When assessing the potential profitability of a multifamily investment, active investors tend to focus on the property’s cash flow or internal rate of return. While this can be useful, it doesn’t paint the entire picture.

Beyond generating income and increasing equity over the long term, there are other ways for real estate properties to turn a profit for their investors. A multifamily real estate investment can offer several unique tax advantages. Understanding these tax benefits can be crucial to saving money and approaching tax season strategically. Here, we will discuss the tax advantages of investing in multifamily real estate, which could potentially help you earn higher returns.

WHAT ARE THE POTENTIAL TAX BENEFITS OF OWNING MULTIFAMILY REAL ESTATE?

Multifamily provides several tax advantages that make property investment attractive. For example, investors can deduct the cost of acquiring and improving rental property over time through depreciation. [1] This non-cash deduction allows real estate investors to write off the cost of the building (excluding land) over 27.5 years for residential and 39 years for commercial properties. 

This reduction in taxable income can result in substantial tax savings. Investors can even depreciate improvements made to the property to enjoy more tax benefits. [2] While 25+ years seems a long time for some, investors can benefit from bonus depreciation. Bonus depreciation refers to an IRS tax incentive code that allows taxpayers to accelerate deductions on assets they invest in. 

Simply put, some parts of a property depreciate much faster than others—e.g., fixtures, floors, etc. Rather than waiting for the entire “useful life” of a property, investors can depreciate the cost of eligible assets sooner than 27.5 years. Remember that political events, such as the inauguration of a new presidential administration, can impact investment real estate. Under prior law, depreciation percentages were phased out (60% in 2024, 40% in 2025, and 20% in 2026). However, on July 4, 2025, the One Big Beautiful Bill Act was signed into law, reverting that percentage to 100%. [3]

Another significant tax advantage is deferring taxes through a 1031 exchange. This strategy allows investors to sell a property and reinvest the proceeds into another like-kind property without immediately paying capital gains taxes on the sale. [1] By deferring these taxes, real estate investors can leverage their capital more effectively, increasing their potential return on investment (ROI). In a private placement fund, however, the decision to pursue a 1031 exchange rests solely with the fund manager, not the individual investor. The structure of the investment influences it. So, investors may not benefit from a 1031 exchange.

Even the interest on loans used to acquire or improve rental properties is deductible, offering further tax relief. These tax benefits enable investors to maximize their profitability and manage their tax liabilities more effectively. [4]

MORTGAGE INTEREST

As with any tool, debt must be used appropriately to achieve the best results. Debt (or leverage) allows investors to buy assets using less of their capital. In multifamily real estate, leverage is using debt to finance a property, such as through a mortgage or loan.

Mortgage interest is deductible for multifamily properties. According to the IRS, mortgage interest may be deducted on a tax return if you receive rental income from the rental property as a business. [5] This can result in a significant reduction in your taxable income.

According to Baselane, “Rental property mortgage interest is deductible on Schedule E, offering tax relief for landlords. Allowable investment property mortgage deductions include interest payments on primary and rented second homes, mortgage points, late fees, prepayment penalties, home equity loans, and pre-sale interest.” [6] As a limited partner (LP) in a passive investment, mortgage interest is a component of the net paper losses you receive. Simply put, the mortgage interest is not directly deducted from the loan amount. Instead, LPs earn a share of the post-expense profit/loss on their Schedule K-1 tax form.

COST SEGREGATION

Cost segregation is a tax planning strategy used in real estate to reallocate the costs of building improvements and personal property within a building into separate cost categories, each with its depreciation schedule. The goal of cost segregation is to identify and reclassify assets so that the property owner can accelerate depreciation and take advantage of the associated tax benefits.

A cost segregation analysis is a study conducted by a real estate expert or analyst that examines a real estate investment property and categorizes its physical components into four categories: personal property, land, buildings or structures, and land improvements. [7] This allows for potentially increased depreciation in a given year, resulting in additional tax savings for investors.

Cost segregation is a complex area of tax law, and it’s best to consult a professional, such as a tax attorney or a cost segregation specialist, to determine if cost segregation is right for you and to ensure that you comply with all applicable tax laws. [7]

FICA TAXES

With multifamily investing, you can even avoid FICA taxes. FICA stands for the Federal Insurance Contributions Act. Typically, self-employed taxpayers are responsible for paying both the employer and employee portions of the Social Security and Medicare taxes, also known as FICA or federal payroll tax. However, rental property income is not classified as earned income, so it is not subject to FICA tax. [8]

PASS-THROUGH DEDUCTION

A pass-through deduction is a tax provision in the United States tax code that allows business owners who operate as pass-through entities (such as sole proprietorships, partnerships, or LLCs) to deduct a portion of their business income from their taxable income.

This deduction, known as the Qualified Business Income Deduction, was introduced as part of the Tax Cuts and Jobs Act of 2017 to reduce the tax burden on small business owners. The pass-through deduction allows eligible taxpayers to deduct up to 20% of their qualified business income, subject to certain limitations.

HOW IS RENTAL INCOME TAXED?

Rental income is reported on the Schedule E portion of your tax return. Any related expenses, such as property maintenance and repairs, can be used to offset the rental income and reduce your tax liability. Additionally, if you have a mortgage on the rental property, you may also be able to deduct mortgage interest and property taxes, as previously discussed.

The IRS recommends good record-keeping to ensure you can benefit from all these tax deductions. Investors must monitor the performance of their rental properties and prepare financial statements. You must identify the source of income and expenses, prepare tax returns, and track all deductible expenses. [8]

Investors must provide receipts, proof of payment, canceled bills, and other documentary evidence if a particular tax return is selected for an audit. You may be subject to additional taxes, penalties, and interest if you cannot provide this documentation to support your tax deductions. [8]

It is important to consult with a tax professional to ensure you properly report your rental income and claim all eligible deductions.

CONNECT WITH AN INSTITUTIONAL REAL ESTATE OWNER/OPERATOR 

Tax benefits have the potential to be great, especially when investing in multifamily real estate. Apartment buildings can generate a strong, consistent cash flow that helps investors build long-term wealth.

However, actively investing in multifamily is not a “walk in the park.” Managing a multifamily property is challenging because you must deal with residents, collect rent, handle repairs, and oversee the day-to-day operations of an entire building. This isn’t always an easy task for first-time landlords. You can hire a third-party property management company to help you with this, but you’ll be pleased to know there’s an alternative.

Accredited investors can participate in multifamily private placements, which address many of the challenges associated with passive multifamily real estate investing. It provides you with all the benefits of investing in a multifamily property or portfolio without the headaches typically associated with being a landlord.

Participating in a private placement, a real estate deal in which multiple investors pool their resources to purchase a single property or portfolio, can help mitigate the high upfront costs associated with this asset class. A sponsor identifies the deal and secures investors who are willing to participate. This sponsor is usually the general partner who coordinates the transaction throughout the process. In exchange for equity in the fund, passive investors provide a portion of the required capital.

BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying assets targeted as having strong profitability potential and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while seeking to mitigate investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units.

For additional multifamily real estate insights, visit Pathways to Passive Wealth, BAM Capital’s new platform designed to make real estate investing more accessible, transparent, and achievable for aspiring and experienced investors.

Remember that no investment is risk-free. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.

Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect BAM Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. BAM Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.

© 2025 BAM Capital. All rights reserved.

SOURCES:

[1]: Forbes. (2023). “Exploring The Pros And Cons Of Real Estate Investment.” https://www.forbes.com/sites/forbesbusinesscouncil/2023/10/30/exploring-the-pros-and-cons-of-real-estate-investment/

[2]: Janover. (2024). The Best 10 Tax Benefits of Investing in Commercial Real Estate.” https://www.commercialrealestate.loans/blog/the-top-10-tax-benefits-of-investing-in-commercial-real-estate/

[3]: Taxfyle. (2025). “How Can You Benefit from Bonus Depreciation in Real Estate as an Investor?” https://www.taxfyle.com/blog/bonus-depreciation-for-real-estate-investors#:~:text=Taxpayers%20must%20comply%20with%20evolving,depreciation%20will%20be%20fully%20eliminated.

[4]: BAM Capital. (2024). “How investing in real estate is beneficial to growing wealth.” https://bamcapital.com/investing-real-estate-achieving-wealth/

[5]: Internal Revenue Service (IRS). (n.d.). “Tips on rental real estate income, deductions and recordkeeping.” https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping

[6]: Baselane. (2025). “Guide to Mortgage Interest Deduction on Rental Property​.” https://www.baselane.com/resources/the-landlords-guide-to-deducting-rental-property-mortgage-interest/

[7]: Forbes. (2020). “Understanding The Tax Benefits Of Multifamily Investment.” https://www.forbes.com/sites/forbesrealestatecouncil/2020/07/08/understanding-the-tax-benefits-of-multifamily-investment/?sh=11a2383e5352

[8]: Stessa. (n.d.). “The 7 primary tax benefits of owning rental property.” https://www.stessa.com/blog/tax-benefits-of-owning-rental-property/