Lining Your Pockets with Tax Reform

[Vince DeCrow]

Tax reform is here and there is plenty of discussion going on about it. What is everyone's best strategy to capitalize on the tax rule changes as they relate to real estate?

Mine is to invest in multi-family real estate in a "low tax" state that needs some capital injection in order to become stabilized. Sell your property after you make the capital improvements in year 5 for a healthy profit. You can make this investment through a partnership or an LLC. Whether you have experience adding value to multi-family real estate and want to be the GP of the partnership or if you are a passive investor and want to be the LP and have someone you trust do it for you, it will work both ways.

Investing this way:

• Avoids the single family residence mortgage interest cap to take advantage of significant tax interest deductions.
• Lets you be on the winning side of the age-old argument that "everyone needs somewhere to live".
• Lets you take advantage of expensing all of your capital expenditures immediately when they are incurred to offset your normal income taxes from your day job and potentially pay no taxes at all in a given year.
  • This was not entirely possible in 2017 because any capital expenditures had to be depreciated over a 27.5 year period for multi-family properties vs expensing immediately.
• Have an effective maximum tax rate on your investment income of 29.6% if you do end up having any income that isn't offset by the capital you put up to do renovations on the multi-family units. This used to be a maximum effective tax rate of 39.6%.
• Improves your property value through the capital improvement plan you conducted.
• Puts you in a superior position to take advantage of the positive economic trickle down from the $1 trillion economic stimulus that will be caused by the nationwide reduction in federal corporate tax rates from 35% to 21%.