Top 5 Benefits & Tax Advantages of Investing in CRE
With tax season upon us, now is a great time to discuss all the advantages of investing in commercial real estate.
1. Commercial Real Estate vs IRAs for Retirement
Typically, when you invest in something like an IRA, you will be taxed at your personal income tax rate when the funds are distributed back to you down the road. The max rate for personal income taxes is 37%. With real estate, you pay no taxes if any distributions are made as return of capital distributions and capital gains tax at the time of the sale (max 20% today). This one difference cuts down significantly on the tax rates you will pay.
2. Depreciation Deductions
Another tax benefit of investing in commercial real estate includes using cost segregation studies to capitalize on depreciation deductions. Cost segregation is a strategic tax tool that can lower taxable income by accelerating the depreciation of certain assets of properties.
These cost segregation studies utilize tools like accelerated and bonus depreciation to take as many expenses up front and pass them along to investors, versus spreading these amounts out over a longer period of time and having to wait longer to realize the tax benefit.
3. Pass-Through Deductions
On the topic of deductions you can receive from real estate investments, it’s important to consider other factors that will be taken out from the tenant rental income, like mortgage interest, repairs and maintenance, property management fees, and so on. All of these deductions combined help to lower the taxable income from the investment and still allows you to have steady positive cash flow coming in.
4. 1031 Exchange
The IRS has another tax benefit to encourage investors to utilize their funds in real estate investing called a 1031 exchange. This exchange allows you to sell one of your real estate investments and purchase another with those funds without paying any taxes. This tax strategy is referred to as “Deferred Capital Gains” and allows you to take advantage of investing, and deferring the taxes that would normally be due at the time of sale. There is some paperwork and rules that go with this process, so you definitely want a CPA guiding you through this process to ensure you are eligible.
5. Step-Up in Basis for Beneficiaries
A final tax benefit from investing in real estate comes with the end of life and estate planning phases. When you leave the investment to your beneficiaries, they will receive a step-up on the basis of the investment. This means they can raise the value of the investment to the current day, fair market value and pay no taxes on the difference in gain. This is a huge tax benefit for building generational wealth in your family and setting them up for success.
While each investor’s situation and goals are different, it’s important to keep up with any IRS pronouncements that may come out relating to the benefits discussed today.
As always, if you have any questions or would like to discuss this further with one of our team members, we’re happy to connect. Simply fill out this quick form to get in touch.
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