In 1789, Benjamin Franklin wrote in a letter, “… in this world nothing can be said to be certain, except death and taxes.” While this is mostly true in the United States, there are times when people don’t have to pay as much in taxes if they take advantage of available tax benefits. For example, commercial property investors can capitalize on many deductions related to commercial property that can reduce the amount of taxes owed at the end of the year and help them keep more of their money. Investors often choose commercial real estate due to the tax benefits they receive, reducing their income and capital gains taxes.
Depreciation is the number one tax benefit used in commercial real estate investment. It allows for significant write-offs without having to do anything. It will reduce your taxable income by deducting the tax-related expenses of purchasing real estate and making improvements to it. A commercial property investor can factor in depreciation the moment their property is placed in service. Commercial property can be depreciated over 39 years, and residential property can be depreciated over 27-1/2 years. A commercial property will depreciate at a yearly rate of 2.564% (100% value of property ÷ 39 years), and a residential building will depreciate at a yearly rate of 3.636% (100% value of property ÷ 27.5 years). Some repairs and improvements to a property are allowed to depreciate faster than these depreciation rates. And remember, the actual land cannot depreciate, only what is on that land.
What is an interest expense? The interest expense of a loan is what it costs to borrow money. When an investor borrows money, there is a daily interest expense occurring that is usually paid on a monthly basis. It can be paid quarterly at a reduced rate, semiannually at a further reduced rate, or annually at an even lower rate. It’s like anything else… the quicker you pay something off, the less you’ll pay total.
Interest expense is considered a nonoperating expense payable on any type of borrowed funds such as loans, lines of credit, or bonds. It is derived from the loan’s interest rate multiplied by the unpaid principal amount of that loan. The larger the interest rate, the higher the interest expense is for a loan. Fortunately, interest expense is deductible at the end of the year, and this deduction can help an investor save a sizable amount of taxes.
If there’s something on your commercial property that needs to be repaired or maintained, all of the supplies, materials, and labor applied toward that repair or maintenance is deductible. This includes cleaning services, plumbing, electricity, appliance placement, etc., even if you do the work yourself. You must ensure that the claims are considered “ordinary” and “necessary”. For example, if the paint in the kitchen on your commercial property starts to peel, you can deduct materials and labor related to repainting the kitchen. However, you can’t re-tile, add new lighting, and replace the appliances if there’s nothing wrong with the existing tile, lighting, and appliances. The work must be necessary to keep your business running smoothly.
Other Commercial Property Deductions
Professional services, such as those from an accountant or lawyer, are one of the more common deductible expenses a commercial property owner might take advantage of.
Marketing is a deductible expense a landlord should remember because they will need to spend money to find tenants to rent their commercial property to.
Educational events can be deducted, and they include conferences, courses, seminars, and conventions.
Travel is a common expense you don’t want to miss out on because it can include the costs of hotels, air travel, meals, and vehicle rental.
Startup costs are an expense that is sometimes overlooked. It can include all expenses related to preparing for a business launch including travel, consultants, business meetings, meals, and much more.
There is a long list of deductible expenses related to owning commercial properties, and a landlord of one of these properties should definitely use an accountant to take advantage of every possible deduction. You’ll find the money you save from using a professional will far outweigh the expense of hiring one.