While tax efficiency is not the sole driver of your investment decision-making, it is helpful to know the types of tax advantages that investing in private real estate can offer, depending on your tax situation.
By Tyler Taves, Compliance Manager
I can guarantee you get just as excited about taxes as I do. Okay, maybe not, but hopefully you will be excited to learn about the tax benefits of real estate investing!
We know taxes don’t make investors’ list of favorite things about investing, but at MLG Capital, we understand the importance of providing investors with the knowledge they need about their taxable income and the cash flow benefits because, quite frankly, it can be very confusing.
While tax efficiency is not the sole driver of your investment decision-making, it is helpful to know the types of tax advantages that investing in private real estate can offer, depending on your tax situation. Part of our focus on doing “smart” deals is considering opportunities that make sense for our investor’s overall financial picture. From a tax standpoint, we use strategies like cost segregation studies and bonus depreciation to create tax and cashflow benefits. Let’s look at our historical approach to how we utilize these methods to benefit each of our funds’ taxable income and the overall benefit to our investors.
Fund Cash Flow Benefits
Since the inception of our fund structure in 2012, we have developed a great track record of generating cash flows throughout our investments. Cash flow is income opportunity that is generated primarily from property operations such as: rental income, property sales**, and refinancing. Cash flow generated by the Funds can then be distributed to investors or used to acquire/improve properties. These resources are crucial to each Fund’s health, as they are used to improve properties (in our value-add strategy scenarios) and used to distribute cash to investors.
In the charts below, you can see our historical efficiency by generating cash flows while providing beneficial taxable losses throughout the lives of our funds. As the fund matures, cash flows continue to grow as the fund collects operating cash flows and receives sales proceeds from property dispositions.*
Cost Segregation & Taxable Benefits
Cost segregation studies are invaluable tools we use for our property acquisitions. Once we acquire a property, we hire teams of engineers to perform a walkthrough of the property and prepare a detailed analysis that breaks out the various depreciable asset lives for the investment.
For tax, the main benefit of cost segregation studies is the ability reclassify the property’s assets to the 5/7/15 year depreciable lives to take advantage of the accelerated bonus depreciation benefits brought forth from the Tax Cuts and Jobs Act. With the help of cost segregations, each Fund can greatly generate large amounts of bonus depreciation that can help from the cost segregation to further reduce taxable income by deducting 100% of the costs associated with the asset in the year placed in service.
For tax reporting, the increased bonus depreciation is then incorporated with the Schedule K-1 line 2: Net Rental Income/(Loss) allowing investors to offset other passive income with beneficial passive losses during the year. It is also worth mentioning that any passive losses not utilized in the current tax year can be carried over indefinitely to offset passive income in future years.
To read more about cost segregation benefits, and why you should be investing in private real estate, please take a read through my colleague Lindsey’s blog post.
What’s the benefit to an MLG investor?
Being able to generate beneficial passive tax losses can greatly benefit investors potentially trying to reduce passive income from their taxable income position. Think of it like this: an investor with investments generating passive income can benefit from the passive losses created from our cost segregation strategy that has historically proven to be successful with our Funds.
MLG’s fund structure has combined the power of cost segregation with key value-add acquisitions to increase these passive losses continuously over our family of funds.
Passive taxable losses that can be offset in future years might grab your attention from the get-go but combining this with a healthy investment cash flow from operations, investors find themselves in the ultimate win-win scenario. It is also important to mention that you should consult with your CPA to determine how investing in private real estate may impact your overall tax situation.
Curious about how you can benefit your passive income position generating investment cash flow with MLG Capital? Contact us to get on track to aligning your tax goals with your investment goals in one stop!
Tyler Taves is the Compliance Manager at MLG Capital, with a primary focus on MLG’s Fund and REIT tax compliance. When he has time, between his daily reading of the Internal Revenue Code, he makes his annual attempt at catching the largest trout in Northern Wisconsin.
*Cash flow sources and uses include any distributions and taxable income allocated to the Manager. Further, allocations to specific investors will vary based upon their capital accounts and admittance dates.
**Cash flow from sale includes any return of capital paid from the investments to the Fund.
This document is presented for informational purposes only and is not an offer to sell interests in a security. This document is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of the applicable fund (the “Fund”), the limited liability company agreements (the “LLCAs”) of the Fund, each as may be amended and/or modified from time to time, and a subscription agreement related thereto, copies of which will be made available upon request and should be reviewed before purchasing Units in the Fund. The contents are not to be considered legal, business, or tax advice, and each prospective investor should consult their own attorney, business advisor and tax advisor as to legal, business, and tax advice. The information in this document was obtained from internal sources, however, the information has not been independently audited. Past performance is no guarantee of future results.