Why purchase commercial real-estate?
An apartment, building or other structure begins to depreciate when you buy it. This depreciation builds up like a running meter and can typically offset a company’s tax liability. For example, the IRS allows depreciation of a residential rental building over 27.5 years, and commercial buildings over 39 years. So, if you buy a residential building for $2 million, the annual $72,000 depreciation would roughly offset the tax you owe on $200,000 in profit.
Post-sales tax savings
If you leave the property to beneficiaries and they decide to sell, they will pay tax only on the property’s increased value from the time of your death. For example, say you purchase a property for $2 million and it appreciates to $5 million by the time you die. If it is worth $6 million when your beneficiaries sell, they would only owe tax on $1 million.
The renovations, maintenance, ongoing upgrades and other expenses related to owning a commercial property are also potential deductions. These are out-of-pocket expenses, but many of these expenditures improve the value of your building and you might be paying some of these costs on a leased property anyway. Condo fees associated with an apartment purchase can also be deducted, assuming you use the property for work. If you also live there, a portion of these fees, proportionate to your use, would be eligible.
Some business owners invest in commercial real estate as a way to create an asset for use at retirement time. A lower capital gains tax rate is one potential benefit a commercial property has compared with other retirement investments such as an IRA. Said another way, when you access most IRA funds, you will be billed at your personal tax rate on those funds. The sale of a commercial property also has tax implications, but the capital gains tax rate associated with a commercial building sale will typically be lower than the personal tax rate associated with your IRA. Roth IRAs—in which you pay tax when you invest the money—are one of the exceptions.
Beyond taxes, a real estate purchase of a commercial building or an apartment sometimes serves as a de facto succession plan. Since many businesses do not have solid succession plans in place, the investment in a commercial property can mean a company has a guaranteed asset at the end of its life, even if there isn’t someone who wants to carry on running the business.