Following the Government’s Playbook: Tax Incentives for CRE Investments 


Investing in commercial real estate can offer various tax incentives that can help investors reduce their tax liability and enhance the overall profitability of their investments. Below is a non-exhaustive summary of key tax incentives for investing in commercial real estate for which investors may be eligible only after engaging a qualified tax professional to assist with proper tax filings:

  1. Depreciation Deductions. Commercial property investors can take advantage of depreciation deductions, which allow them to recover the cost of the property over its useful life by deducting a portion of its value as an expense on their tax returns. The IRS provides specific depreciation schedules for different types of commercial real estate assets. If documented correctly, these deductions can significantly reduce taxable income. However, when the property is sold, any excess depreciation claimed will be subject to recapture.  Excess depreciation is any allowable amount greater than the straight-line method.  Such accumulated excess depreciation deductions are treated as ordinary income and taxed at a higher rate when the property is sold at a gain. [space]
  2. Bonus Depreciation. The temporary bonus depreciation provisions enacted by the Tax Cuts and Jobs Act allow investors to deduct a significant percentage (originally 100% but phasing out by 20% each year beginning in 2023) of the cost of qualified property in the year it is placed in service. This is a departure from the traditional method of spreading the cost over the property's useful life through regular depreciation deductions.  By deducting the allowable bonus percentage of the cost of eligible property in the year it is acquired, this can provide a substantial tax benefit, especially for new construction or major renovations.  This provision is not available for property placed into service after 2026. If the bonus depreciation deduction exceeds the property owner's taxable income for the year, the excess deduction can be carried forward to future years to offset taxable income.  While bonus depreciation can provide substantial tax benefits, it may not be applicable to all property types or situations. [space]
  3. Cost Segregation.  Cost segregation is a strategy that involves classifying certain components of a commercial property into shorter depreciation periods. By doing so, investors can accelerate depreciation deductions and increase the upfront tax benefits. [space]
  4. 1031 Exchange. A 1031 exchange, also known as a like-kind exchange, allows investors to defer capital gains taxes when they sell one commercial property and reinvest the proceeds into another like-kind property within a specific time frame. By doing so, investors can defer paying capital gains taxes and potentially build wealth more efficiently through property exchanges.  However, it is important to engage the services of a qualified intermediary to help facilitate the exchange and properly receive and apply transactional proceeds, so that the efficacy of the exchange is not jeopardized.  There are also important deadlines of which the exchanging party needs to be aware, to avoid unintended tax consequences. [space]
  5. Opportunity Zones. Opportunity Zones are designated economically distressed areas where investors can receive tax incentives for investing in real estate development projects. The Tax Cuts and Jobs Act of 2017 introduced this program to encourage long-term investments in these zones by providing tax benefits, including deferral and reduction of capital gains taxes.  Investors who reinvest their capital gains into qualified opportunity zones investments (“QOF”) can potentially benefit from (i) temporary deferral of capital gains tax until the earlier of (a) sale of the QOF, or (b) December 31, 2026, (ii) basis step-up for a QOF by ten percent (10%) and an additional five percent (5%) held for five (5) and seven (7) years, respectively, and (iii) exclusions of taxable gains for a QOF held more than ten (10) years.  While investment in QOFs offer significant tax benefits, it also involves complex regulations and compliance requirements. [space]
  6. Interest Deductions.  Commercial real estate investors can deduct mortgage interest and other loan-related expenses, such as points and loan origination fees, which can significantly reduce taxable income. [space]
  7. Pass-through Deduction. The Tax Cuts and Jobs Act introduced a 20% deduction on qualified business income for pass-through entities, including real estate investment partnerships, LLCs, and S-corporations. This deduction can reduce the tax burden on real estate income for eligible investors. [space]
  8. Energy Efficiency Incentives. Some governments offer tax incentives or credits to commercial property owners who invest in energy-efficient features or renewable energy systems, such as solar panels or energy-efficient HVAC systems.

Tax laws and incentives can change over time and can vary based on the investor's specific situation and location. Additionally, proper documentation and compliance are critical to claiming the aforementioned tax benefits accurately and legally.  Therefore, investors should work closely with tax professionals, financial advisors, and attorneys who are knowledgeable about commercial real estate tax laws to maximize the available tax benefits while ensuring compliance with tax regulations.


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