Wealth preservation has two aspects: placing your wealth in assets that won’t lose value and minimizing taxation on those assets. There are a variety of strategies to accomplish this—investing in bonds, collectibles, and/or hedge funds are common techniques. Just as you diversify your investment portfolio, you should take a diverse approach to wealth preservation.
Buying rental property, particularly luxury apartments, to preserve wealth can be a sound strategy with specific advantages as well as requirements, such as income generation, steady long-term appreciation in value, and the option to defer capital gains taxes and depreciation recapture through the utilization of 1031 exchanges.
Why Buying Rental Property to Preserve Wealth Makes Sense
The arguments in favor of investing in multifamily housing to preserve wealth relate to the multifamily market’s essential nature and the opportunities it provides for tax optimization. Investing in residential real estate can be more volatile, but not all forms of it are equal. Recent history has proven that investing in single-family homes can be very risky for wealth preservation.
Class A multifamily real estate in particular holds its value well over time, which is essential for wealth preservation. Rental property should provide you with an income stream. The reliability of this income is the main reason the property retains its value and may even appreciate. This stability is largely due to the fact that, in an economic downturn, one’s home is one of the last things to be sacrificed. Also, the large number of residents in a Class A apartment community means that small fluctuations in that number have minimal impact.
This is only part of the story, however. Luxury multifamily really shines when the tax advantages of owning real estate are factored in. While your Class A multifamily real estate investment may be holding or gaining value, you are required to take depreciation according to the IRS formula, deducting 1/27.5 of the tax basis (purchase price plus related costs) of the property annually. That is $3,636 on every $100,000—a significant amount. This compares to 1/39 of the tax basis per year for forms of commercial real estate other than residential. By owning your property through a LLC, you can pay taxes on the income the property produces and take the depreciation deduction on your personal income taxes, without paying corporate taxes.
Finally, the option of using your multifamily real estate in a 1031 exchange allows you exceptional flexibility in financial planning. A 1031 exchange allows you to exchange real property through the services of a qualified intermediary, and defer capital gains taxes and depreciation recapture. If you intend to sell your real estate assets someday, you have the option of exchanging your property to moderate depreciation recapture, and you can even sell at a point when you have capital losses to offset your gains on the real estate. If you never sell your real estate assets, they will be “stepped up” to market value in your estate and the capital gains and depreciation recapture will be eliminated when you pass away.
Get Professional Advice to Set Yourself Up for Success
To reap the full benefits of buying luxury multifamily rental property to preserve wealth, you need to choose your asset carefully. You may want to have professional property management on-site as well. This can pay for itself several times over in time saved and managerial mistakes avoided, and makes the rents you receive truly passive income. A real estate investment management firm can help you with these questions. In addition, a 1031 exchange requires the services of a qualified intermediary to ensure that you do not come into receipt or constructive receipt of cash. Besides that, it is a complex transaction with far-reaching implications and many strict rules. You should do extensive research and consider hiring professionals to assist you before carrying it out.
At CWS Capital Partners, we are a fully-integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country, and we employ a team of experts who can help you hone your investment strategy.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.