How Real Estate Syndication Can Support Your Tax Strategy
Consider these factors before you make a new investment.
Real estate syndications are one of the best ways to access the full tax benefits of real estate ownership while still investing passively.
This is one of the key differentiators between investing in a syndication versus investing in a real estate investment trust or a fund. Investments in a REIT or a fund are treated as ordinary dividend income by the IRS. This means that you pay higher taxes on that income and are not able to claim some of the common real estate deductions and tax benefits.
These benefits include depreciation (ex: bonus depreciation) and the ability to defer taxes with 1031 exchanges. In this article, we’ll answer some of the most common questions about the tax benefits of real estate syndications and share some valuable strategies for making the most of these opportunities.
What is Bonus Depreciation, and How Can You Take Advantage of It?
With bonus depreciation, businesses can immediately expense eligible assets in their first year of service, rather than claiming depreciation across a longer time period. This can offset income in the first year after acquiring a new property.
When used effectively, bonus depreciation will lower the amount of income tax you pay while also generating passive income through your investment. To do this, businesses may implement a cost segregation study, identifying all property-related costs that can be depreciated faster per IRs guidelines. This could apply to an acquired property, new construction, or even remodels and build-outs.
This tax incentive is particularly time sensitive, as bonus depreciation will begin to phase out starting Jan. 1, 2023. Any assets acquired and placed in service in 2023 will be eligible for 80% bonus depreciation. In 2024, the deduction will lower to 60%, then 40% in 2025, and so on until it phases out completely in 2027.
Keep in mind that bonus depreciation has been introduced and expired before (2008-2013). It’s intended to incentivize taxpayers to purchase eligible assets and could be introduced again in the future. We recommend keeping an eye out for any IRS pronouncements of new incentives that could impact your investments in the coming years.
How Do You Use a 1031 Exchange to Defer Taxes?
A 1031 exchange is a unique strategy that allows you to defer capital gains taxes from a property sale and instead reinvest the proceeds by purchasing a new property. Not only does it allow you to defer taxes, but it also gives you the opportunity to reinvest your earnings into a higher-value or more cash flowing property.
1031 exchanges must be structured correctly and completed within a limited timeframe. Within 45 days of relinquishing your first property, you must identify a new property you plan to purchase. You must also close on that new property within 180 days.
The new property you purchase must also be of “like kind” to the original property, and it needs to have greater or equal value to the property you’re selling.
Because this strategy has such specific requirements, the best way to ensure your 1031 exchange is conducted correctly is by working with an experienced partner like Excelsior Capital.
Are All Syndication Deals Equally Tax Efficient?
Real estate syndication can provide a great opportunity for increasing the tax efficiency of your portfolio, but not all deals are created equally.
To access the full range of tax benefits, make sure you’re working with a sponsor who prioritizes tax efficiency when sourcing and structuring their deals.
At Excelsior Capital, we understand that syndication deals give investors a unique opportunity to directly own real estate and access its full tax benefits. We take our responsibilities seriously and make sure to carefully vet each deal, prioritizing inflation-resistant, stable commercial opportunities.
If you’re an accredited investor looking to access the full tax benefits of direct real estate investment, we’d love to connect with you. Simply fill out this form to get in touch.
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With 35 years of experience in financial services, working on Wall Street and for major regional firms, Richard has seen it all.
A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.
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