Commercial real estate investing can be lucrative, especially when it comes to tax benefits. You can leverage these advantages and lower your tax obligation with the appropriate information and direction. We’ll look at some of the main tax benefits of investing in commercial real estate in this blog post.

Depreciation

Depreciation is one of the biggest tax advantages of owning commercial real estate. A non-cash expense called depreciation enables you to annually deduct a portion of the cost of your property from your taxable income. Your property’s worth decreases with time because, in the perspective of the IRS, it has a finite shelf life. You can take advantage of this value drop to lower your tax liability.

For commercial assets, depreciation is calculated over a 39-year period, so you can subtract 1/39th of the property’s worth each year. For instance, if you spend $1 million on a commercial property, you can subtract around $25,641 from your taxable income per year for the following 39 years.

1031 Exchange

The 1031 exchange is another tax advantage of investing in commercial real estate. With this tax-deferred exchange, you can sell one property and buy a different one that is similar to it without having to pay capital gains tax on the sale. Both the property you’re selling and the one you’re buying must be used for commercial or investment purposes in order to be eligible for a 1031 exchange.

You can reinvest the earnings from the sale of your property without incurring capital gains tax by using a 1031 exchange. This enables you to continue expanding your investing portfolio while keeping more cash in your pocket.

Interest Deduction

You can exclude the interest paid on a loan taken out to buy a business property from your taxable income. This can lower your tax liability dramatically and improve your cash flow. All loans, including mortgages and credit lines, qualify for the interest deduction.

To make sure you’re correctly deducting your interest payments from your taxable income, it’s crucial to keep thorough records of all your payments. To be sure you’re maximizing this tax benefit, you should also speak with a tax expert.

Cost Segregation

A tax planning technique called cost segregation might speed up the depreciation of your commercial property. It entails locating and isolating each element of your property, including the plumbing, electrical, and structural systems. By doing this, you can give each component a shorter depreciation term and subtract more from your taxable income each year.

Instead of depreciating the entire property over 39 years, you might, for instance, give your plumbing and electrical systems a 15-year and a 5-year depreciation term, respectively. Your deductions may rise dramatically as a result, and your tax liability may decrease.

Pass-Through Taxation

Pass-through taxation is one of the special tax advantages of investing in commercial real estate. This means that you as the owner are taxed at your personal tax rate on the income produced by your property. All forms of commercial real estate, including office buildings, retail establishments, and warehouses, are subject to pass-through taxation.

Because the income is not subject to corporation tax rates, pass-through taxation is advantageous because it enables you to benefit from reduced tax rates. To make sure you’re structuring your investments in a way that optimizes this tax benefit, it’s crucial to speak with a tax expert.

When it comes to tax benefits, investing in commercial real estate can be a profitable endeavor. You can drastically lower your tax burden and improve your cash flow by leveraging depreciation, a 1031 exchange, the deduction of interest payments, cost segregation, and pass-through taxes.

It’s crucial to keep up with the most recent changes because tax laws and regulations are subject to frequent change. You may manage the complex tax environment and optimize your tax benefits by working with a tax expert who has experience in commercial real estate transactions.

A reliable income stream and long-term capital growth can be obtained from investing in commercial real estate. You can enhance your returns and lower your tax liability by utilizing the different tax perks that are available. Before making any financial decisions, it is essential to undertake exhaustive due diligence and obtain professional guidance.

F2H Capital Group is a debt advisory firm specializing in negotiating the best terms for your commercial real estate projects. The company offers a range of financial products and services, including fixed loans, bridge loans, and construction loans across all asset types. Please contact us for any of your financing needs.