If you're a real estate investor or commercial property owner, one of the most valuable tax deductions is depreciation. While the concept of depreciation may not be foreign to most, it can become exceptionally complicated when coupled with taxes and commercial real estate. However, the IRS offers helpful guidelines to make depreciation-related deductions on business real estate easier and more transparent.
At the MB Group, we are a team of experienced CPAs who specialize in helping business owners, business developers, real estate developers, and real estate investors capitalize on depreciation-related deductions on business real estate. Although everyone's situation may be different, we've created an easy-to-read guide and introduction to depreciation-related deductions on business real estate. Continue reading to learn more and don't hesitate to reach out to our team for a personalized strategy.
Depreciation Schedules for Real Estate
Real estate depreciation is the process of deducting the cost of purchasing an income-generating property over several years. In fact, real-estate depreciation is arguably one of the most important benefits of real estate. And it's important to understand that real estate depreciation does work differently than depreciating non-real estate assets.
Investors may be able to depreciate the cost of the structure — but not the land — over the property's useful period. However, there is no surefire way of determining how long the income-deriving property will be usable. Because of this, the IRS has developed standard periods for depreciation:
- Commercial real estate can be effectively depreciated over a 39-year period
- Residential real estate can be depreciated over a period of 27.5 years
Simplified Real Estate Depreciation
While depreciation-related deductions on business real estate can be very complex, a simplified example would be if you bought an office building and land for $1 million. Once appraised, the land comes back at around $200,000, which means the building has a value of $800,000. If you were to depreciate this amount by 39 years (the amount of time a commercial property can be depreciated), you would arrive at $20,513 annually.
This amount represents your depreciation expense for each year you own the property. The IRS offers guidelines on how to prorate the depreciation deduction during your first full year. You will be able to continually take depreciation-related deductions on commercial real estate for every year until your entire cost basis of the property has been depreciated or when you sell the property.
Updates to Tax Laws Create Unique Opportunities
If you own commercial real estate or business real estate, it behooves you to work with an experienced real estate accountant. Failure to do so may result in you missing out on extremely valuable depreciation-related deductions for business real estate. Here are two examples of depreciation-related deductions on business real estate that can impact your bottom line.
For example, did you know that under Section 179 of the Tax Cuts and Jobs Act (TCJA) you may be able to deduct the entire cost of eligible business property in the first year you place it into service up to $1 million? For real estate owners, "eligible business property" can include different improvements you make to the inside of a nonresidential building as long as the improvements are placed in service after the building was. The TCJA greatly extends the types of improvements that are covered to include:
- HVAC Systems
- Security Systems
- Fire and Alarm Systems
At the same time, certain improvements and lodgings may also be covered under Section 179, such as
- Equipment utilized in the living quarters of a facility used for lodgings, such as a dormitory, apartment house, or other facilities where accommodations for sleep are provided and rented out
For property that qualifies placed in service from 9/28/17 - 12/31/22, the Tax Cuts and Job Acts bolsters the 1st-year depreciation bonus percentage from 50% up to 100%. This bonus depreciation includes both used and new qualifying property. All qualified improvement property includes
- Qualified retail improvement property
- Qualified restaurant property
- Qualified leasehold improvement property
Contact the MB Group to Maximize Depreciation-Related Deductions on Business Real Estate
As one of the valuable tax deductions for businesses and real estate investors, it's imperative to maximize all depreciation-related deductions on business real estate. However, when it comes to understanding the complex rules and regulations surrounding different depreciation deductions, it's often easier said than done. To make matters even more complex, these laws tend to regularly change.
Because of all of the nuances and changes to depreciation-related deductions on business real estate, it makes dollars and cents to partner with the experienced CPAs at MB Group. We will work closely with you to minimize your tax liability, maximize your returns, and help you achieve your strategic goals.
Contact MB Group today to learn more about depreciation-related deductions on commercial and business real estate.