asset classes touted by most financial advisors.
But before we go through the tax benefits of a real estate syndication, we must ask a vital question.
Why Do Syndicate Partners Get Tax Benefits?
According to their agreement, an equity investor who puts money in a syndication is considered a limited partner or passive investor. The government has given these individuals easy pathways by creating taxation benefits for passive and active investors. This is a win-win situation for both investors and the government.
The government provides these tax benefit to all real estate investors since it is in the government’s best interest for people to keep building commercial properties. Real estate has tax advantages in excess of practically every other type of investment, whether you are starting a business, investing in bonds, preciously metals, stocks, etc.
Let’s review the tax benefits of a real estate syndication.
1. DEPRECIATION – allows real estate investors to write off 3.6% of the value of the building each year as an expense, even though there is no out-of-pocket cost for this expense. Sweet!
2. BONUS DEPRECIATION – this extraordinary benefit is a form of accelerated depreciation. It allows commercial real estate investors to take 100% of the accelerated benefit and utilize it all in year one of ownership.
3. COST SEGREGATION – a technical process where short-life items are separated from long life items and depreciated rapidly over 5-7 years. It typically doubles or triples depreciation during the first five years of ownership.
4. 1031 EXCHANGE – when real estate is sold for a large profit, instead of paying capital gains taxes on the gain, you can do a 1031 Exchange which allows you to defer taxes.
5. NO SELF-EMPLOYMENT TAX – Consistent self-employment makes business owners owe money towards Medicare or Social Security taxes (this totals up to 15.3%). This takes away a huge chunk of what one may have earned from their secondary income stream. Through investing in a real estate syndication, not only is the investor earning money, but they’re also shedding a few expenses since they won’t have to pay the self-employment tax.
6. CAPITAL GAINS – When an investor collects the profits after selling an investment, the return is called a capital gain. This return is typically taxed at a lower rate than the income they earn. The investor keeps long-term investments like real estate for more than a year in many cases, and the tax rate for these investments maxes out at 20%. This is much better than the 37% max income tax bracket.
Individual Retirement Accounts
Additionally, a growing number of investors are slowly becoming aware that they can pick other investments (apart from mutual funds, stocks, ETFs, and bonds) within their retirement account. Investing in real estate through an IRA that you control can be a brilliant way of diversifying your retirement savings.
A traditional and Roth IRA can be changed to a self-directed IRA. In this case, the individual gets to control more of what happens with the cash, while the tax-deferred benefits still stay in place (the traditional ones that come with an IRA account). A 401(k) plan, on the other hand, works a bit differently. If you’re still working for the company sponsoring your 401(k) account, you won’t be able to move the money around. But if it’s an older 401(k) account, a rollover may be possible.
The process is easy, and it will let you start investing in a multifamily syndicate as a limited partner.
Adding up these benefits and deductions can lead to significant gains for an investor. When these gains compound over time, it becomes clear why so many passive investors consider investing in real estate syndications. Thanks to the breaks offered by the government, investors end up with more profit in their pockets.
To discuss the tax benefits of a real estate syndication get in touch with us today, and we’ll help manage your investments while you get a monthly return and back end profits!
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