Commercial real estate has many advantages to go along with the increased work and responsibilities. The most prevalent ones concern the benefits incurred under income tax laws, where investors can use so-called 1031 Exchanges and depreciation to take advantage of real estate tax rewards. In this short piece, you will better understand the specific effects that asset depreciation of commercial real estate and 1031 Exchanges have on taxation.
CRE Investor and 1031 Tax Exchanges
As time wears on, a combination of increasing market values and the inevitable depreciation of physical assets can translate to exorbitant capital gains taxes once the property is sold. Since the different in value from the time of sale to the time of purchase is income, then you should expect a considerable tax bill – however, Section 1031 of the IRD Tax Code allows a sort of “loop hole”: if, instead of pocketing the cash, you use it to purchase another, similar property, the taxes can be deferred. The beauty of this method is that it is functionally illimitable; you can keep on doing this into perpetuity.
Of course, it means keeping your funds tied up in commercial real estate investments; but since the profits keep on growing without taxation, it could be a huge boon in the long run when you finally decide to sell for hard money. There are of course tax requirements and rules in Section 1031 that the CRE investor must satisfy and fulfill.
Since any physical thing depreciates, it loses value as time wears on. For the CRE investor, this represents an opportunity to benefit from tax breaks, if you report the annual depreciation as a business expense. Ultimately, this leads to taxable income that diminishes year-after-year, and amounts to big tax savings.
On the other hand, this depreciation, although it is an expense, doesn’t affect your cash flow and working capital. It functions, effectively, as the best of both worlds. Contact 360 Commercial Capital today to learn more.