Investing in real estate syndication offers a number of benefits, not least of which are the tax benefits. These tax benefits are often overlooked by new investors, but they can be incredibly helpful when it comes to lowering your taxes and maximizing your returns.  Let’s take a look at some of the most beneficial tax advantages associated with real estate syndication investments.

Depreciation Deductions

One of the most attractive tax benefits associated with investing in real estate syndication is depreciation deductions. Depreciation is the process by which an investor receives annual deductions based on the wear and tear of their property over time.  The IRS allows investors to deduct up to 27.5 years worth of depreciation for residential properties and 39 years for commercial properties. This means that an investor can write off a large portion of their investment each year, resulting in significant savings.

Tax-Free Exchange Opportunities

Another great benefit is that real estate syndications provide investors with the opportunity to complete what’s known as a “tax-free exchange” when they’re ready to move on from their investment. A 1031 exchange allows investors to sell one property and reinvest all of the proceeds into another like-kind property without paying any capital gains taxes on the sale. This means that investors can defer their capital gains taxes until they eventually decide to cash out completely or move their money into another asset class entirely.

Drone Image of New Multifamily Development in Central Texas. Credit to Henry Che

Deduction Opportunities from Pass Through Entities

Finally, when you invest in a real estate syndication, you become part owner (or Limited Partner) in a pass through entity such as an LLC or LP (Limited Partnership).  The income generated by this type of entity passes directly through to its owners and is not subject to double taxation like corporations are. As such, Limited Partners who own more than 25% interest in these entities are eligible for additional deduction opportunities such as self-employment taxes and business expenses that wouldn’t otherwise be available if they weren’t investing through a pass-through entity structure.  Real estate syndication investments offer numerous financial benefits, including potentially significant tax savings opportunities that many new investors may overlook when making their decision whether or not to invest in these deals. Investors should always consult with a qualified accountant before making any decisions about investing in these types of deals so that they understand all potential tax implications before committing their funds.  However, understanding all the potential tax advantages associated with investing in real estate syndications will go a long way towards maximizing your returns while minimizing your taxable liabilities over time.