The U.S. is host to over 5 million commercial buildings every year, meaning property owners routinely have to worry about property tax and other logistics.
If you’re a commercial property tax owner, you want as many opportunities to get tax relief as possible. But how do you know where to get them? And how do they even benefit you?
That’s what we’re here to answer today. Read on to learn about 5 commercial property tax considerations before you file taxes in 2021.
1. Different Tax Rates For Different Property
Real estate and property income aren’t the same for everyone. Where the property came from and how long you’ve owned it factors into how the IRS taxes you.
Short-Term Capital Gains
You owe short-term capital gains taxes when you sell an asset within a year of buying it. This applies to anything from stocks to real estate to other assets.
Let’s say you bought a house for $100,000. You put about $50,000 into renovating it and sold the house for $200,000. If you got about $15,000 in closing and other costs, you’ve gotten a profit of $35,000.
The IRS will tax you for that profit during tax season. Short-term capital gains tax is the same as your income tax rate.
Long-Term Capital Gains
If you hold an asset for longer than a year, you’ll owe long-term capital gains taxes. These taxes encourage longer investment in the U.S. economy.
That’s why they’re lower than short-term capital gains tax. Middle-class earners are taxed about 15%. It can be as low as 0% depending on your income.
Real Estate Dealer Income
Anyone who holds real estate with the intent to sell it considered a dealer by the IRS. That means your property investment is seen as a business.
Moreover, you’ll be taxed for the income you make, and dealers pay self-employment tax. House flippers face different criteria and it can get a bit confusing. The best course of action is to ask your accountant.
2. Property Tax Benefits
While commercial property owners pay a unique set of taxes, don’t forget about the benefits you get as well. Investing in owner-occupied commercial property has a few pros that you should always be aware of.
When you buy property, there’s the building itself and the land that it sits on. The land won’t crumble away or rust, but your building might.
Commercial property investors can depreciate the cost of the building over the course of 27 and a half years. It’s basically a tax deduction spread over the course of a few decades.
You divide the cost of the building by 27.5 then subtract that portion each year until the entire cost is deducted. You can even depreciate the cost of renovations and improvements you’ve made to the building.
Depreciation isn’t the only thing you can deduct from your annual taxes. Other useful property tax deductions include:
- Closing costs
- Interest on mortgage
- Utility bills
- Repairs or maintenance
- Landlord insurance
- Professional fees
- Home office fees
These are “above-the-line” deductions that you take off of your taxable income. You would subtract them from your gross personal income before you calculate the taxes owed.
This leads to greater savings for commercial property owners each year.
3. Deferring Capital Gains Taxes
If you don’t want to pay your capital gains taxes, commercial property owners have a few tricks to defer them. You might even be able to delay paying them indefinitely.
Opportunity zones are economic tools that let people invest in distressed regions or areas. It’s meant to spur more jobs and better local economics in areas that need it.
Commercial property investors can seek out these opportunity zones for Qualified Opportunity Funds. The longer you hold your shares in these funds, the better the tax credits.
Installment sales are when you sell property and finance most of the sale for the buyer. The buyer essentially pays their mortgage to you rather than taking out a loan from a bank.
This lets you spread your capital gains taxes over a few years instead of paying it all at once. This way, your taxes won’t drastically increase in a single year.
A 1031 Exchange lets you move the profits you made from selling one property to buying a replacement. This can be done without paying any capital gains taxes from the first property.
Think of it like reinvesting your profits from one property to other more lucrative ones. It’s great for scaling up your commercial property portfolio.
Once you sell your property or take in the profits, then you’ll have to pay capital gains taxes.
4. Avoiding Capital Gains Taxes Altogether
A great way of avoiding capital gains taxes while getting tax deductions is by cashing out your equity.
Maybe you want to start spending some of the equity accrued in your commercial property. You could just sell it, but then you’d lose passive income and have to pay capital gains taxes.
Instead, you can borrow money against your property’s equity. That way you won’t lose passive income or have to pay capital gains taxes.
Your cash flow might dip, but you can deduct the mortgage interest on your taxes.
5. Secure More Capital Allowances
Capital allowances are tax benefits against plants and machinery for trade purposes. They allow you to claim those items as tax deductions and can provide valuable relief each year.
Anyone who purchased the property or incurred the relevant expenses can get capital allowances. Click on this link if you want to maximize tax relief through capital allowances.
Maximize Your Commercial Property Tax Considerations
Commercial property tax can be a complex field, but it doesn’t mean you can’t save money on taxes each year. Use this guide to help you find useful shortcuts and tricks to improve your cash flow.
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