Commercial Real Estate Tax Strategies

 

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Taking Advantage of Tax Benefits: A Guide for Real Estate Investors

With Perigon Legal Services, you can unlock your commercial real estate tax strategies. Get in touch with us today!

Author: Stan Faulkner, Founder, Perigon Legal Services, LLC

Mr. Faulkner is an experienced counselor and litigator with 15 years of experience, having held bar licenses in four states (Mo, Il, Ct and Ga). Stan Faulkner uses this experience and focuses his skills in the pursuit of assisting individuals in probate (trust and estate) matters, guardianships and conservatorships, estate planning, business disputes and contract disputes. Published on January 04, 2024.

Effective tax planning is necessary to reduce tax liabilities. In commercial real estate transactions, tax planning allows owners of commercial properties, real estate investors, and rental property owners to maximize their returns while keeping their tax liabilities minimal.

The field of taxation could get truly complex and daunting. For those involved in commercial property transactions, hiring real estate attorneys for personalized guidance on minimizing tax liability while ensuring compliance is practical.

Understanding Commercial Real Estate Taxes

 

Owning commercial real estate (CRE) in Georgia provides various benefits to investors. Rental income, price appreciation, and portfolio diversification are a few reasons why investing in real estate is lucrative. Georgia has become an attractive place to invest in real estate due to various incentives to investors, low taxes being one of them. 

Common Tax Terms Explained

When you invest in CRE, the primary taxes that you are likely expected to pay are the following:

  • Property tax
  • Federal income tax
  • State income tax
  • Sales or rental tax

Each affects the investor’s assets and requires careful and effective tax planning to maximize the financial benefits.

  1. Property tax: This is calculated based on the property’s assessed value and the applicable tax rate set by the local government.
  2. Federal income tax: This tax is levied on the profit generated from your real property. This means that any income you derive from your property is subjected to income tax.
  3. State income taxes: This tax is collected by the state of Georgia on your rental real estate income. The rate depends on your tax income bracket.
  4. Rental or sales tax: The tax on the monthly rent collected from the CRE or rental property is called rental tax, sometimes sales tax.

Other taxes that may affect one’s commercial dealings include the capital gains tax. Capital gains taxes are imposed on the sale of a property. This tax is calculated at the same rate as income tax in Georgia.

Key Tax Strategies for Commercial Real Estate

As business cash flow grows, so do its tax liabilities. Therefore, it is crucial that a business owner understands how taxation works and adopts tax strategies to avoid being surprised by hefty bills.

Real estate attorneys with a comprehensive background in business and tax laws could assist you in legally reducing your taxes. Here are some key strategies that you and your lawyer can work on:

Depreciation Strategies

This tax strategy is known as the depreciation tax shield. As a tax reduction technique, it allows businesses to offset a portion of their yearly taxable income due to their property’s wear and tear.

Utilizing 1031 Exchanges

In a 1031 exchange, you swap one CRE for another property and avoid capital gains tax. This sounds simple, but a real estate investor should follow a specific set of rules for the 1031 exchange tax shield to apply. Speak with credible and experienced real estate tax attorneys to know if this applies to your commercial real estate transactions.

Tax Deduction

Eligible business expenses can be deducted from one’s business income to lower its overall tax burden. These allowable deductions include business-related costs, charitable contributions, and employee benefits. Note that eligibility for business income deductions will depend on the filer’s taxable income.

Leveraging Cost Segregation Studies

As a tax planning tool, cost segregation allows real estate investors to quickly deduct a property’s depreciation against their taxable income.

A cost segregation study can be a powerful way of minimizing your tax burden and maximizing depreciation deductions. How? As a general rule, the depreciation of any real estate investment you own can be written off on your income taxes over some time.

With cost segregation, you can speed up the depreciation schedule to increase the amount you can deduct each year. As a result, this reduces your yearly income tax and your expenses for owning commercial property.

Cost segregation studies are not something that you can do on your own. Make sure to work with professionals skilled and experienced in tax law, accounting, and even engineering and construction.

Maximizing Deductions and Credits

Investing in commercial real estate has its ups and downs. From a financial standpoint, it is crucial for investors to work with professionals who can formulate effective tax planning strategies. This way, they can maximize the income potential of their commercial real estate investments. They can also grow their tax savings or minimize liabilities.

Some of the allowable deductions and credits that you should know when you invest in commercial real estate: 

  1. Deductions for repairs and maintenance
  2. Depreciation deductions for income taxes
  3. Interest expense tax deductions
  4. Non-mortgage tax deductions
  5. Qualified business income deductions
  6. Charitable contributions
  7. Opportunity zones
  8. 1031 exchanges
  9. Reduced tax burden for beneficiaries
  10. Other tax credits (low-income housing tax credit, historic tax credit, and new markets tax credit program)

Qualifying for tax credits is not automatic. Make sure to speak with a tax and real estate professional to know more about these matters.

Perigon Legal Services: Your Partner in Commercial Real Estate Tax Planning

Investing in commercial real estate has many advantages, but it can also be expensive because of the tax liability that comes with it. Fortunately, you can implement effective tax planning strategies to help you in maximizing tax benefits. These include tax deductions, depreciation strategies, utilizing 1031 exchanges, and leveraging cost segregation studies.

To make sure your commercial real estate transactions go smoothly, let Perigon Legal Services assist you. Whether you own an investment property or are still working with real estate agents and brokers, we can assist with your commercial real estate transactions. With our team’s extensive knowledge of the tax code, we could help you maximize savings and avoid or minimize taxes.

Our personalized approach has proven to be a successful strategy, helping us achieve the most favorable results for our clients. Contact us today to schedule a free consultation with an experienced real estate attorney.

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