Last updated on September 25th, 2023
Whether you currently own commercial real estate or are considering whether to jump into the market, of the many pros and cons you evaluate, don’t forget to take a look at related tax and investment benefits. Here are a couple that stand out:
Depreciation deductions on income taxes.
As a physical asset that will wear down over time, CRE investors can deduct a defined amount from income taxes each year for depreciation. Residential buildings can be depreciated over 27.5 years, while commercial buildings can be depreciated over 39 years. So, if you buy a commercial building for let’s say $5 million, your income taxes can be reduced by $128,000 each year for depreciation.
If you want larger depreciation deductions over a shorter period of time, you can do that, too, by engaging an engineering firm to conduct a cost depreciation study to identify parts of the property that can be depreciated in less time.
Again, going back to the commercial building you buy for $5 million, let’s say the cost depreciation study identifies $1 million in parts that can be depreciated in 10 years rather than 39. You’ll be able to pay a $100,000 depreciation deduction each of the first 10 years you own the property. Between this portion of the deduction plus depreciation deductions for the rest of the property, for the first 10 years your depreciation deductions will equal about $202,000. That amount goes down to $102,000 for each of the remaining 29 years.
Bonus depreciation.
With the Tax Cuts and Jobs Act (TCJA) of 2017, there is bonus depreciation to qualified improvement property put in service before year-end. Up through 2022, the bonus depreciation was up to 100% of a property’s value the year the property was placed in service. The bonus depreciation is phasing out, dropping to 80% in 2023; 60% in 2024; 40% in 2025; 20% in 2026; and 0% in 2027.
1031 exchange.
This allows you to defer capital gains taxes if you exchange one property for a “like-kind” commercial property in a defined period of time. The new property must be worth the same or more than the first property. After the new property is sold, capital gains taxes are due in full (unless you want to do yet another 1031 exchange, which will defer those taxes even longer).
Diversification.
Diversification is a strategy investors take to manage risk and minimize losses. By diversifying or spreading investments across several different options (i.e., CDs, bonds, stocks, mutual funds, etc.), you hope that if one tanks the others will make up for it. Unlike traditional investment options which typically have a similar reaction during recessionary times, there is another one that may help stabilize a portfolio: CRE. While there are no guarantees against losses, diversifying into CRE may help minimize risk.
Inflation hedge.
One way to protect your investment against a decrease in the purchasing power of your money is to “hedge” against “inflation.” Typically, when inflation rises, so do property values and rents; in turn, real estate returns go up.
There are other deductions associated with CRE investments, including transportation costs, employee wages, professional fees, contractor costs, and more. If you take a business loan to buy a CRE, you may also be able to take a 30% deduction on taxable income for equipment, technology, building repairs and materials, and renovations.
To ensure you take advantage of all the deductions that may be available to you as a CRE owner, make sure to work with a tax professional, like the ones you’ll find at RBT CPAs. We believe we succeed when we help our clients succeed. Want to learn more? Give us a call.
NOTE: This article is for informational purposes only and should not be construed to be advice or direction. If you are interested in learning more about purchasing CRE as an investment, be sure to speak with a CRE realtor and attorney.
RBT CPAs is proud to say all of our work is prepared in the U.S.A. – we never offshore. As a result, you get peace of mind that your operation’s financial and confidential information is handled by full-time, local staff who have met our high standards for quality, ethics, and professionalism.