Unlike stocks or bonds that tie you to fixed tax treatments, commercial real estate is inherently tax-efficient.
It allows you to use strategies like accelerated depreciation and mortgage interest deductions, among others, to reduce your taxable income and increase your net returns.
But to maximize their benefits, you need to understand how they work and apply them correctly.
Below are some of the most common ways that you can use commercial real estate to reduce your tax liabilities while building long-term wealth, straight from the playbook of high-income investors.
Depreciation deductions
Like any physical asset, your commercial properties lose value over time as they age — but you can use that to your advantage, because the IRS allows you to offset this natural decline in value by taking annual depreciation deductions.
Currently, commercial buildings can be depreciated over 39 years.
So if you purchase a $5 million commercial property, you can claim roughly $128,000 in depreciation each year. This deduction can meaningfully lower your taxable income and increase your net returns.
Non-mortgage tax deductions
Beyond mortgage interest, you can take advantage of several other deductions that lower your taxable income.
These include deducting repairs and maintenance costs, as well as commercial property management fees, from your rental income.
Additionally, deductions apply to:
- Travel expenses for property visits, including lodging and 50% of meal costs during business-related trips.
- Education and professional development expenses, such as the seminars and conferences you attend, as long as they’re related to real estate investment.
Keep in mind that major property improvements (such as remodeling units or upgrading structural systems) do not qualify as immediate deductions.
Instead, these costs must be depreciated over your property’s useful life, allowing you to spread the deduction across multiple years.
Tax deductions from interest expenses
One of the strongest tax advantages in commercial real estate is that you can deduct the portion of your loan payment that goes toward interest each year.
For example, if your monthly mortgage payment is $10,000 and $2,000 of that amount represents interest, you can deduct approximately $24,000 for that year.
This benefit can be particularly meaningful when you are using higher-interest financing, such as a construction or commercial bridge loan, since the deduction amount grows with your interest payments.
Reduce the tax burden for your heirs
The tax advantages of commercial real estate extend beyond your lifetime — they can also benefit your heirs.
When you pass down a property, its taxable value is usually reset to the market value at the time of inheritance. This step-up in basis can reduce or even eliminate capital gains taxes if your heirs decide to sell.
Suppose you purchase a commercial property for $3 million and its value increases to $4.5 million by the time of your passing.
Thanks to the step-up in basis, your heirs wouldn’t owe capital gains tax on that $1.5 million increase. They’d only be taxed on any appreciation beyond $4.5 million if they decide to sell.
With this adjustment, your heirs can save them hundreds of thousands or even millions of dollars in potential capital gains taxes — and this is why many high-income investors use commercial real estate for long-term wealth preservation and estate planning.
Take advantage of losses
Under certain conditions, even a loss can have financial advantages. You can use real estate losses to offset taxable income and manage your overall tax exposure.
However, the IRS limits how much of that loss you can claim based on your taxpayer classification:
- If you earn $100,000 or less per year – You can deduct up to $25,000 in real estate losses from your taxable income. Let’s say you earned $90,000 and recorded $25,000 in losses. Your taxable income would drop to $65,000. Though the benefit gradually phases out, you can take a partial deduction when you earn between $100,000 and $150,000.
- If you qualify as a real estate professional – Those recognized by the IRS as commercial real estate professionals face no cap on deductible losses. To qualify, you must spend at least 750 hours annually in real estate-related work — such as being a property manager, broker, agent, or active investor — and spend more time in real estate than in any other occupation.
- If you earn more than $150,000 per year – In this income bracket, you cannot typically deduct real estate losses against your income. However, losses may still carry forward to offset future gains, depending on IRS rules and your tax strategy.
Because of the potential advantages, some investors transition to full-time property management or designate a spouse as a full-time real estate professional.
If you do that, your household can access unlimited loss deductions and maximize after-tax returns.
Get qualified business income deductions
While complex to calculate, the Qualified Business Income (QBI) deduction can be another tax-saving opportunity for you.
It can help you reduce your taxable income by up to 20%, including income from passive real estate investments, if you meet the IRS requirements.
However, the deduction is limited to the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages paid plus 5% of the depreciable basis of the property.
Most commercial real estate investors rely on the second formula, especially when properties are held through special-purpose entities with little or no staff.
Keep in mind that income from property sales (capital gains) does not qualify.
The QBI deduction only applies to ongoing income from rental operations or property management.
CRE tax benefits vs. retirement IRAs
Commercial real estate provides a unique tax advantage compared to traditional retirement accounts.
When you sell a property, your profits are typically taxed at the capital gains rate, which is generally lower than the personal income tax rate that applies to withdrawals from a traditional IRA.
This lower rate lets you retain more of their earnings when exiting a property.
However, this benefit does not extend to Roth IRAs, since those withdrawals are already tax-free.
The key difference lies in timing. Commercial real estate gives you greater flexibility for deferring and minimizing taxes through strategies like depreciation and 1031 exchanges, while IRAs primarily offer tax advantages during contributions and withdrawals.
Tax credits – LIHTC, NMTC, and HTC programs
Beyond deductions, you can also benefit from federal tax credit programs designed to encourage socially beneficial projects.
With the Low-Income Housing Tax Credit (LIHTC) program, you can get dollar-for-dollar tax reductions for investments in qualified affordable housing developments.
In some cases, these projects can also qualify for the Opportunity Zones program, combining both incentives for even stronger returns.
Other major credit programs include:
- Historic Tax Credit (HTC) – Offers credits based on eligible expenses used to restore historic buildings for commercial or mixed-use purposes.
- New Markets Tax Credit (NMTC): Grants tax credits when you fund commercial projects in low-income or economically distressed communities.
1031 exchanges to defer capital gains
One of the most effective ways to defer capital gains taxes while growing your portfolio is through the 1031 exchange.
With this strategy, you can sell a property and reinvest the proceeds into another ‘like-kind’ property.
The replacement property must be of equal or greater value, and you have to complete the transaction within specific time limits defined by the IRS.
Take note that ‘like-kind’ doesn’t mean identical, so you can exchange one type of commercial property for another, such as a mixed-use building for a retail center.
While a 1031 exchange defers taxes rather than eliminating them, you can continue using this strategy indefinitely. By reinvesting in new properties after each sale, you can compound your equity and postpone paying capital gains taxes for as long as you continue exchanging.
Need capital for commercial real estate?
Expand your portfolio or start a new project with the financing options from a direct commercial lender, such as our team here at Private Capital Investors.
You can apply for funding directly on this website or call 927-865-6206 to learn more about how we can tailor our loan programs for you.
FAQs on how to use commercial real estate to defer taxes
What tax benefits can I get by investing in commercial real estate?
The main tax benefits of investing in commercial real estate include:
- Accelerated depreciation – Allows you to deduct the cost of your property over a shorter period, improving cash flow and reducing taxable income
- Mortgage interest deduction – Lets you subtract interest payments on your commercial loan from your federal taxes.
- Inheritance-related perks – The step-up in basis for your heirs ensures that inherited property is taxed only on the appreciation that occurs after inheritance. So, it helps preserve more wealth in your family for generations.
How can I maximize the tax benefits of investing in commercial real estate?
You can get the most out of real estate’s tax benefits by taking advantage of depreciation deductions. The IRS currently allows you to depreciate commercial buildings over 39 years.
For example, a $5 million commercial property generates roughly $128,000 in annual depreciation, which can be deducted each year.
Beyond that, you can combine mortgage interest deductions with heir-related advantages and accelerated depreciation strategies to further lower taxable income.
How can I reduce my tax liability when investing in commercial real estate?
You can lower your tax liability by taking advantage of all available deductions, including expenses related to travel and employee wages.
It’s also possible through a 1031 exchange that lets you reinvest profits from a property sale into another qualifying investment without immediate tax consequences.
