There are more than a few benefits for investing in apartments. What you may not realize if you are just beginning your investment journey is that there are tax incentives provided by the government.
There are a variety of potential tax incentives that can come from investing in apartments. Here are some of the most important of those potential tax incentives and what they can mean for investors.
Low-Income Housing Tax Credit
Going back to 1986, this tax credit is provided to private investors that create affordable rental housing. Because of this tax credit, it is estimated that nearly 3 million units have been placed under the LIHTC from 1987 to 2015.
That said, the process of filing for low-income housing tax credit can be quite complex. The credit is claimed proportionally over a 10-year period in exchange for the providing and maintaining of affordable rental housing that is well below current market rental prices.
1031 Exchange Tax
When most profitable investments are sold, there would be a capital gains tax. But with the 1031 Exchange Tax, it allows investors to sell a property and then exchange it for a like-kind property, deferring taxation along the way.
This basically gives investors the opportunity to trade up to something bigger and better without having to worry about taxes bogging them down. For those who are looking to continue growing in the real estate world, the 1031 Exchange Tax can be invaluable.
Depreciation
This is one of the most powerful tax deferral strategies out there. Basically, it means that there is a reduction in the value of a certain asset over time. The IRS will allow businesses to expense a number of things that depreciate throughout their life due to use.
Real estate falls under that umbrella. This basically creates an expense that can be taken against income for the purposes of taxation. It is why so many apartment investors avoid paying taxes on the income generated by the apartment for years at a time.