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How to Maximize Tax Deductions and Depreciation with Commercial Real Estate

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Investors that purchase or purchased commercial real estate after 9/27/17 are going to crush it on tax deductions over the next several years. In one example, an investor that bought a duplex for $400,000 was able to depreciate $129,600 in the first year. That resulted in $57,024 in tax savings in the year they bought the property! There are 3 things that you need to know to make this work. Cost Segregation, Bonus Depreciation, and Opportunity Zones.

Own Commercial Real Estate? You Just Crushed It with The New Tax Laws

What is cost segregation? In basic terms, some components of a commercial property have a shorter lifespan than others. The IRS recognizes this, so they allow you to depreciate the value of those components faster than others. Think about an industrial building. The carpet in the office is going to wear out in a few years (IRS says 5 to 7 years), while the roof is going to last much longer (IRS says 27.5 to 39 years). An “engineering-based” cost segregation report breaks down every item in a building down to the screws holding in the front door. This allows the building owner to have a much better understand of how long the building will last and more importantly how much of the building depreciation can be reported to the IRS.

Bonus depreciation is where the serious tax deductions come into play. Now that you have your itemized engineering-based cost segregation report in hand. The IRS gives you the option to take a large portion of the depreciation on items that last less than 20 years in the first year you put the property into service. This means that you don’t have to wait 20 years for the paint to peel off the walls to save money on your taxes. This has been huge for commercial real estate investors, but it just got better. For property that was purchased after 9/27/17, the IRS now allows you to take 100% of the depreciation in the first year on items that last less than 20 years. This is how the investor in the example above was able to write off $129,600 in the first year on a $400,000 investment purchase. Not only can you write off this massive depreciation in the first year, but you can carry it forward if you don’t need it immediately. Who doesn’t need money saved in their back pocket for the IRS? The crazy thing is that there is one more part of the new tax law that may be even bigger.

Opportunity zones have been identified across the US to help stimulate economic growth in areas of need. To incentivize this economic growth, the IRS is allowing businesses and investors to purchase commercial real estate now and then defer their capital gains, or not pay any capital gains at all if you hold the property for at least 10 years. Here is link to the opportunity zone map and yes, downtown Bellingham, WA in an opportunity zone.

What do you need to do to move forward? First contact a company Cost Segregation Authority. Then consult with your accountant and look for your next commercial real estate investment.

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