Tax Benefits of Commercial Real Estate Investing
3 strategies to reduce your tax burden while investing in commercial real estate.
However, these benefits are not applied automatically, so it’s up to you as the investor to make sure you’re taking advantage.
In particular, there are three main strategies that are especially valuable for reducing your tax burden while continuing to generate consistent returns.
1. Defer Taxes with 1031 Exchanges
If structured correctly, a 1031 exchange allows you to defer the capital gains taxes you’d typically pay when selling a property, and instead reinvest the proceeds from the sale by purchasing a new property.
1031 exchanges can be challenging because you have a limited amount of time to complete the investment (you must identify a new property within 45 days of relinquishing your first property, and close on that new property within 180 days). There are also limitations around the type of real estate you can purchase, as it must be of “like kind” and have greater or equal value to the original property.
However, when working with an experienced partner who understands the ins and outs of these transactions — like Excelsior Capital — a 1031 exchange can be enormously beneficial. Not only does it allow you to defer taxes, but it also gives you the opportunity to reinvest your earnings into a higher-value or more cash flowing property.
2. Claim Bonus Depreciation Before it Phases Out
You may have heard that bonus depreciation is about to expire, but it’s not too late to take advantage of this tax benefit. Any assets acquired and placed in service before Jan. 1, 2023 is still eligible for 100% bonus depreciation. In 2023, the deduction will lower to 80%, then 60% in 2024, and so on until it phases out in 2027.
With bonus depreciation, businesses can immediately expense eligible assets in their first year of service, rather than claiming depreciation across a longer time period. This can offset income in the first year after acquiring a new property.
To do this, businesses may implement a cost segregation study, identifying all property-related costs that can be depreciated faster. This could apply to an acquired property, new construction, or even remodels or build-outs.
Even if bonus depreciation is not renewed before the end of 2023, Congress may still introduce other tax incentives to offset the phase out process. Make sure to keep an eye out for any IRS pronouncements that might affect your 2023 investments and the depreciation options available to you.
3. Leverage Life Insurance as a Source of Capital
Many real estate investors reach a point where they don’t have enough cash reserves to participate in all the deals that interest them. If you’re looking to accumulate capital in order to grow your investment portfolio, you may benefit from purchasing Cash Value Whole Life Insurance.
This strategy can help you deploy capital more efficiently, and it also provides unique tax advantages in the process. The money you accumulate and distribute within a life insurance policy is tax free, as are any dividends you receive. In essence, you’re using your life insurance policy like a personal, private bank, providing a loan from your insurance policy to finance your next real estate investment.
To learn more about the power of cash value whole life insurance for real estate investors, we encourage you to watch this webinar.
Are Your Investments Tax Efficient?
Not all real estate sponsors make tax efficiency a priority when sourcing and structuring deals. If you want to make sure you’re accessing the full range of tax benefits of commercial real estate investing, make sure you’re working with people who share your goals and have the knowledge and expertise needed to help you achieve them.
At Excelsior Capital, we understand that direct real estate ownership is the best way for our investors to access the full tax benefits. We make that ownership possible with our carefully vetted, inflation-resistant commercial real estate investments.
If you’re an accredited investor looking to optimize your portfolio for tax efficiency, we’d love to connect with you. Simply fill out this form to get in touch.
Real estate syndications are one of the best ways to access the full tax benefits of real estate ownership while still investing passively.
Jeff Strese is an Organizational Development Consultant and Executive Coach focusing on multi-generational family enterprises, corporations, and mission-driven nonprofit organizations.
David Mandel is an emerging tech Super-Angel Investor and managing partner of Emerging Ventures Capital. He has invested in over 500 startups.
Billy Keels is the founder of First Generation Capital Partners. He grew up knowing nothing about investing and challenged himself to learn everything.
A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.
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