For high-net-worth investors, multifamily real estate has long been an attractive asset class thanks to its stability, consistent demand, and ability to generate income. But what makes multifamily especially compelling is its powerful tax advantages compared to traditional equities or fixed income.
In this article, we’ll walk through the primary tax benefits of private multifamily investing and highlight how CEP Multifamily’s long-term strategy leverages these tools to optimize investor outcomes.
Benefit #1: Depreciation
One of the most valuable tax advantages in real estate is depreciation. The IRS allows investors to depreciate multifamily assets over 27.5 years, creating a paper expense that reduces taxable income without impacting actual cash flow.
For example, if a property generates $100,000 in annual net operating income, depreciation might offset a significant portion of that, lowering reported taxable income, even while investors still receive cash distributions.
Through cost segregation studies, certain property components (like fixtures or appliances) can often be depreciated over shorter time frames, further accelerating tax benefits in the early years of ownership.
Benefit #2: 1031 Exchanges
A major advantage for long-term investors is the ability to use a 1031 exchange. This provision of the U.S. tax code allows investors to defer capital gains taxes when selling one property and reinvesting the proceeds into another like-kind asset.
By deferring taxes, investors keep more capital at work, compounding wealth over multiple investment cycles. CEP’s long-hold strategy naturally aligns with this approach, giving investors opportunities to benefit from tax deferral while maintaining exposure to multifamily assets.
Benefit #3: Passive Losses and Income Offsets
For investors who qualify as “passive” under IRS rules, multifamily real estate can generate passive losses (primarily due to depreciation and interest expense). These losses can often offset other passive income sources, improving overall tax efficiency.
For certain investors—particularly those who qualify as real estate professionals—the benefits can be even greater, allowing active income to be offset as well.
Benefit #4: Long-Term Capital Gains Treatment
When multifamily assets are held for more than a year, profits from the sale are generally taxed at the long-term capital gains rate, which is lower than ordinary income tax rates.
This favorable treatment rewards patient, strategic investing—precisely the philosophy CEP applies in building and holding workforce housing communities.
Benefit #5: Estate Planning Benefits
Real estate also plays a role in wealth transfer and legacy planning. Upon inheritance, assets typically receive a “step-up in basis,” which can significantly reduce capital gains liability for heirs.
For family offices and multigenerational investors, multifamily real estate provides not only ongoing income but also a tax-efficient way to transfer wealth.
Why This Matters for Investors
The ability to reduce taxable income, defer gains, and optimize long-term wealth creation is one of the reasons multifamily real estate remains a cornerstone allocation for sophisticated investors.
At CEP Multifamily, our focus on long-hold workforce housing allows investors to capture these tax advantages while benefiting from operational excellence and consistent cash flow.
While tax considerations should never be the sole driver of an investment decision, they are an essential part of maximizing overall returns. Multifamily real estate offers a unique set of advantages that, when combined with experienced asset management, make it one of the most tax-efficient investment options available.
Intrigued? Learn more about our approach and talk with our team.
