Commercial real estate investors have an (almost unfair) advantage.

 

It’s not just about fantastic profits. It’s also that the unique tax advantages allow you to keep more of the money you’ve earned — more so than nearly any other investment type out there.

 

In this article we will explore the top 3 tax benefits that you can access as a passive investor in real estate syndications.

 

Long-Term Capital Gains: A Favorable Tax Rate

 

Capital gains (from profits when you sell a property) are taxed lower than income taxes. 

 

And with the vast majority of real estate syndications, the property is held for over a year. Which means profit is taxed at the more favorable rates of long-term capital gains (as opposed to “short-term”, when the investment is held for less than a year).

 

This isn’t an earth-shattering benefit, but it’s good to know that your profits will be taxed in the lowest manner possible.

 

Next is where the fun starts…

 

Depreciation On Steroids

 

Real estate in the US allows for a special kind of depreciation, which is called Cost Segregation.

 

First, we take the principle that assets depreciate over time, due to “wear and tear”.

 

So even if you make pure profit, and your property accrues no expenses, you can still write off a percentage of the building each year as depreciation. Even if the property has been renovated and commands higher rents, you still get to file your taxes as if the property depreciated.

 

Then, we get to Cost Segregation. This is a special form of accelerated depreciation.

 

It allows you to separate your real estate holding into personal and real property. Real property depreciates over a period of 39 years, but personal property depreciates much faster. 

 

So certain improvements done on the property may allow you to use much higher depreciation amounts against your profits earned.

 

These higher “expenses” will allow you to keep most (or sometimes ALL) of the cash flow in your pocket.

 

The only caveat is that when it comes time to sell the property, you can be taxed on the depreciation. This is called “recapture”.

 

But commercial real estate has yet another option that allows you to defer all the taxes owing upon sale… and when you set up your investments with an eye to multi-generation legacy, you can even eliminate the taxes altogether. 

 

Read on.

 

Avoid Paying Capital Gains Taxes By Using The 1031 Exchange

 

When it comes time to sell a property, you have the option of using a 1031 Exchange to reinvest your profits into a new property.

 

Here are the requirements:

 

– the new property has to be of equal or greater value than the existing property

– the properties must be held for business or investment purposes

– both properties have to be “like kind” (this covers most types of commercial real estate)

 

If you find a new deal that fits those rules, then you can take your capital gains, reinvest them, and defer the taxes owed.

 

Now let’s think long-term:

 

You could keep reinvesting, over and over. Meaning you keep deferring the taxes. If you have the proper financial structure in place, you could do this right up until your death. Then you could leave the ownership of the current property to your children… and that would wipe out any taxes owing.

 

So using the three unique tax advantages of commercial real estate that we detailed above, you can keep more profits in your pocket, defer taxes, and then eventually eliminate your owed taxes altogether as you pass on the legacy to your family.