Real estate can be a great alternative asset class for investors of all stripes — accumulators, early retirees, regular retirees, trust fund beneficiaries, and more.
There is more to passive real estate, though, than your nearest REIT – for accredited investors, there are syndications, and they bring with them not only passive income but also some special tax benefits, too.
ESI Money delves into these tax benefits of syndications. Let’s get into some of those incentives and benefits that investing in a real estate syndication provides.
Although commercial real estate typically appreciates over time, the IRS allows you to depreciate its value through what’s known as a paper, or phantom, loss. They classify each depreciable item according to its useful life.
A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.
Tax law changes under the Tax Cuts and Jobs Act of 2017 gave a boost to cost segregation and depreciation. Bonus depreciation was increased from 50% to 100% on certain qualifying assets.
How much these gains are taxed depends on how long you hold before selling. Short-term capital gains are taxed as though they are ordinary income. Long-term capital gains tax is based on profits received from the sale of an asset held for more than a year.