Why do our Investors LOOK FORWARD to the Tax Season?
Families in higher tax bracket, and especially those with two working adults with a W-2 typically end up owing the IRS additional money during tax season and have to cut a check. Typically, its something they have to budget for and have to plan for. Tax season can be daunting, even for the financial savvy investor. Equity market returns, come with a capital gains tax owed immediately for that tax-year.
We just distributed our K1s for 2018. K1 is a tax document to report investment income to investment partners, much like a W-2 is used to report employment income. Our investors are very thrilled with their K1. Why?
We and our investors jointly acquire large multifamily/apartment properties (That’ right- We put our own money in every project, unlike any other investment firm you will find, where they might not invest into what they offer their investors!). In general, these assets are depreciable assets over a timeline of 27.5 years in the tax-code. However, the new tax-code allows investors to hire experts who can classify all the owned property components in 5, 15 and 30 year depreciation classes. Immediately on acquisition, we employ a third party expert firm to perform a such “cost segregation” analysis of the property. Based on the study report, the 5 and 10 year depreciable components can then be optionally depreciated in Year 1. This generates a large depreciation related “paper” loss and a negative K1 income in first year, that can shield passive cash flow from this investment and other alike investments for years to come.
Here is an example with real numbers generated from our investment portfolio. Our Investor invested $50,000 in August 2018. This investment is on track to delivering a 16.5% IRR which includes a 9% annual average cashflow. For 2018, the cost segregation study gave our investor $37,300 of negative income associated with depreciation. Each year the investor will roughly make $4,500 cash return at 9% rate. The depreciation loss reported in the K1, will almost entirely offset all the cashflow they will earn over the 3-5 year hold period of this asset. Hence, our investor will earn tax- deferred money over the life of this investment!
This is why our investors are smiling during tax season. They are earning superb passive cash flow returns without tax-liabilities over the hold period! This is our standard operating best practice for all acquisitions to boost cashflows for our investors and for us.
If you or anyone you know would benefit from learning more about such investment options please reach out to info@LotusCapitalCRE.com