By Patrick Grimes

Passive income is any money you make from an activity in which you are not actively involved. Investment in dividend-paying stocks, owning rental properties, participating in affiliate programs, or owning financial products that produce income streams are all examples of passive income.

Passive investing then does not depend on your “running” the business or spending a lot of time working on it. Rental properties are an example of a popular passive investment that can reward investors with an income from cash flow.

Appropriately planned, investing in rental property, particularly “multifamily” property, allows owners to collect cash flow from a real estate asset with nearly no work on their part.

Depending on the number of units owned, a property can be professionally managed and will not require much landlord involvement.

There are also some incredible tax advantages available to passive real estate investors about which they may not be aware.

To give you a sense of long-term multifamily investing’s power to make you wealthier, I want to point out a few of these savings, which can turn a “meh” investment into a great one.

I’m not a CPA or financial professional, so there are probably many more tax advantages to investing in commercial real estate. It would be best if you sat down with a CPA or advisor, particularly one who focuses on real estate investing, to discover them all.

To help you understand the many ways in which passive real estate investing helps grow your wealth, I want to discuss a few tax-mitigating benefits that I find appealing. In my opinion, tax benefits can be an even more appealing aspect of commercial real estate investing than cash flow when one looks at the big picture.

Repairs: Ordinary, necessary, and reasonable repairs to the building you’ve invested in are deductible in the year they are made.

Common repairs such as plastering, painting, fixing leaks, replacing broken windows and damaged floors, and repairing roofs are examples of deductible repairs. 

It’s possible you are a little confused about the difference between repairs and improvements. In general, an “improvement” is anything that changes an asset to adapt it to a new use, restores an asset to operating condition, or substantially changes an investment to make it much better than it was before.

Mortgage interest: One of the more apparent tax-savings for real estate investors is the ability to deduct the interest paid on their rental properties’ mortgages. This can add up to thousands of dollars off your tax bill.

Credit card interest: Owners of investment properties can also deduct credit card interest when cards are used specifically to maintain or repair the rental property.

Travel related directly to your rental property: Travel expense is a deduction that many multifamily owners miss, but it can genuinely add up. It is possible to deduct money you spend traveling to run or maintain your property. Visits to the property itself can amount to travel expenses, as can gas, vehicle repairs, and other costs. You must be able to show that these travel expenses are directly related to your rental property. For this reason, you should keep accurate logs and receipts. Talk to your CPA or tax planner for more advice.

Home office: Another deduction that many business owners, including passive investors, overlook is the deduction for a home office. Passive income investors who work from home are allowed to deduct their home office, provided the office meets minimum acceptable criteria established by the IRS. Refer to the IRS website or contact your accountant to discover these criteria. As in the case of travel deductions, you must prove how you use your office. Photographs and videos can help establish business use.

Depreciation losses: Per IRS guidelines, depreciation losses are defined as “allowances for exhaustion, wear, and tear of the property.” These depreciations start as soon as you place your rental property in service. 

A technique known as “cost segregation, which I will discuss in more detail in later posts, might be applicable in your situation. A cost segregation study can benefit passive investors in multiple ways. The study identifies, then reclassifies, personal property assets to shorten the depreciation time for tax purposes. This shortened depreciation can reduce your current income tax obligations significantly.

One of the most significant advantages of becoming a passive investor in real estate is that you can get substantial tax breaks.

When you treat your investments as a business, not a hobby, you can enjoy many deductions that you wouldn’t otherwise have. These include: deducting mortgage interest, repairs, travel, and home office expenses.

You may also get to deduct other kinds of interest related to the business and many other expenses not outlined here.

I recommend that you find a competent CPA or tax attorney to walk you through the nuances of saving money on taxes by investing.

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