Commercial real estate - Tax benefits of a commercial real estate

Real estate remains one of the lucrative and best wealth-creation businesses around the world. It is a business that is highly sustainable and generates a high return on investment. The benefits of a commercial real estate are hard to overlook.


 Whether you are new to this field or you are a long-time investor, you need to understand the tax benefits of a commercial real estate and then use them to your advantage. This article shows you the tax benefits you stand to gain if you are a commercial real estate investor. Over the years, these have been tested, trusted, and proven to be real.  Here is a breakdown of five major benefits:


Depreciation is an annual allowance for the obsolescence or deterioration, wear, and tear of the property. Over the years, residential rental properties depreciate, sometimes over 27.5 years, and this is what is known as the ‘useful life’ of a multifamily or residential building. More so, depreciation can be accelerated through a cost-segregation research.


This process separates building improvements from personal property. For example, personal properties like appliances, fixtures, carpets, and furniture can be recovered in less than 5 years, while land improvements like landscaping, fences, paving, sidewalks can depreciate within a 20- year recovery period.


Although cost segregation is very complex, it has the capacity to save you hundreds or even thousands of dollars weekly, monthly or annually, especially within the first few years of ownership or when you are new in this investment.


 By all standards of evaluation, depreciation remains a great tool that will enable you to reduce income on your real estate investment without any negative influence on actual cash flow. This is 100% true whether you are the owner of the property either out rightly or indirectly through a limited liability company or limited partnership. Depreciation reduces the volume of tax an investor is supposed to pay on the income.



FICA (Federal Insurance Contributions Act) helps in the splitting of the rate of tax between employers and the employee. If you are self-employed, then you will be required to pay the full amount, which is 15.3%. This is called self-employment tax.

One may be tempted to think what the real benefits are for real estate investors. In the United State, the rental real estate is not viewed as a business. Therefore, rental property income does not come under the federal Insurance Contributions Act and is not generally seen as ‘earned income’.


But this depends on your earning power from the real estate investment, if you are running it as a holding company, and draws a salary, and then you must abide by the principles of FICA.


Interest Expense


Sometimes the interest you pay on a real estate loan in order to acquire another real estate investment is tax deductible. For most real estate investors, this is a huge deduction, which can give rise to significant tax savings. The interest expense can limit the volume of tax an investor will be expected to pay on such income.


Long-term capital Gain on exit


Every investment whether in stocks, real estate or otherwise is subject to two types of taxes; capital gains tax and ordinary income tax. You pay capital gains tax when you sell the asset- this can be as high as 20% and ordinary income tax rates if the property generates operating income, and this can be as high as 37%. To the savvy investor, making money from real estate business will be highly beneficial to them.


1031- Exchanges

In the tax code, there is a provision that permits real estate investors to defer paying capital gains taxes when they sell an investment asset. This is called 1031-Exchange. This principle gives the investor the privilege of selling the real estate asset and reinvesting the proceeds to another real estate asset.


By this, the investor will acquire a new sales proceeds via a 1031-exchange. This can help the investor to buy more valuable real property in perpetuity and can be deferring paying taxes as long as they can. As an investor, before you benefit from the 1031-exchange, it is important you take this into consideration.



In this article, we have tried to analyze some tax benefits of a real estate investor. Depending on the investor’s income, risk tolerance and level of comfort, there are many ways they can actually invest.

As a real estate investor, you are strongly advised to speak with your tax professional; they will be in a better position to inform you about the benefits that will apply to you at the moment. No doubt, savvy investors will create an incredible wealth if they can take advantage of the available tax benefits discussed in this article.


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