High net worth, accredited investors looking for an investment alternative to traditional stocks, bonds, and mutual funds may want to consider investing in commercial real estate through a DST (Delaware Statutory Trust) or LLC with multiple investors. The investments are known as MOREs – Multiple Owner Real Estate, and they are typically diversified portfolios of properties, such as retail, office and residential. They enable investors to select the private placement program that best suits their needs.
Advantages of Owning Commercial Real Estate
- Portfolio diversification with value tied to bricks and mortar
- Possible hedge against inflation
- Income generated, if any, may be considered passive income
- May provide monthly or quarterly cash flow
- Capital appreciation possible on sale
Potential tax advantages through depreciation and other tax deductions may provide attractive tax equivalent yields. In the event of a profitable sale of a certain property, owners may explore the possibility of deferring the tax on their capital gain through a 1031 exchange.
Benefit of Passive Income Generators
Fortitude has the capacity to offer private-placement investments that may be passive income generators, presenting investors with opportunities they are often interested to discover. If you have other passive real estate investments in other passive programs – with expenses that exceed cash flow – you have passive activity losses.
The only way to get a tax benefit from those passive losses before selling the passive real estate asset, is to have passive income. Passive losses are not deductible against any kind of income except passive income.
Here’s How It Works
A hypothetical investor has $100,000 in passive activity losses, which he is looking to carry forward over a 10-year period. He is considering an investment that is expected to produce 6% in cash flow over a probable life of 10 years. Here is a formula he might use to determine the amount of money he would need to invest to produce $10,000 of passive income to offset his passive losses:
- $100,000 passive activity losses divided by 10 years (carry-forward period)
- Looking to offset $10,000 in passive activity losses per year
- $10,000 passive income / 6% (hypothetical cash flow) = $166,666.00
- Investment of $166,666.00 equals $10,000 of tax free income per year assuming a continuing 6% cash flow
This example is hypothetical and used only to illustrate a possible scenario. Because each investor’s tax implications are different, you should consult your tax advisors. Any real estate investment is subject to risks, including those real estate risks associated with the operation and leasing of commercial properties. There is no guarantee investors will receive distributions or the return of their capital. All real estate investments have the potential to lose value during the life of the investment.
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