Tax Benefits of Commercial Real Estate

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.

About AVANA CUSO

Established in 1998 and headquartered in Simi Valley, CA, AVANA CUSO is one of the most seasoned credit union service organizations (CUSO) focused on commercial real estate lending. For decades, we have partnered with credit unions across the country to offer competitive and collaborative CRE loans. We also uniquely support and guide our partners through the entire lifecycle of our loans. AVANA CUSO is a proud member of the AVANA Family of Companies.

Contact us today to learn more about becoming an AVANA CUSO partner.