Best Tax Advantages of Commercial Real Estate You Must Know

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.

Savings on Capital Gains

Investing in commercial real estate is a common avenue for individuals seeking to build wealth and secure a substantial asset for their retirement. A notable advantage of owning commercial property lies in the potential for lower capital gains taxes compared to alternative investment vehicles. While withdrawing funds from an IRA incurs taxes at personal rates, commercial property sales typically attract a more favorable tax rate.

This tax advantage becomes particularly apparent when the property is sold. Commercial real estate transactions generally incur lower tax rates than those applied to personal income. Consequently, investors stand to benefit from significant tax savings compared to traditional retirement options, such as IRAs. It's worth noting that the Roth IRA, which involves paying taxes on invested money, serves as an exception to this rule. In such cases, taxes are incurred at the time of investment rather than when funds are withdrawn.

In essence, the allure of commercial real estate extends beyond the potential for wealth accumulation during ownership; it encompasses tax advantages that persist even upon the sale of the property. This distinction positions commercial real estate as an attractive and tax-efficient vehicle for building and preserving wealth, especially when contrasted with more conventional retirement investment options.

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Interest Expense

When meeting your mortgage obligations for a commercial property, the interest payments you make mirror those of any real estate purchase. The yearly accumulation of interest becomes fully tax-deductible. To illustrate, if your monthly interest payment for a commercial property amounts to $2,000, the annual deductible interest would total $24,000. This deduction serves as a valuable means to offset a potentially high tax liability. It's important to note that the precise interest amount can vary, contingent on diverse factors.

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Depreciation

From the moment you acquire a property, it embarks on a journey of depreciation. While the perpetual nature of depreciation might raise concerns, it holds a notable tax advantage. Specifically, the depreciation of a commercial property offers a valuable means to mitigate tax liability. According to IRS guidelines, commercial buildings can be depreciated over 39 years, and residential rental buildings over 27.5 years. This extended depreciation period allows property owners to leverage tax benefits over the long term, contributing to a more favorable financial landscape.

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Savings After Selling

Another noteworthy tax benefit, albeit one that you may not personally enjoy, becomes apparent for your beneficiaries. Post-sales tax savings are a unique advantage associated with commercial properties. In practical terms, when your beneficiaries opt to sell the property, they will only be liable for taxes on the increased value of the property from the time of your death to the actual sale. This nuanced approach to taxation can result in substantial savings for your beneficiaries, representing a tax advantage that often goes unnoticed by many individuals.

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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.  

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