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Tax Benefits of Commercial Real Estate

July 8, 2024/in Insights

Commercial Lending 101: What You Need to Know

June 5, 2024/in Insights

Learn the Ins & Outs of Commercial Lending to Better Understand Your Next Steps If you’re expanding your small business, you may be wondering: “Where will I get the funding for it?” Although personal finances and partners can put up some of the capital, much of the financing may come from a loan. Here AVANA […]

Tax Benefits of Commercial Real Estate

July 8, 2024/in Insights

Commercial Lending 101: What You Need to Know

June 5, 2024/in Insights

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Tax Benefits of Commercial Real Estate

July 8, 2024/in Insights

With the tax deadline approaching in April, many investors will reflect on the strategies they employ and look for deductions that will lessen their tax liability. Investing in commercial real estate offers more than just property appreciation and steady cash flow—it also unlocks a variety of tax advantages. Understanding the Tax Benefits of Commercial Real Estate can empower investors to reduce their tax liabilities while reinvesting savings into growing their portfolios. By leveraging deductions, depreciation strategies, and tax-deferred exchanges, investors can maximize returns and enhance overall financial performance. This comprehensive guide explores how smart tax planning transforms commercial real estate investments into profitable ventures. Throughout this post, we’ll dive into the most effective methods for capturing the Tax Benefits of Commercial Real Estate and provide actionable insights to help you succeed. Whether you’re a seasoned investor or just starting out, embracing these strategies is essential for long-term financial success.

Here we’re outlining some significant money-saving incentives for investing in commercial real estate – contrary to stocks and bonds.

Tax Benefits of Commercial Real Estate

Let’s understand the commercial real estate tax benefits.

Interest Expense Deductions

The first tax advantage of commercial real estate investing is the ability to deduct the interest paid on a commercial mortgage.

For example, if an investor pays $15,000 each month in commercial mortgage payments, of which $3,500 is paid for interest, they would be able to get a deduction off their federal income taxes of around $42,000 for the year.

Depreciation Deductions

Given the fact that commercial real estate has some level of depreciation over time, investors can find tax benefits from this aspect as well.

Currently, the IRS allows owners of commercial properties to depreciate the asset over a 39-year period. So, if the investor purchased a commercial property valued at $3.2 million, they’d be able to take a depreciation deduction of about $82,000 a year for those 39 years.

Non-Mortgage Deductions

Additionally, commercial real estate investors can enjoy tax deductions from the costs they incur related to:

property repairs
some property management expenses
maintenance costs
costs of traveling to and from the property
and other operating expenses, such as attending related conferences, seminars, or educational events for commercial real estate investing

Operating Expense Deductions

Many expenses associated with managing and maintaining commercial properties are tax-deductible, including:

Property management fees.
Repairs and maintenance.
Utilities and insurance premiums.
Marketing and advertising costs to attract tenants.

By deducting these operational expenses, investors can lower their taxable income while maintaining their properties.

1031 Exchange: Deferring Capital Gains Taxes

A 1031 Exchange is a valuable tax-deferral strategy for commercial real estate investors, allowing them to reinvest proceeds from a sold property into another “like-kind” property without immediately paying capital gains taxes. This approach offers significant benefits, such as deferring taxes on property sales and enabling portfolio growth by reinvesting the full sale proceeds. However, to qualify for this tax advantage, the replacement property must be of equal or greater value, and the transaction must adhere to specific timelines outlined by the IRS.

Bonus Depreciation

Bonus depreciation offers another immediate tax benefit by allowing investors to accelerate the depreciation of qualified property components in the first year of ownership. This means that instead of spreading out deductions over several years, you can write off a significant portion of the property’s cost right away. Often paired with a cost segregation study—which breaks down the property into components eligible for faster depreciation—bonus depreciation can lead to substantial tax savings during the early years of investment. Be aware, though, that bonus depreciation rules are subject to change, and the available percentage may phase down over time, so staying updated on current regulations is essential.

Reduced Impact on Beneficiaries

Lastly, commercial real estate investors not only enjoy tax benefits themselves but also their beneficiaries can too.

When the investor’s heirs inherit the property, they will only owe taxes on the amount that the property has appreciated, not the full value. This can mean the difference between your beneficiaries being able to afford the property or needing to sell it after your passing.

For example, if an investor purchased a commercial property at $2 million, and at the time of their passing it had appreciated to $2.6 million, the beneficiaries will only pay taxes on the $600,000 appreciation. As such, this can save the heirs hundreds of thousands of dollars, and maybe even millions.

Recent Developments and Future Trends

The tax landscape for commercial real estate is continually evolving, with regulatory changes and market trends influencing available benefits. Recently, adjustments in depreciation schedules and renewed interest in real estate investment trusts (REITs) have created new opportunities—and challenges—for investors. With more investors turning to REITs, which often benefit from favorable tax treatments, there is increased competition in the market. Additionally, shifts in interest rates and potential legislative changes mean that staying informed is more critical than ever. Keeping abreast of these trends can help you adapt your investment strategy to maximize tax savings and optimize returns over the long term.

Expert Tips and Best Practices

Maximizing tax benefits in commercial real estate requires not only understanding the available deductions and strategies but also implementing best practices to ensure compliance and efficiency. Consider these expert tips:

Maintain Detailed Records: Keeping meticulous records of all property-related expenses is essential for substantiating your deductions during tax season.
Engage Professionals: Partner with tax advisors and financial consultants who specialize in real estate to design a tax strategy tailored to your unique situation.
Plan Ahead: Use tools like cost segregation studies and regular financial reviews to adjust your strategy as regulations and market conditions evolve. By applying these best practices, you can optimize your tax benefits and strengthen your overall investment strategy.

Conclusion

Commercial real estate investing offers not only strong potential for income and appreciation but also significant tax advantages that can maximize your returns. From depreciation and mortgage interest deductions to tax-deferred exchanges and energy efficiency credits, savvy investors can leverage these benefits to build wealth efficiently.

Understanding the tax benefits of CRE is essential to creating a robust investment strategy. Consulting with a tax professional can help you navigate the complexities and ensure you take full advantage of the incentives available.

Commercial Lending 101: What You Need to Know

June 5, 2024/in Insights

Learn the Ins & Outs of Commercial Lending to Better Understand Your Next Steps

If you’re expanding your small business, you may be wondering: “Where will I get the funding for it?” Although personal finances and partners can put up some of the capital, much of the financing may come from a loan. Here AVANA CUSO, a financial institution specializing in commercial real estate lending, offers insight into what commercial lending is, how it works, and the various types of commercial real estate lending available.

What is Commercial Lending?

Commercial lending involves borrowing money from commercial lenders to pay for various business expenses, such as purchasing land or buildings, renovating or expanding, or buying related equipment. For instance, if you’re interested in opening a new Italian pizzeria, you’ll need to secure funding to purchase commercial property such as a building that previously housed a restaurant or a vacant lot. Then, you’ll need to build or renovate a building, and purchase kitchen equipment such as stoves, pizza ovens, seating, and decor.

What are Commercial Mortgage Lenders?

Commercial mortgage lenders back the funding of commercial loans and provide you with the up-front capital to grow your business. Commercial mortgage lenders can be credit unions, banks, asset-backed trusts, government-sponsored entities and private financial institutions.

How to Get a Commercial Loan

Securing a commercial loan involves these five steps.

The Pre-Approval/Qualifying Process. Your chosen lender will evaluate your personal and business financial history, available lines of credit, debt service coverage ratio, the purpose of the loan, credit approval and several other factors.
Submitting a Loan Application. Once you’ve been pre-approved, it’s time to submit a formal loan application. You’ll need to include financial statements, as well as income and tax documents from the last three years.
The Lender Reviews Your Application. A loan officer will further analyze credit history, personal and business collateral, projected business income and other financial documents.
The Underwriting Process. The loan officer passes the application to the underwriting team, who evaluates and decides to approve or decline the loan.
Decision. You’ll receive a decision on whether the underwriting team decided to approve or decline your loan. If approved, they will include information about the interest rate, loan terms, loan to value ratio, monthly payments and closing date.

4 Types of Commercial Real Estate Lending

Commercial real estate loans are popular products to which entrepreneurs look when they need a brick and mortar for an office space, storefront, production site and more. There are four major types of commercial real estate lending available:

Traditional/Term Loans: This financing option is similar to that of a residential mortgage, except that it offers shorter terms.
Small Business Administration (SBA) Loans: Both the SBA 504 loan and SBA 7(a) loan are financing options backed by the SBA.
Bridge Loans: These short-term lending options can be used for business owners who are waiting for long-term financing.
Construction Loans: Construct new structures or renovate old ones with construction loans.

AVANA CUSO offers a variety of these commercial real estate lending products, including commercial real estate loans, SBA 504 loans and conventional construction loans.

What are the Typical Commercial Lending Rates?

Commercial lending rates vary based on the type of loan you choose, the lender, your financial qualifications and credit score, the type of project you’re looking to finance and the market. Commercial real estate loan rates can range from 2.2% to north of 18%. AVANA CUSO offers competitive rates starting at 4.00% and can provide funding for projects up to $25 million.

About AVANA CUSO

Established in 1998 and headquartered in Simi Valley, CA, AVANA CUSO offers competitive and collaborative commercial lending options. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire full lifecycle of the loans from application to approval, supporting credit unions and borrowers through the complex process. AVANA CUSO is a proud member of the AVANA Family of Companies.

About us

AVANA CUSO is one of the most seasoned credit union service organizations (CUSO) focused on commercial real estate. Established in 1998.

Half Sized Blog Element (Single Author Style)

Half Sized Blog Element (Multi Author Style)

Tax Benefits of Commercial Real Estate

Commercial Lending 101: What You Need to Know

Tax Benefits of Commercial Real Estate

Commercial Lending 101: What You Need to Know

Full Sized Blog Element (Big Preview Pic)

Tax Benefits of Commercial Real Estate

Tax Benefits of Commercial Real Estate

Interest Expense Deductions

Depreciation Deductions

Non-Mortgage Deductions

Operating Expense Deductions

1031 Exchange: Deferring Capital Gains Taxes

Bonus Depreciation

Reduced Impact on Beneficiaries

Recent Developments and Future Trends

Expert Tips and Best Practices

Conclusion

Commercial Lending 101: What You Need to Know

Learn the Ins & Outs of Commercial Lending to Better Understand Your Next Steps

What is Commercial Lending?

What are Commercial Mortgage Lenders?

How to Get a Commercial Loan

4 Types of Commercial Real Estate Lending

What are the Typical Commercial Lending Rates?

About AVANA CUSO

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Who We Serve

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