By: Louis Goldenberg, Director of Accounting & Operations at Xendoo
From the moment you buy or sell a commercial property (and even before), your actions can affect how much tax you have to pay on it. The more you know about the implications of your decisions, the better off you will be.
Xendoo tax experts have put together some of their top tips for minimizing your tax burden.
1. Assessed Value
A commercial property pays real estate tax on the basis of its current assessed value, as determined by the local government tax appraiser. Because appraisers don’t physically inspect properties every year, use outdated valuation formulas, and other factors, it is not uncommon for the assessed value to be much higher than it should be.
It has become almost routine to appeal the assessed value in court and get it revised downward, thus resulting in significant tax savings. Although you can do it yourself, you may wish to engage a tax attorney to handle the process for you. (Many of them will only charge a fee as a percentage of any tax savings they win you.
2. Ownership Status
When you sell the property, you will have to declare on your income tax form whether you did so as a dealer or an investor.
A dealer is someone who buys and sells real estate as a business. Developers who improve land and resell it at a profit also fall into this category.
- When a dealer sells the property, it is taxed as ordinary income.
- If it’s sold at a loss, the total amount of the loss can be used to offset income.
An investor is someone who generates income from the property, for example, a retailer who owns the store’s building or the owner of an apartment building.
- When an investor sells the property, it is taxed as a capital gain or loss.
- If sold at a loss, it can only offset capital gains and up to $3,000 of ordinary income.
As you can see, it pays to plan ahead for the day you sell your commercial real estate. Your tax advisor can help you determine which status to declare, and what records you will need to support your statement.
How, when, and even whether you itemize depreciation of your property on your tax return can make a difference in how much you have to pay. Here are a couple of examples.
For new construction or renovations on a property, cost-segregation will assign each component of the work to the most tax-favorable category. Structural additions to a building would have a 39-year tax life, while items considered as personal property usually have a 5- to 7-year tax life.
For corporations with expiring net operating losses, it might be better to opt out of bonus depreciation. Or they may wish to exchange bonus depreciation for acceleration and allowance of unused credits, such as research and development credits.
4. Environmentally Friendly Deductions
You may be able to receive tax credits for the cost of:
- Energy-efficient interior climate control systems (heating, AC, etc.)
- Using renewable energy sources such as solar or wind power
- Improvements to the building envelope (i.e. energy-efficient windows)
5. Charitable Land Contributions
A charitable gift of land can result in a hefty tax deduction. However, you must be careful that you don’t receive any other benefit from the action, or the IRS will interpret it as a for-profit transaction and either limit or totally disallow the deduction.
These are just a few of the tax saving strategies that commercial real estate owners can employ. But they do have to be planned for in advance, and not every idea will work for everyone. Your tax advisor will review the details of your company’s operations and goals, and help you decide on the best ways to reduce your tax liabilities.
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Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.