Tax Advantages of Multifamily Investing
Multifamily real estate isn’t just a great vehicle for cash flow and appreciation—it also comes with some of the most powerful tax advantages available to investors. By understanding and leveraging these benefits, you can significantly improve your after-tax returns and accelerate your path to financial freedom.
Here’s a breakdown of the key tax benefits of multifamily investing and how they work:
1. Depreciation: A Paper Loss with Real Benefits
Depreciation is one of the most powerful tools in real estate.
Even though your multifamily property may be appreciating in value, the IRS allows you to deduct a portion of its cost each year as it “wears down” over time—on paper. This is called depreciation.
What it means:
Multifamily properties (residential) are depreciated over 27.5 years.
This non-cash expense reduces your taxable income, even if you're collecting steady rental income.
👉 The result? You can often show a loss on paper while still enjoying positive cash flow in your pocket.
2. Cost Segregation: Supercharging Depreciation
Want to take depreciation even further? Cost segregation is the strategy that allows you to do just that.
Cost segregation studies break down your property into components (like flooring, appliances, lighting, etc.) and reclassify certain assets into shorter depreciation schedules—5, 7, or 15 years instead of 27.5.
Why it matters:
This accelerates your deductions in the early years of ownership.
With 100% bonus depreciation (available through 2022 and tapering off), you could write off a significant portion of the purchase price in year one.
👉 The result? Massive early tax savings, especially valuable for high-income investors.
3. 1031 Exchange: Deferring Capital Gains
A 1031 exchange allows you to sell one investment property and roll the proceeds into another “like-kind” property—without paying capital gains taxes at the time of sale.
Rules to know:
You must identify the replacement property within 45 days.
The transaction must close within 180 days.
The new property must be of equal or greater value.
👉 The result? You can keep your capital working and growing, tax-deferred, instead of losing a large portion to the IRS every time you sell.
4. Mortgage Interest Deductions
As with many real estate investments, the interest you pay on your loan is tax-deductible.
This further reduces your taxable income and increases your net return on investment. For large multifamily properties with sizeable financing, this can make a meaningful difference.
5. Passive Losses & Offsetting Other Income
If you're classified as a real estate professional (per IRS standards), or if your income falls within certain limits, you may be able to use passive real estate losses to offset other forms of income, including W-2 income.
This is one of the reasons many high-income earners are drawn to real estate investing—not just for the growth, but for the tax sheltering potential.
Tax Strategy: A Core Part of Multifamily Investing
Real estate isn’t just about buying low and collecting rent—it’s about building a strategy that keeps more money in your hands, year after year.
When you combine depreciation, cost segregation, 1031 exchanges, and deductible expenses, you gain an unfair advantage over almost any other asset class.
Ready to Maximize Your Tax Benefits?
At Momentum Multifamily, we help investors find opportunities that not only perform—but are structured for tax efficiency. Whether you’re investing passively or building a portfolio, we’ll help you invest smarter.
📩 Get in touch today or sign up for our next investor webinar.
