The Top Tax Benefits of Multifamily Investing: What Every Investor Should Know
- Jarom A Pratt
- Nov 24
- 5 min read
Investing in multifamily real estate is not just about steady income and long-term appreciation; it is also about significant tax efficiency. For many investors, the tax advantages of multifamily investing are a major driver of returns. At EagleCap Legacy Wealth Partners, we believe understanding these benefits empowers you to make smarter investment decisions.
In this article, you will learn about:
1. Depreciation: The Foundation of Tax Shelter
2. Accelerated Depreciation & Cost Segregation
3. Bonus Depreciation After Recent Tax Law Changes
4. Passive Losses & Passive Income Offsets
5. 1031 Exchanges & Tax-Deferred Wealth Building
6. Step-Up in Basis & Estate Planning Advantages
7. Personal Investment vs. Retirement Account Investment
8. Business Entity Investing Considerations
9. Other Important Tax Factors to Know
10. What Multifamily Tax Benefits Can’t Do (Important Limitations)
Conclusion
We’ll walk through the most important tax benefits of multifamily investing, explain how they work, and highlight questions you should ask your CPA. While you should always check with your tax professional, having this foundation will give you clarity and confidence.
1. Depreciation: The Foundation of Tax Shelter
One of the biggest advantages of multifamily deals is depreciation: a non-cash deduction that reduces taxable income.
You cannot depreciate the land; only the building/improvements.
For residential rental properties, the building is typically depreciated over 27.5 years under straight-line MACRS.
Depreciation generates a “paper loss” that can offset rental income.
This loss doesn’t reduce cash flow; your monthly distributions remain intact while your tax bill goes down.
Key question for your CPA: How much of the purchase price is allocated to land vs building vs improvements, and when will the property be placed in service?
2. Accelerated Depreciation & Cost Segregation
Beyond standard depreciation, savvy real-estate investors use cost segregation to accelerate deductions:
A cost segregation study breaks out portions of the property into components with shorter lives (e.g., 5, 7, or 15 years).
These shorter-life assets allow you to front-load deductions and increase early-year tax benefits.
This is especially effective in value-add or rehab multifamily deals where improvements are significant.
Consider: Are we planning a cost segregation study? How much of the basis can be reclassified to shorter-life assets?
3. Bonus Depreciation: A New Landscape
Recent tax law changes (as of the One Big Beautiful Bill Act/OBBBA) restored 100% bonus depreciation for eligible property placed in service after Jan 20, 2025.
Certain assets with a useful life of 20 years or less can be expensed fully in year one.
This means large early deductions for improvements, appliances, fixtures, land improvements, etc.
Note: The building structure itself (27.5-year life) is not eligible for bonus depreciation, but many improvements are.
Ask your CPA: Which assets in our project qualify for bonus depreciation? Do we want to elect out of bonus depreciation for strategic reasons?
4. Passive Losses & Passive Income Offsets
For most real-estate investors, rental real estate is treated as passive activity under §469. That means:
Losses from depreciation can offset passive income (e.g., other rental income, passive business income, passive K-1 income).
If the investor qualifies as a Real Estate Professional (REPS), losses may offset active income (W-2, 1099, business income).
Unused passive losses carry forward indefinitely.
Portfolio Income (dividends, stock sales, crypto gains, etc) cannot be offset
Important to know: If you invest personally, you may enjoy these loss offsets. If you invest via a retirement account, depreciation doesn’t pass through to you personally.
Ready to explore how a tax-efficient multifamily investment fits your goals? Contact us today.
5. 1031 Exchanges & Tax-Deferred Growth
When you sell a property, you may be liable for capital gains and depreciation recapture. However, under Internal Revenue Code §1031, you can defer those taxes by reinvesting proceeds into a like-kind property.
You must meet deadlines (45-day identify, 180-day close) and reinvest all equity.
Using 1031s allows your capital to continue compounding without tax drag.
At a future date, you could either sell (triggering tax) or pass property to heirs for a step-up in basis.
Investors should ask: Is a 1031 exchange supported in this offering? Will our structure enable this at exit?
6. Step-Up in Basis & Estate Planning Benefits
One of the lesser-discussed advantages: when the investor dies, heirs receive a step-up in basis to fair market value.
All previously deferred gains and depreciation recapture are wiped out.
Heirs can immediately sell or continue the investment with a new depreciable basis.
This makes multifamily real estate a powerful tool for multigenerational wealth.
7. Key Differences: Personal Investment vs Retirement Account
It’s important to understand how tax treatment differs when investing personally vs investing through a retirement account (SDIRA or Solo 401(k)).
Personal Investment:
You receive depreciation, passive losses, K-1s, etc.
You can offset passive income.
If REPS, you may offset active income.
Retirement Account Investment:
The retirement account gets the K-1, not you personally.
Depreciation flows inside the account (not to your personal return).
No current tax benefits personally, though tax-deferred (Traditional) or tax-free (Roth) growth is an upside.
Check out our page on Retirement Investing to learn more about using your existing retirement funds to invest in real estate.
8. Corporate / Business Entity Investing Considerations
If a business (LLC, S-Corp, or C-Corp) invests in a multifamily deal:
If it is a pass-through entity (LLC/S-Corp), the depreciation may pass through to owners.
If it is a C-Corp, the depreciation stays inside and may result in double taxation.
Passive losses from multifamily can’t offset active business income unless the investor or their spouse qualifies for Real Estate Professional Status.
Entity type matters greatly! Ask your CPA about flow-throughs, passive vs active vs portfolio income, and entity tax status.
9. Other Important Tax-Related Points
Recapture risk: When you sell, depreciation taken is recaptured (up to 25%) unless deferred.
At-risk rules: Deductible losses are limited to your “at-risk” basis.
State taxes: Some states do not honor federal bonus depreciation or have different tax rules.
Record-keeping: Documentation (cost seg studies, time logs for REPS, etc) is key in audit scenarios.
Disposition strategy: Consider exit options (sale, refinance, 1031, UPREIT) in your tax planning.
10. What Multifamily Tax Benefits Can’t Do (Important Limitations)
While multifamily investments offer powerful tax advantages, investors should be aware of what these benefits cannot offset unless specific criteria are met:
Depreciation cannot always offset W-2 income
Unless the investor or their spouse qualifies as a Real Estate Professional (REPS), depreciation and passive losses do not reduce taxes on:
Salary/W-2 income
Bonus or commission income
Active business/operating income
Self-employment/1099 income
Portfolio income (dividends, stock gains, interest, crypto gains)
Passive losses cannot offset active business profits
Income from operating businesses (plumbing, construction, restaurants, franchises, etc.) is active, so passive losses from multifamily can’t offset it.
Depreciation does NOT flow through if invested through a retirement account
If investing via an SDIRA or Solo 401(k):
Depreciation stays inside the retirement account
There are no personal tax deductions
No ability to offset passive income or active income
Depreciation does not eliminate taxes forever
Unless the investor uses a 1031 or passes assets to heirs (step-up), depreciation taken today may be subject to depreciation recapture later.
C-Corp investors may not get personal tax benefits
If a C-corporation invests in a multifamily deal, depreciation benefits may remain trapped inside the corporation.
Conclusion: Multifamily Investing Has So Many Tax Benefits
The tax benefits of multifamily investing are real and powerful, but they must be understood and implemented correctly. From depreciation to bonus depreciation, passive-loss offsets, 1031 exchanges, and estate planning levers, each piece plays a role in optimizing after-tax returns.
At EagleCap Legacy Wealth Partners, we build our deals with tax efficiency top of mind so our investors can focus on the real investment goal: building wealth, reducing tax drag, and preserving capital for the long term. Of course, you should work closely with your trusted CPA or tax advisor to tailor strategies to your individual situation.