If you are thinking about purchasing commercial property, there are several items that we discuss often with our clients. These are the three more common items raised during our discussions:
- Entity structure
- Different options depending on tax benefits, liability protection, and operational efficiency (usually, LLC or partnership for Real estate investments)
- Purchasing options (Cash flow)
- Finance – Finding finance from a normal financial institution or SBA products. If you are purchasing the building or commercial space that you already rent, you might have additional products available (i.e. going from tenant to owner of your commercial space)
- Seller’s finance – Lately due to the high interest rates, we have seen more and more seller’s finance in Real estate transactions. However, get your lawyer involved as we have seen red flags in many of the finance agreements in the early negotiation stages.
- Cash – If you have the liquidity and your return on those funds are lower than the interest rates charged on financing, it might be an option as far as your business cash flow allows it.
- 1031 exchange – option of deferring capital gains taxes by reinvesting proceeds into a like-kind property (even partially from a previous sale of real estate if you meet the 1031 requirements)
- Taxation
- Tax credit and incentives such as opportunity zone (Federal level) or Keystone Opportunity Zones (in PA) or similar names (State and local level)
- Cost segregation – accelerate depreciation on certain components of the property, like fixtures and equipment, resulting in significant tax savings. Instead of depreciating in 39 years for commercial properties, it could be five, seven or fifteen
- 179D Deduction – also, known as Energy-Efficient Commercial Buildings Deduction, is a tax incentive in the United States designed to encourage energy efficiency in commercial buildings. You could deduct up to $5.00 per square foot of the property, depending on the energy efficiency improvements and the year of qualification.
- Investment tax credit – a U.S. federal tax incentive designed to encourage investment in certain types of assets, particularly those related to renewable energy and energy efficiency. Up to 30% for projects starting construction between 2022 and 2032. This tax credit requires the IRS form 3468.
Note that this is not a comprehensive list, and you should have done your due diligence in certain areas like return on investment, tenant background check, type of lease agreement (i.e. triple net), etc.
Check with our CPAs and tax professionals for guidance tailored to your case.
