Private real estate investments offer several potential benefits to investors seeking alternative assets classes beyond stocks and bonds. While the tax implications of private real estate investing can vary from one individual to the next, there are some general tax benefits you may be able to take advantage of when adding private real estate to your investment portfolio. Here’s a closer look at four of the most common.
Depending on the type of investment real estate you own, IRS rules may allow you to reduce your taxable income by taking a deduction for your depreciation expenses. This is designed to help address the cost often associated with keeping a property in good condition as it ages. Under certain circumstances, you may be able to take a depreciation deduction for various private real estate investment structures including Delaware Statutory Trusts (DSTs), limited liability companies, and direct ownership.
Most investors hold private real estate for longer than 12 months, allowing them to take advantage of long-term capital gains tax rates. While the maximum rate for short-term capital gains is currently 37%, long-term gains are taxed at a range of 0% to a top rate of 20%, depending on your income level and filing status. This can provide beneficial tax savings when compared to an asset sold within one year of acquisition.
Many private real estate investments are structured as limited partnerships (LPs), or Delaware Statutory Trusts (DST’s) which do not pay income tax directory on their earnings. Instead, they pass earnings through to investors who are responsible for reporting them on their federal and state income tax returns and paying taxes at their ordinary income tax rate. Owners of certain pass-through entities are allowed a tax deduction of up to 20% on their pass-through income, reducing their tax liability.
Rather than immediately paying taxes on the capital gains resulting from a property sale, private real estate investors may be able to defer their capital gains taxes by investing in a Qualified Opportunity Zone (QOZ) or engaging in a 1031 exchange, for example. The ability to re-invest these funds rather than using them to pay taxes can help contribute to wealth accumulation over time.
If you’re intrigued by the idea of improving tax efficiency with private real estate investing, now is a great time to learn more. Start by downloading a copy of our free ebook, “Tax-Advantaged Investing: The Power of Private Real Estate.” Inside, you'll have an overview of important topics such as the potential risks and rewards of private real estate investing and how to use Delaware Statutory Trusts (DSTs), 1031 exchanges, and qualified opportunity zones (QOZ) to help further optimize tax efficiency.
If you would like to explore whether private real estate might be a good option for your specific situation, please feel free to contact us today to schedule a consultation!
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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
Certain QOZ areas may not be able to appreciate as predictably as more established areas. Some neighborhoods may be more accommodating to development than others, impacting the success of the investment. Development and redevelopment of real estate traditionally have more risk than other types of real estate strategies. The availability and cost of construction and development financing is uncertain and represents a risk inherent in the execution of a QOF strategy. The rules and regulations of the QOZ Program are complex, compliance with the QOZ Program comes with significant challenges. QOFs tend to be illiquid investments for ten or more years. Any discussion regarding “Qualified Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidance’s, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any.
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.