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What is Tips for Commercial Real Estate Investors?

Managing taxes can be a complex and daunting task for commercial real estate investors. In addition to the many tax forms you must supply, keeping up with changing tax laws is challenging.

That said, understanding the tax code and taking advantage of deductions will increase your returns and minimize your liability. Whether you’re a seasoned investor or just getting started, here are seven real estate tax tips to help you keep more cash in your pocket while staying compliant.

1. Track Your Expenses

Tracking your expenses is the best way to ensure you don’t miss any potential benefits. Organization from the outset is critical. Of course, this is easier said than done. A paper trail of receipts and loose notes will probably become a headache.

Consider tracking your finances with the assistance of technology. Many accounting and even real estate-specific software providers can make it easy to keep an eye on your finances throughout the year. That way, when it comes time to file your taxes, everything you need is digital and easy to access.

2. Go Green

One of real estate owners’ most overlooked real estate tax tips pertains to environmentally friendly features. When it comes to residential properties, this is usually in the form of green appliances, but commercial spaces provide some of the same opportunities.

Is it time to replace your HVAC system? There are tax breaks for choosing energy-efficient items. Additionally, installing solar panels is another investment that can give you some tax benefit. Consider going green when it’s time to make a replacement, and you may reap the rewards for years to come.

3. Take Advantage of Depreciation

Property depreciation can also be subtracted from your taxable income. Instead of taking one large deduction when you buy a property, the depreciation occurs throughout the “useful life” of the property.

The IRS lays out the following conditions for depreciation:

  • You’re the owner of the property

  • You use it for your business or income-producing activity

  • The property has a determinable useful life, meaning it wears out, decays, gets used up, becomes obsolete, or eventually loses value from natural causes

  • You expect the property to last more than one year. It must have a useful life extending substantially beyond the year a business places it in service

  • Land is exempt because it does not depreciate.You must determine your land’s value and subtract it from your overall cost

  • According to the IRS timetable, residential properties have a lifespan of 27.5 years, and commercial properties have a lifespan of 39 years. That means you can continue to depreciate for this time or until you remove the property from service.

4. Use Write-Offs

Deductions are one of the best ways to lower your taxable income. Fortunately, real estate investors can take advantage of numerous write-offs that make a considerable difference when you file your taxes.

Make sure you’re taking advantage of some of these handy deductions:

  • Property taxes

  • Mortgage interest

  • Insurance

  • Property management services (if you use a company)

  • Utilities you pay for tenants

  • Landscaping

  • Advertising

  • Tenant background or credit checks

  • Travel expenses to and from properties if you live out of town

  • Repairs and necessary maintenance

  • Legal or accounting expenses

  • Business software or equipment

Remember, you must track these expenses carefully to take advantage of them. Work with a tax professional to ensure your documentation is sufficient. This is the best way to maximize your profits and prevent an audit.

5. Report a 1031 Exchange

Selling an investment property may be a great opportunity when the market is hot, but capital gains taxes can hurt your bottom line. This is where the 1031 exchange comes into play.

A like-kind exchange or Section 1031 is ultimately an investment property swap. You can avoid paying this tax when you sell a building and buy another similar one.

Here are the qualifications and conditions the IRS puts forth:

  • Both properties must be used for business or as an investment. Property used for personal use, like a second home, does not qualify

  • Both properties must be similar enough to qualify as like-kind (the same nature, character, or class)

  • You must identify the replacement property within 45 days of selling the prior property and acquire it within 180 days

6. Invest in Opportunity Zones

If you’re open to long-distance investments, it’s worth looking into opportunity zones. The 2017 Tax Cuts and Jobs Act made modifications to help spur economic development in distressed communities. These areas, referred to as “opportunity zones,” need more jobs and development, so the government incentivizes investors who put money into these areas.

The program allows investors to defer and reduce capital gains taxes by investing in properties in these areas, which can lead to increased property values and rental prices. This is an attractive real estate tax tip for savvy investors, but it’s essential to thoroughly research the regulations in each opportunity zone to avoid any unexpected pitfalls.

7. Hire a Professional

For real estate investors, the tax process can get tricky. It’s nearly impossible to track every potential benefit, not to mention the additional taxes you may owe when you file. You probably use a reputable commercial real estate agent when searching for property, so why would you go it alone on your taxes?

A professional, such as an accountant or CPA, can help you navigate the tax laws that change so frequently. The benefit of having this close contact is year-round access to an expert when you have questions. This individual can help you maximize tax benefits by tracking your daily operations.

Avoid surprises and enjoy peace of mind when you leave it to the professionals.

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