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Significant Tax Advantages of Investing in Commercial Real Estate


Real estate investments are one of the most popular ways of generating wealth for many investors. It is a tangible asset that can provide income either through rent, appreciation or both. In the United States, investing in commercial real estate can also provide investors significant tax advantages that can potentially increase their returns. Read further as we dive into the main tax advantages of investing in commercial real estate, and how they benefit investors.


Depreciation

Depreciation is an allowable tax deduction that investors can claim for their investment properties. Depreciation is essentially the reduction of the value of an asset over time due to wear and tear, and it is calculated using specific tax codes for commercial real estate. As an investor, you are allowed to depreciate the value of your commercial property over a certain period of time, which can lower your taxable income and, ultimately, your tax bill.


Tax Credits

There are different types of tax credits available for commercial real estate, including energy, historical and low-income housing tax credits. Tax credits can directly offset tax liabilities, and some credits can even be carried forward to future years. For example, a developer may qualify for a low-income housing tax credit if they build affordable housing units for low-income families. The developer can then use the tax credits to offset the tax liabilities generated by other projects.


Capital Gains Tax

If you hold a commercial property for more than one year, any profits realized from its sale will be taxed at a lower capital gains tax rate instead of the ordinary income tax rate. Long-term capital gains tax rates are generally lower than the income tax rates, hence making it an attractive investment strategy to hold commercial properties for at least a year before selling them.


1031 Exchange

A 1031 exchange allows investors to sell a property and defer paying capital gains taxes on the profits if the proceeds are reinvested within a certain period of time in a similar investment property. In other words, as long as the proceeds are used to purchase another investment property, the profits will not be taxed. This allows investors to keep growing their investments without worrying about paying taxes on their profits.


Deductions for Expenses

All expenses associated with commercial properties are tax-deductible, including mortgage interest, property taxes, insurance, and maintenance and repair costs. These deductions can lower an investor's taxable income and, ultimately, their tax bill. In addition, deductions for expenses can offset any income generated from the property, which could potentially result in a net loss for the investor, and hence reduce their income tax bill.


Commercial real estate investments come with several tax advantages such as depreciation, tax credits, lower capital gains tax, 1031 exchange and deductions for expenses. These tax benefits can help reduce an investor's tax bill and increase the profitability of the investment. It's important to note that commercial real estate investing can be complicated, and not all investors will qualify for every tax benefit. Therefore, it’s important to consult with a tax professional before investing in commercial real estate to fully understand the potential tax advantages.


Have questions on Commercial Real Estate ownership? I am a seasoned Commercial Real Estate Specialist.

Give me a call:

Christy Westphal

(562) 294-1838

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