Assuming that a passive replacement property can sustain its projected distribution rate over the life of the program, it is possible that the typical offering will produce a higher yield than one’s current rental. Fluctuations in distributions, if they occur, may be the result of material unanticipated changes in rental revenue, expenses, capital expenditures, or some combination thereof. Most offering memorandums include a detailed 10-year projection of revenues, expenses and distributions. #5. Potentially Higher Income
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The anticipated income potential may be attractive, especially compared to one’s current property. Furthermore, for some current owners, the depreciable improvements in a passive program may be greater than a landlord’s current apartment building, potentially resulting in less taxable income.
#6. Potential to Reduce Taxability
Not all income is created equal. Landlords today likely are depreciating property based on the estimated value of their above-ground improvements from several years ago. In some markets, the land value of rental properties may exceed the improvement value. And regardless of the improvement/land ratio, the current annual depreciation deductions on highly appreciated property are only a small fraction of the current property value. Again, diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/ returns/appreciation are not guaranteed and could be lower than anticipated. Conversely, some passive replacement programs offer properties with high ratios of improvement values to land values. For example, in a Midwest multifamily property whose value is 80% improvements, with an LTV of 50%, its potential annual depreciation will be 5.8% of its initial equity. In a new purchase, any annual income from the property below 5.8% of equity would be potentially sheltered from current income tax. Of course, taxpayers in a §1031 exchange carry over their previous cost basis. They may benefit from additional depreciable basis to the extent that the depreciable improvements of the replacement property exceed both the improvement value of their previous rental and any unrecognized gain from its sale. 9 Individual results will vary; investors must consult with their tax professional to determine what potential tax benefits, if any, may be available from a particular investment.
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