Investing in commercial real estate is an excellent way to build steady wealth over time. It can also be something of a headache come tax time. Luckily, there are plenty of tax benefits available to commercial real estate investors that can help offset certain expenses. Read our article for the top tax breaks for commercial real estate investors and learn how you can take advantage of them.
Tax Deductions for Commercial Real Estate
1. Mortgage Interest Tax Break for Commercial Real Estate
Just as you can deduct your private property’s mortgage interest from your taxes, you can also deduct the amount you have paid in commercial mortgage interest. In mortgages with high interest rates, this can offset the amount owed by a significant amount.
You should receive a Mortgage Interest Statement from your lender, which is form 1098. It will tell you the full amount you have paid in interest over the last tax year. Claim this amount on your tax returns in the appropriate section, or ask your financial advisor to assist you in claiming the full deduction.
2. Business Expenses
Outside of your mortgage interest, you can claim certain deductions related to the cost of maintaining your commercial property. Such expenses can include repairs, expansion, renovations, and residential fees. You may also be able to deduct travel and lodging expenses related to operating the business, such as hotel costs for out of town educational seminars.
The exact costs you are eligible to deduct will vary somewhat. Be sure to keep careful records, including receipts, of all costs you have incurred maintaining the property. Keep track of mileage and other expenses while traveling for your business. Your financial advisor will go through these records with you and help you determine which ones qualify as a deduction.
3. Depreciation of Property Value
You can claim depreciation as a deduction on your commercial property. The IRS permits an annual deduction based on a specific formula. In addition to this amount, you can claim additional depreciation by having a formal site inspection conducted by a specialized firm.
Tax Credits for Commercial Real Estate Investors
The federal government offers tax credits to investors who choose to develop in certain areas:
1. Low Income Housing Tax Credit
Investors who invest in the construction and/or upkeep of affordable rental housing for low-income families may qualify for a federal tax credit known as the Low Income Housing Tax Credit (LIHTC).
In order to qualify for the LIHTC, investors must meet certain tenant requirements and pass a gross rent test. For example, one tenant requirement stipulates that at least 20 percent of the property’s apartments must be occupied by families whose income is less than 50 percent of the area median income (AMI).
To pass the gross rent test, rent rates should not exceed 30 percent of 50 percent of the AMI. In other words, tenants who make less than 50 percent of the AMI should not have to pay more than 30 percent of their gross income in rent.
Again, qualifications will vary depending on the type of commercial property, the location, and its residents. Your financial advisor will help you determine if you qualify for this credit and how much you can claim.
2. Historic Tax Credit
The federal Historic Tax Credit (HTC) is also known as the Rehabilitation Credit, or Historic Preservation Credit. It rewards investors who choose to invest in the rehabilitation of a historic structure. In some cases, you may also qualify for a state HTC. The federal HTC allows a credit of up to 20% for qualifying projects.
In order to claim the HTC, you must meet certain requirements. Namely:
- The building must be a certified historic structure
- The building must have undergone renovations (greater than $5000)
- The property must have been designated a “building’ prior to renovations
- The building qualifies for depreciation or amortization
3. New Markets Tax Credit
Rather than receiving tax credits for the construction or renovation of low-income properties, the New Markets Tax Credit (NMTC) rewards investors who provide capital to other entities looking to develop affordable housing communities.
NMTC investors can claim tax credits within seven years of the initial monetary investment. This is in the form of 5 percent of the investment for each of the first three years, then 6 percent of the investment for the remaining four years. The total credit thus amounts to 39 percent of the initial investment.
Commercial Property Loans in Colorado
Pine Tree Financial Partners has established itself as one of the leading commercial real estate lenders in Colorado. If you are looking to develop new housing, renovate existing properties, or have another specialized project in mind, give our office a call. We are known for our exceptional customer service, attention to detail, and fast closing times. Let us help your dream project become a reality.