What are the Tax Benefits for CRE Investors?
When you invest in real estate, getting the tax breaks you need isn’t always easy. The simplest way is to purchase direct ownership of a property. However, that’s not an option for everyone. For the commercial real estate investors looking to expand their portfolio, there are a few ways to lower your tax expenses through crowdfunded equity investment.
How Crowdfunding Equity Works
With crowdfunding, you can invest in real estate by creating a small shareholder group. You can effectively invest in shares of a property, commercial or residential, and split the portions of the rental income. Additionally, you can create an LP or LLC for each investment. This creates a pass-through partnership, separating your personal finances from your crowdfunded investment.
A great way to reduce taxable income is to claim depreciation for your investment. Because of the way equity regulation works in an LLC or similar structure, each investor can claim a share of the depreciation deduction, lowering personal income taxes. Additionally, depreciation and maintenance costs can be used lower taxable income accrued by the commercial real estate investment.
Loan Interest Write-Offs
Another viable source of tax deductions is through mortgage loan interest. Loan interest payments are subtracted from rental returns; taxable income is all that remains. Under an LLC or LP structure, interest expenses are passed through to the individual investors, offsetting their personal income. When combined with depreciation, you can see some significant deductions on your tax return. At the same time, interest deductions increase overall return on investment returns while limiting tax burdens.
Lower Rates for Passive Activity
Commercial real estate investors who play a passive role in the business transactions involving the property pay a lesser rate on income generated by “passive activity.” This means they didn’t play a material role in the business decisions regarding the property. Passive activity is taxed at a marginal rate, lower than standard income and capital gains rates. As a passive participant, you can still have a hands-on role in your rental business and generate income, all while paying a more favorable rate.
Long-Term Capital Gains
Most real estate holdings are long-term investments, meaning you pay a more favorable capital gains rate. And like any equity, you do not pay until it is sold. If you invest in a property for 10 or 20 years, you do not pay capital gains tax until you sell.
Speak to a financial advisor to learn more about how you can limit your income taxes through crowd-shared commercial real estate investing.