What Is A Commercial Real Estate Depreciation

What Is A Commercial Real Estate Depreciation
by Kevyn Pitts - September 16, 2021

Commercial real estate depreciation is a significant tax advantage available to qualified commercial real estate owners. The Internal Revenue Service (IRS) permits eligible owners of commercial real estate investments to decrease their tax bill by depreciating the value of their property over a predetermined period of time, similar to how ordinary business tax deductions work. Depreciation is just as significant to many real estate investors as the cash flow and potential increase in market value that a property generates. Read the complete blog to know what is commercial real estate depreciation and its benefits.

Benefits Of Commercial Real Estate Depreciation

Despite the fact that the name "depreciation" implies a loss, it is actually a significant gain for commercial real estate investors and a major reason why individuals invest in real estate. Here's an illustration of how the straight-line depreciation method for commercial property works:

  • The building is barely worth $1 million.
  • $1 million / 39 years = $25,641 annual depreciation deduction
  • $225,000 in taxable revenue – $25,641 in depreciation expense = $199,359

Not only has the investor's taxable income been decreased, but the tax rate has also changed from 32 % to 24% percent as a result of commercial real estate depreciation.

Examples Of Commercial Real Estate Depreciation

The term "commercial real estate" refers to physical structures that represent a variety of industries. Given below are a few examples of commercial real estate properties:

  • Supermarket
  • Self-storage
  • Motels
  • Hotels
  • Warehouses
  • Restaurants
  • Hospitals
  • Casinos

Properties That Can Be Depreciated

Given below are the properties that can be depreciated:

  • The rental property was put into service, after 1986
  • Residential income property, such as a duplex or triplex, and multifamily property, such as a duplex or triplex (depreciated over 27.5 years)
  • Commercial real estate that is either owner-occupied or income-producing (39 years)

If you are also interested in becoming a commercial real estate developer, we have got you covered. Take a look at the complete guide on how to become a commercial real estate developer with Prudential Cal.

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