Six Tax Benefits That Help Owners Optimize ROI On Their CRE
Commercial real estate has a long-standing reputation as a sound financial investment, for a multitude of reasons. Most buyers recognize that a CRE purchase offers the potential for new income through renters and, generally, increases in value over the duration of ownership. However many don’t realize that a business property also provides a wealth of tax benefits as well, making commercial real estate a front-running investment opportunity.
An added possible tax perk for CRE investor in the U.S.? Recently passed tax legislation may be taking the financial gains up a notch for commercial real estate owners. In December 2017, Congress passed the Tax Cuts and Jobs Act, one of the most far-reaching tax code changes in over 30 years. While it’s still too soon to gauge big picture impact, the newly implemented program delivers several potential tax benefits specific to owners of commercial properties. The implied advantages of the new code have encouraged current property owners as well as enticed potential buyers to take a closer look at investing in the business real estate sect.
Current Commercial Real Estate Tax Considerations: What You Need To Know
Whether you own commercial real estate now or are contemplating a future purchase, it’s critical to understand the current tax benefits associated with CRE to maximize return on your overall investment. Some key advantages to consider include:
Decreased Tax Rate
One of the biggest advantages of the Tax Cuts and Jobs Act to CRE owners? A lowered tax rate. The new system puts the “cuts” in Tax Cuts by decreasing the expected rate from 35% to 21% for corporations, giving current owners an instant raise of sorts. While it’s still too soon to tell, LLC’s and pass-through businesses may also be eligible to receive the benefits offered by this slashed rate.
Also known as like-kind exchanges, 1031 legislation was first instituted in 1921 and currently remains untouched under the new tax code – which is a good thing for commercial real estate investors. Like-kind exchanges allow property investors to defer paying taxes by selling one investment property and applying the equity (aka profit) to buy a different property (or properties) of equal or greater value. It’s important to note that there is a specified timeline on when the second transaction must incur to be eligible for a like-kind exchange, making it essential to consult with a commercial real estate accountant to ensure your property sale meets all the criteria and you don’t miss the deadline.
Commercial real estate purchases rely heavily on loans and debt financing, which means owners are incurring annual interest costs. Previously, interest payments were fully deductible expenses. The recent laws do impose limits on interest deductions for pass-through businesses and corporations. However, investors can elect for exemptions on interest restrictions in exchange for more restrictive depreciation scheduling.
Speaking of depreciation – the IRS acknowledges that for rental properties, natural wear and tear is a tangible factor that impacts the overall value of the property. Depreciation is a tax benefit that allows commercial real estate owners to recover the cost of maintaining their income-producing properties. The new laws and codes uphold most of the existing depreciation rules and timelines. However, there are some specific factors that may change depreciation deductions, which makes it vital to discuss the process with an accountant who specializes in real estate tax law.
Sometimes referred to as “promoted interest,” carried interest can prove a major tax advantage for CRE owners. The carried interest provision allows certain incentive-based income to be taxed at a lower, longer-term capital gains tax as opposed to incurring a higher ordinary income tax. While promoted interest is still very much a viable perk for CRE investors, under new legislation, owners have to go through a three-year holding period before tapping into the tax break.
Historic Tax Break
Purchasing a historic property also has its advantages. Owners of qualifying income-producing historic properties are eligible for a tax credit of 20%, taken in equal amounts over a 5-year period. There is one change historic property owners should know: the prior 10% deduction allowed for buildings constructed before 1935 has been removed.
Contact Southpace Properties Today
Southpace Properties specializes in commercial real estate properties in a multitude of corporate verticals. Whether you’re a long-time investor or purchasing CRE for the first time, our team of realtors can help you find the right property for your needs and budget. Contact us today to hear more.