If a residential property is owned for investment reasons only and is not utilized as a primary residence, it can be used in a 1031 exchange. But can you 1031 exchange from residential to commercial property? Click here to read on…
One of the main advantages of investing into multifamily real estate is the tax advantages that come with it. The direct ownership in the LLC of the property (which you get through a syndication) allows for you to take part in the full depreciation or paper loss of the property, as opposed to the very limited depreciation that you get with investing in a REIT for example.
Depreciation is essentially the decline of an asset’s value over time (on paper) even though the actual value continues to appreciate. The depreciation loss that you can write off in an apartment building is sometimes more (or close to it) than the cash flow that the building produces on an annual basis. That means that the taxable amount on that cash flow could be $0 or close to. Furthermore, having direct ownership may give you the ability to qualify for real estate professional status. If you meet the IRS’s qualifications to be considered a “real estate professional”, you could even take your paper loss from what the IRS considers to be “passive income or loss” and apply it towards your active income to further reduce your personal tax liability.
For individual investors, the 1031 exchange is a great tool to encourage and promote ongoing improvements, it also helps drive markets too. They create a sustained level of transaction volume in the real estate market and as a result, create a secondary business economy to facilitate those transactions and renovations that need to be performed. In this guide we’ll go in depth on what a 1031 exchange is, the qualifications, how it works in real estate investing, some examples and much more.