It is important for investors to understand that managing commercial real estate tax benefits is not a straightforward process, thus needing a proper strategy. In this guide, we will discuss various tax strategies that can be used by commercial property owners to minimize their tax liabilities and increase their profits.
Key Deductible Expenses Property owners should know that there are many costs that can be used wisely to lower the taxes. Important deductible expenses are:
- Mortgage Interest: This is because one of the most significant tax deductions lies in the interest on commercial property mortgages, especially in the early years of the loan.
- Property Taxes: Real estate taxes are a write-off as a business expense.
- Insurance Premiums: Other types of property insurance include liability, fire, and theft which are fully tax deductible.
- Utilities and Maintenance: Some general expenses that are tax deductible include electricity, water, HVAC servicing, painting, and landscaping.
- Professional Fees: Property managers, accountants, lawyers, and other associated service providers’ expenses can be deducted.
Understanding Depreciation Strategies
Depreciation is perhaps one of the biggest tax advantages that are available to owners of commercial properties. The IRS permits property owners to write off the cost of a building in a certain timeline which is usually 39 years for commercial properties. This is a scheduled deduction which can be used to reduce the tax income liability and in turn reduce the taxable income.
Advanced Depreciation Techniques: Cost Segregation
Cost segregation is one of the most effective tax avoidance strategies that splits property into tangible and intangible assets for faster depreciation. Through proper identification of property that includes furniture, equipment, and such things as landscaping, site improvements, and special fixtures, one can greatly enhance his or her ability to claim depreciation expenses in the early years of the property, thereby increasing the cash flow and at the same time reducing the tax liability.
Section 179: Equipment Deductions at the Beginning of the Year
Especially for the smaller commercial properties there is a great opportunity offered by Section 179 of the Internal Revenue Service tax laws. This provision enables property owners to claim deduction of the entire cost of new equipment that meets specific conditions within the first year of adding the equipment into service, instead of claiming depreciation over several years. Some of the items that may be included are machinery, furniture and certain building construction.
Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction which was added by the Tax Cuts and Jobs Act allows pass-through entity owners to deduct up to 20% of the qualified business income from the taxable income. However, this benefit comes with certain income limits and other requirements that must be met properly.
1031 Exchange: Postponement of Capital Gains Tax
1031 exchange is one of the most effective tools whereby property owners can sell their commercial property and invest the proceeds in another property without incurring capital gains tax immediately. To be eligible, the replacement property must be of equal or more value and exchange has to be done within certain period. This approach enables the investors to replace or diversify their real estate assets while delaying the tax liabilities.
Tax Credits: Hidden Opportunities
Federal, state, as well as local tax credits are available for commercial property owners, especially those who are buying properties that are being upgraded with energy efficiency, historical property, or green building features. Programs such as the Energy Efficient Commercial Buildings Deduction under Section 179D and the Historic Tax Credit can drastically cut down on taxes.
Capital Gains Considerations
When one is selling a commercial property, it is important to know the tax implications that come with it. Properties that are held for more than one year attract long-term capital gains tax which are usually lower than the ordinary income tax. This is because depreciation recapture may occur; this means that the IRS may require taxes on previous depreciation amounts that were claimed as deductions when selling a property.
Why It is Crucial to Seek Expert Advice?
Although these strategies provide numerous ways to reduce the taxes that one has to pay, the tax laws are rather comprehensive, and it is advisable to seek the advice of a tax expert – a tax attorney and/or accountant. A knowledgeable tax professional can:
1. Point out possible deductions
2. Make sure that all the actions are compliant with the tax laws presented in the current period of time.
3. Create an individual tax strategy that will meet the client’s needs
4. Navigate through legal minefields
And Finally
Realizing the tax implications of commercial property investment is a crucial part of property investment, therefore. Therefore, it is important for property owners to know the depreciation rules and how they can be used, the various deductions that are allowed and the tax incentives that are available. It is important to be aware of the changes in the tax laws and to always make sure that the financial statements are well prepared in the future.