Arrived Investor Tax Analysis 2021

Tax 2021

Real estate is known for being an asset class that passes on great tax benefits to investors. 

In our other articles, we’ve covered different tax deductions that investors can take advantage of, like depreciation and the Qualified Business Income deduction.

 We’ve also reviewed how Arrived investments are taxed, and gone through the different line items that will show up on your 1099-DIV. 

That’s all great, but now it’s much easier to see real examples of how real estate investors can generate cash income and use real estate tax rules to keep more in their pocket.

Tax Overview

In 2021, we had 28 properties in operations. Investors have owned 6 properties since April 2021, and over those 9 months the properties paid out 2 sets of dividends (Q2 dividends paid in July and Q3 dividends paid in October). 

The other 22 properties have been owned by investors since September 2021 (4 months), and paid out their first dividends in Q4 (October). 

This is all important because the income generated by the properties in Q4 is paid out in January 2022, and will be on your 2022 tax forms (in January 2023). 

As a review, there’s 3 different boxes that will be filled in on the 1099’s. You can read about these in more depth in this tax article.

Box 1a: This is the taxable income generated by the property.

Box 5: This is the income that qualifies for a 20% reduction in taxable income, which is all of the income in Box 1a.

Box 3: This is the non-taxable income that was part of the dividends. This happens when the property distributes more cash flow than the profits on the property.

2021 Analysis

Overall, Arrived properties paid out nearly $47,000 to investors in 2021. Of this, about $2,800 is taxable income and the rest is non-taxable return of principal. 

To emphasize, that means that Arrived investors collectively only need to report $2,800 in taxable income, despite receiving $47,000 in dividends!! 

This may sound confusing, so let’s look at a few sample properties.

The Pecan paid $3,100 in dividends to investors in 2021. Despite this, the property had a tax loss, so investors in The Pecan will report a grand total of $0 in income on their tax returns. 23 of the 28 properties had a tax loss, meaning the investors received dividends but will have $0 taxable income to report.

On the other hand, The Soapstone did have taxable income. That property paid out $2,701 in dividends and had a net profit of $237. Investors in The Soapstone will collectively report $237 of taxable income, despite getting dividends for more than 10x that amount!

On top of the depreciation wiping out most of the income, investors also benefit from the Qualified Business Income deduction. This further shields the income generated by investment properties from Uncle Sam. 

Let’s assume that all investors in The Soapstone are in the 32% marginal Federal tax bracket. That would mean that normally they’d report $237 in income and owe $75.84 in taxes ($237 * 32%). 

With the QBI deduction, the amount of taxable income is reduced by 20%. So even though there’s $237 in income, investors are taxed as if it was only $189.60 ($237 * 20%). The grand total in taxable income is $189.60, which would mean $60.67 in taxes due at the Federal marginal 32% bracket. 

The $60.67 is 20% lower than the $75.84 without this special deduction. So only $60.67 would be due despite receiving $2,701 in dividends! 

In this example, of all the dividends distributed by The Soapstone, only 2.25% would be paid to the Federal government for income taxes! ($60.67 / $2,701).

No wonder that some of the world’s best investors have a significant amount of real estate investments. 

Of the 1,303 investors who received a dividend in 2021, only 317 have ANY taxable income. The other 986 received dividends, but they don’t owe any taxes on them this year!

Real estate has always been used as a great way to earn income and keep more of it in your pocket. While these incredible real estate tax benefits have been around for years, only now can investors get a piece of the action. 

You’ll be amazed come tax time at the power of generating income from cash-flowing rental property investments when properly shielded