What Are the Tax Advantages to Owning Commercial Real Estate?

What Are the Tax Advantages to Owning Commercial Real Estate?

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Most commercial real estate investors opt for investing in this type of real estate for the sheer profitability of such property. However, many are not aware that a sizable chunk of that profitability stems from the fact that owning commercial real estate can bring you a lot of tax advantages.

Let’s go over the significant tax savings you can obtain through commercial real estate property.

Capital Gains Tax Benefits

Selling commercial real estate always has some tax implications, but when it comes to the capital gains tax rate on a commercial building sale, it’s far lower than the personal tax rate that’s associated with your IRA. Many real estate investors use this neat little trick to gain an asset to use when they retire, besides the fact that they save on taxes.

Saving on Depreciation

Every property, be it residential or commercial, starts to depreciate the moment you buy it. As this depreciation acts as a meter that builds up over time, it can usually compensate your company’s tax liability.

The law allows for the depreciation of commercial property over 39 years and residential property over 27.5 years.

Interest Deductions

Interest expense is a significant tax advantage in commercial real estate as the interest you have to pay on a mortgage for your property is in fact deductible. Essentially, this means that the interest payments you make in a whole year, which are part of your regular mortgage payments, can be deducted from the tax you owe with your business.

The deduction is quite sizeable as interest on a mortgage is often quite high, making the eventual interest expense you can deduct measured in tens of thousands of dollars.

Tax Savings on Changes to Property

A mortgage is not the only cost that can eventually be recuperated to an extent, as there are other potential tax savings. Upgrades, renovations, maintenance, and other similar expenses with commercial real estate are all possible tax deductions.

Yes, they are out-of-pocket expenses, but many of these are considered as expenses that increase the value of the building. These can even apply to residential buildings that are used for work.

Additional Tax Deductions

  • If you purchase equipment and furnishings for your commercial property, you can deduct part of those costs as long as the purchases have been put into use in the same year when they were bought.

  • The so-called 1031 exchange can be an excellent opportunity to get a sizeable tax deduction. It works when you sell an investment property that’s used in a trade or as a business, and then use the funds for a similar type of investment in no more than 180 days. In such cases, you don’t have to suffer the tax consequences. There are little details with 1031 exchange that you need to know about though.

All in all, as you can see, there are plenty of ways you can save on taxes when it comes to commercial real estate, making this type of property very beneficial for all investors. Finally, remember that everyone’s financial picture is different, and before making any decision that can have any effect on your tax liabilities you should definitely consult with your accountant/CPA or financial advisor for their professional advice.

For more information on the subject, you may reach us at info@cbicommercial.com

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