Tax Incentives for Multifamily Homes

August 13, 2020 – Multifamily

Are you looking for investment opportunities in2020? Then multifamily home investments are an excellent choice, particularly for tax benefits. The odds are stacked in your favor when you consider the tax breaks provided by the government.

Clued up multifamily property owners can take advantage of tax breaks to reduce operational costs. The amount of money saved by each type of tax break differs, but it’s worthwhile taking advantage of each of them. Let’s go through the various tax incentives available to multifamily home investors.

Depreciation Tax

The IRS views your home like a car or any other asset that decreases in quality over time. The roof gets old, the paint begins to peel, and the plumbing gets rusty. It may seem counterintuitive, but the value of a home can still rise as the quality decreases. Many outside factors influence a home’s price, such as job opportunities and average incomes in the area.

Even though real estate prices increase over time in most neighborhoods, houses are still a depreciating asset. You can claim the depreciated amount as a tax deduction, which usually exceeds the “wear and tear” costs of property maintenance.

You might be wondering how the depreciation tax laws work. Essentially, the government views real estate as profitable for 27 years. Consequently, deprecation tax claims are eligible for that same amount of time.

Passive Income Tax Benefits

If you spend less than 500 hours on real estate activity per year, you won’t be considered a real estate professional, and you must pay a passive income tax for real estate income. So why would you want to pay passive income tax? Because then you don’t have to pay federal income tax, which is usually much higher than passive income tax.

Research to figure out how many hours you work on real estate and the tax cost difference if you’ve become a successful passive multifamily real estate investor. The tax benefit from not working more than 500 hours means you can save a lot of money annually.

1031 Exchange Tax Benefits

The 1031 Internal Revenue Code states that there are no capital gains tax obligations when property owners swap rental units. Consider the following to meet the specific criteria to qualify for this tax break:

  • The swapped properties must be similar
  • The new property use must also be for business purposes
  • The new property valuation must be the same or higher value

Make sure the transaction does not violate the rules of the tax law. You may need to hire a professional to review the transaction beforehand to make sure you are eligible for this tax incentive. Errors could potentially result in the transaction being taxable, which could be a big hit to your bottom line.

Cost Segregation

Cost segregation is a similar tax incentive to depreciation. However, in this case, the depreciating asset is not the house but the items within the multifamily home. It might be furniture, cabinetry, fixtures, and appliances. It’s another type of tax benefit that will increase the ROI of running a multifamily home rental business and build more of your wealth via real estate.

There is a catch to know about before you take advantage of cost segregation tax benefits—they affect your tax bill when you want to sell the property. The size of the tax bill increases in proportion to the amount of cost segregation tax breaks you use.

Real Estate Investment Tax Deductions

Tax deductions are another smart move to lighten your tax load. Tax laws allow real estate owners to deduct taxes from the costs of running a business, such as:

  • Marketing
  • Utilities
  • Mortgage interest
  • Repair and maintenance costs
  • Insurance premiums

Get the help of a specialist to give you ideas on what tax deductions for which your property can apply. You’ll be pleasantly surprised by the number of tax deductions you can get when you ask for them. However, don’t push your luck—you can’t make claims for everything related to the running for multifamily home rental business.


Taking advantage of all of the tax incentives for owners of multifamily homes can significantly reduce your costs from renting your property. Furthermore, it helps you compete against properties in your local area. Other property owners might be offering a lower rental rate because they are also taking advantage of all the possible tax incentives. To learn more about your property’s tax incentive potential, get in touch with an expert at Yankee Capital.

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