Introduction: Unparalleled Tax Benefits

Real estate investors have long benefited from the ability to create significant taxable losses and convert ordinary income into income taxed at capital gains rates, resulting in higher after-tax returns. On a typical multifamily acquisition, we might expect to see 40-50% passive taxable losses on invested equity. These significant passive taxable losses can be of immense benefit in your tax picture, creating the opportunity for a permanent tax rate arbitrage. Let’s explore how these taxable losses are created and how investors can utilize them.

Methodology: Cost Segregation Studies

When we acquire multifamily properties, we generally employ cost segregation studies to allocate the purchase price into the various individual components of a property. This means that, for tax purposes, we’re not acquiring say 100 multifamily units, but we’re acquiring 100 front doors, 100 sets of windows, 100 fridges, 100 kitchen counters, etc. This allows us to reclassify the property’s assets from what would have been 27.5-year property, into property with shorter useful lives. By doing so, we’re able to significantly accelerate the depreciation of the property’s assets, the depreciation deductions produced by doing so being used to offset rental income created by the property, often creating significant taxable losses for investors.

Accelerant: Bonus Depreciation

The Tax Cuts and Jobs Act (TCJA) of 2017 greatly enhanced the ability for investors to benefit from bonus depreciation. While these benefits have been stepping down since 2022, investors in 2025 can still benefit from a 40% write-off of eligible property. Furthermore, legislators are currently reviewing proposals from the United States House Committee on Ways & Means to reinstate the full 100% bonus depreciation deduction.

In any event and in whatever form it may persist in, bonus depreciation, when layered on top of cost segregation studies, allows real estate investors to accelerate deductions and enhance early-year losses through writing-off property with shorter useful lives. We expect real estate to remain a highly tax-advantaged asset class, regardless of what happens to bonus depreciation.

Result: Significant Taxable Losses

Through cost segregation studies and bonus depreciation, Nautilus is able to create significant taxable losses in the first year of an investment, which are directly passed through to its investors. These taxable losses can amount to 40-50% of invested equity in the first year, despite the fact that an asset may likely be producing positive cash flow.

Investors can use these taxable losses to offset other passive income that they have within their portfolio. In the event an investor doesn’t have any current passive income, those taxable losses can often be carried forward to offset future passive income or released upon the sale of assets.

The net result of the depreciation deductions and the powerful taxable losses they produce make real estate arguably the most tax advantaged asset class and greatly enhance after-tax returns when compared to other asset classes. High earning individuals and families can greatly benefit from these taxable losses, deferring near-40% (plus state) tax rates, keeping more of their money working for them for longer. Further, when recognizing gains through the sale of a property, investors are often mostly being taxed at significantly lower capital gains rates (15-20%), creating a permanent tax rate arbitrage when compared to the ordinary income taxes they may have been able to defer.