CAP rates for multifamily assets have held relatively stable over the last two years, according to a multifamily investment forecast report from Marcus & Millichap published February 2018.
Although interest rates continue to rise, the sturdy outlook for apartment fundamentals is unlikely to change significantly in 2018, the report said. “The maturing apartment investment climate has continued its migration from aggressive growth to a more stable but still positive trend.”
One of the main reasons investors continue to allocate capital into the multifamily sector is due to the many tax benefits it provides. The Tax Cuts and Jobs Act (“the New Law”), signed in December 2017, further creates additional tax incentives to invest in multifamily properties.
One of the primary tax benefits to the New Law for multifamily investors is the change to an asset’s depreciation schedule. The investor can now accelerate the rate of depreciation at unprecedented levels. The New Law increases the allowance for bonus depreciation from 50% to 100% on improvements to land and personal property through the year 2022, and diminishes in 20% increments every year for the following 5 years. That incentive is said to likely spur more improvements and rehab to properties, something value-add investors and developers see as a substantial benefit.
The New Law does not limit bonus depreciation to newly constructed property. The eligibility for bonus depreciation has expanded to the acquisition of used property as well, which eliminates the requirement that the original use of the qualified property begin with that taxpayer—a significant change from previous bonus depreciation rules.
In addition to benefits granted under the New Law, some owners are still eligible for pass-through deductions as high as 20% of the taxable income allocated to the multifamily investor after losses have fully been applied. Ultimately, when the property is sold, the gain can be deferred by purchasing a replacement property using a vehicle referred to as a “1031 exchange”. Otherwise, the gain would be treated with a favorable capital gains rate for owners who do not wish to embark in a 1031 exchange. With so many tax and other advantages now available to investors, the multifamily real estate market will continue to be strong for the foreseeable future.
It is important to consult with tax experts on the subject.