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Investing in commercial real estate is a popular way for high net worth investors to reduce their tax liability. There are several tax benefits associated with commercial real estate, including depreciation, cost segregation studies, and bonus depreciation. In this article, we will discuss each of these strategies in more detail.
One of the primary tax benefits of investing in commercial real estate is depreciation. Depreciation is a tax deduction that allows investors to write off the cost of the property over a period of time. This deduction can significantly reduce the taxable income of investors, thereby reducing their tax liability.
Commercial real estate properties are generally depreciated over a period of 39 years for tax purposes. This means that investors can deduct a portion of the property's value from their taxable income each year for 39 years. The depreciation deduction can be especially helpful for high net worth investors who have a significant amount of taxable income.
Another tax benefit of investing in commercial real estate is cost segregation studies. Cost segregation studies involve breaking down the components of a commercial real estate property and classifying them into different categories based on their useful life for tax purposes. This allows investors to accelerate depreciation deductions on certain components of the property, such as building systems and fixtures.
For example, instead of depreciating a building over 39 years, a cost segregation study may identify certain components that can be depreciated over 5, 7, or 15 years. This can result in a significant increase in depreciation deductions in the early years of ownership, which can reduce the taxable income of investors.
Recent tax laws have made bonus depreciation available to investors in commercial real estate. Bonus depreciation allows investors to deduct a larger portion of the cost of a property in the year it is placed in service. The Tax Cuts and Jobs Act of 2017 increased the bonus depreciation percentage to 100% for assets placed in service after September 27, 2017, and before January 1, 2023.This means that investors can deduct the full cost of qualifying property, such as equipment and machinery, in the year it is placed in service. This can provide a significant tax benefit to investors, especially in the early years of ownership.
Investing in commercial real estate can provide significant tax benefits to high net worth investors. Depreciation, cost segregation studies, and bonus depreciation are just a few of the strategies that investors can use to reduce their tax liability. It is important to work with a qualified tax advisor to ensure that these strategies are being implemented correctly and in compliance with all applicable tax laws and regulations.
This is an interesting video because it highlights the tax benefits and how they largely benefit the wealthiest members of our society. Knowing about the tax codes is one thing, but actually taking advantage of them is something a lot of people never do. The end result is a lot of U.S. citizens pay more taxes than they need to which slows the growth rate of their savings.
Owning commercial real estate and writing off depreciation is the biggest secret of all.
This is a more serious video that covers the Tax and Jobs Act that our clients utilize to claim depreciation, record passive losses, avoid taxable events, and reduce their liabilities. There is a lot more to it than that, so we will let the industry experts explain it in detail. The video is 1 hour long.
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