At the beginning of 2018, federal tax reforms came into effect that will have a beneficial impact for many commercial real estate owners. But if you want to take advantage of these tax reforms, it’s important to understand what they are and how you can use them to increase your profits and save money. Read on to learn about 3 instances where these tax reforms can make a serious impact for commercial real estate investors.
1. Capital Gains Taxes Can Still Be Deferred
One of the most significant ways that tax reforms will benefit commercial property owners isn't really a change, but rather the preservation of the 1031 exchange that allows real estate investors to defer capital gains taxes when they sell one property and reinvest the profits into a similar property. By using this exchange, you could save yourself from having to pay up to 20 percent in taxes on the sale of a commercial property, and that means more money for you to invest in real estate or other projects.
2. Pass-Through Deductions on Rental Property Income
Commercial real estate investing is a business, and that's why many owners don't hold property in their own names, but rather in pass-through entities, which can include:
● S corporations
● Limited liability companies
Because these entities don’t pay corporate taxes, the partners or shareholders are responsible for paying them. Thanks to the new tax reforms, you'll now be able to claim a 20 percent tax deduction on the net income you make from rental properties, as long as you don’t make more than $157,500 a year (or $315,000 if you file jointly with another person).
3. Expenses and Deductions to Lower Taxes
The third way these recent tax reforms can help you as a commercial property owner is through an increase in the amount you can expense. Before the reforms, property investors could deduct up to $500,000 in expenses for commercial real estate, but as of 2018, this cap was increased to $1 million. You can now also deduct mortgage interest from your taxes, and the bonus depreciation deduction was increased from 50 to 100 percent of the property’s cost.
Investing in commercial real estate has the potential to be a more profitable endeavor thanks to the 2018 tax reforms, and there are three main ways these reforms can help you make more money and keep more money in the bank at the end of each tax year. By allowing investors to defer capital gains tax when they sell one property and buy another and increasing pass-through deductions, and expensing options, these tax reforms will help real estate investors save money and encourage them to invest with confidence. If you’ve found the perfect property to add to your portfolio, then talk to one of our commercial experts today, we can find an investment property loan that works for you.