Obtaining commercial real estate is a common way for investors to save money on their taxes. There are two ways to get money back using this method. One is capital gains and the other is the commercial property’s cash flow. The taxing method used is based on cash flow or capital.
Cash Flow Method
After expenses have been paid for by an investor, any leftover money they make is considered cash flow. This is considered standard income, and is taxed accordingly. The tax rate an investor is charged depends on the tax bracket he or she falls into.
Capital Gains Method
A commercial real estate investor buys and sells properties. Capital gain refers to the difference of the dollar amount between the purchase price and the price an investor sells it for. However, deprecation of the property also has to be taken into consideration. Capital gains are not taxed in the same way that regular income is.
Commercial Real Estate Tax Benefits
Deprecation is only one of the tax benefits of commercial real estate. Since it is considered a non-cash expense, commercial real estate investors can write it off their taxes. Yet, there is no purchase required in order to receive this benefit. It also means that investors pay less and less in taxes every year.
How Interest Expense Works
Loans are often the way investors pay off a commercial property they’ve purchased. Mortgage payments can be written off on their taxes. During the beginning years of a new loan, this is often the best way for investors to save money. The reason for this is that throughout those years, principal payments are dwarfed by interest payments.
The 1031 Exchange
A 1031 exchange is when an investor sells one property to use the money needing for buying another property. An intermediary assists investors in making 1031 exchanges. The capital they gain is used to purchase a higher value property they will earn a better income for. Many commercial real estate owners’ 1031 exchanges are the best way to avoid paying taxes on capital gains.
For more information on commercial real estate tax benefits, please contact DAL Commercial Capital.