Best Tax Advantages of Commercial Real Estate You Must Know

June 5, 2019
by Donald La

While there are a number of benefits to owning commercial real estate, many are not fully aware of all of the various tax advantages of commercial real estate. Those who are looking into the benefits of investing in these types of properties will certainly want to get a better understanding of just what benefits could be available to them, especially when it comes to their taxes. Below are the best tax advantages of commercial real estate.

Capital Gains Savings

One of the main reasons that people tend to invest in commercial real estate is so they can start to amass wealth. They also want to be sure that they can create a solid asset that will be useful to them when they reach their retirement age. One of the nice benefits of owning commercial property is that it is often possible to have lower capital gains taxes when compared with other types of investment vehicles. When accessing funds from an IRA, for example, you will have to pay your personal tax rates on the funds that are used.

However, a great benefit of commercial property is that even when the property is sold, the tax rate will generally be lower than the personal rate. This means that you are saving on taxes compared to an IRA and other retirement options that are often used. One of the only exceptions to this rule is the Roth IRA. With those, you would be paying the tax when the money is invested.

Related: How To Calculate Cash-On-Cash Return, ROI, Cap Rate, and GRM

Other Expenses Not Related to the Mortgage

You could also find a range of other tax deductible expenses, including out of pocket expenses. This might include upgrades to the property, landscaping, pest control, and other types of maintenance.

Interest Expense

When you are paying your mortgage on the commercial property, you are paying interest, just as you would be with any type of real estate purchase. The interest that is paid off over the course of a year will all be tax deductible. For example, if you are paying $2,000 a month in interest on a commercial property, that means that at the end of the year, there will be $24,000 in interest that will be tax deductible. This can help to offset a high tax bill nicely. Of course, the exact amount of interest that you are paying will vary based on a number of different factors.

Depreciation

The moment that you buy a piece of property is the moment that it starts to depreciate. Deprecation is something that never goes away, and while that might seem concerning, it does have a tax advantage. In fact, depreciation on a commercial property can provide a good way to offset tax liability. The IRS will allow depreciation for commercial buildings for 39 years, and for residential rental buildings for 27.5 years.

Savings After Selling

Another one of the tax benefits is one that you might not be able to enjoy yourself, but it is one that your beneficiaries will appreciate. There are post sales tax savings with commercial properties, meaning that when the beneficiaries decide that they want to sell the property, they will only have to pay taxes on the increased value of the property from the time of your death to the time of the sale. This could help to save the beneficiaries a substantial amount of money in taxes, and it is one of the tax advantages that many people never even consider.

Always Consult with a Tax Professional

Taxes can be quite complex. The rules can change from year to year, and this can make understanding all of the nuances of the taxes more difficult. Trying to navigate the tax system is not something that should be left up to amateurs. Always take the initiative to work with a tax professional who will be able to help with these matters.

Working with a tax professional will not only help to ensure that you have a solid understanding of the ways that your taxes can be benefited with the property, but they can make sure that you do not make mistakes that could lead to an audit.

Other Great Benefits of Commercial Real Estate Investments

Tax advantages are certainly not the only reason to choose commercial real estate investments. Those who want to have a quality, sustainable income month after month will find that commercial real estate is a stellar option. Investors can start out with just a single investment property and then slowly buy more over time. Eventually, they will be able to make more than enough to retire and still have plenty of income to live on, save, and invest in other areas.

By making further improvements to the property, such as adding new flooring, it can increase the overall value of the property, which can be helpful if you sell. In addition, properties that are in good shape and that have upgrades will often be able to command a higher rate when they are being leased.  

There are many tax advantages from investing in commercial real estate. Donald La, licensed commercial property broker with multiple years of experience, is a trustworthy expert in the San Gabriel Valley area as well as Los Angeles County. Contact Donald if you’d like to have a great start in building your commercial property portfolio.

About the author
Donald La
Donald La
Donald is a licensed Commercial Real Estate Broker specializing in purchases and sales in the San Gabriel Valley. Donald and his father have a combined 35+ years experience in real estate and are heavily invested in the newest tools and technology to stay competitive and help their clients grow.