A Guide On Tax Breaks for Commercial Real Estate Properties in Lee County
Investing in real estate is a massive undertaking with great risk, but also great reward. Real estate (and real property) is something that is easily passed down, will always have value, and can easily bring in revenue if you play your cards right.
Property in Florida is always a good investment, especially if you’re looking to purchase a commercial property for sale in Lee County, FL. As one of the state’s fastest-growing areas, commercial real estate in that area and all over Florida is an investment that you won’t regret. The tax breaks that you can get on your investment property aren’t bad either!
Why Now Is A Good Time To Invest
Now, more than ever is a great time to jump in on the real estate investment game. While interest rates have been climbing over the past few months, they are still some of the lowest rates in recent history. Before the interest rates start climbing again, it’s a good idea to take a look at some of the properties you might be interested in investing in.
Plus, rent is climbing nationwide. If you’re interested in purchasing an investment property to rent it out to others, it’s a good opportunity to do so now. In addition, depending on where you purchase your property, there might be extra tax breaks that you can take advantage of, whether that be with Lee County commercial real estate, commercial real estate in Cape Coral, or anywhere else in Florida.
Like so many things, including cars, electronics, and more, real estate also depreciates over time. This is due to age, wear and tear, features on the home becoming outdated, and more. As a result, you can claim a certain percentage of depreciation on your taxes each year over time.
If you’ve invested in a commercial building, then according to the Internal Revenue Service (or IRS), your building can depreciate over a 39-year period. If you’ve invested in a residential building instead, then that residence can depreciate over a 27.5-year period. However, if you’re looking to take a larger depreciation deduction, there are ways to depreciate your building faster!
For instance, you can order something called a cost depreciation study from an engineering firm and they can do a more comprehensive investigation of components in your property that will depreciate more quickly. Things in your property like electrical, plumbing, roofing, and more can increase the depreciation value if properly documented in one of these studies, leading to more tax breaks.
The important thing to note about depreciation deductions is that when you sell the property, you have to be careful about how much you sell the property for. If you sell it for more than the depreciated value, something called depreciation recapture will occur. For example, if you have a property that was originally valued at $500,000, and the depreciation value is $400,000, if you sell the property for anything over $400,000, that is when depreciation recapture will occur.
When depreciation recapture occurs, this means that the investor will have to pay their regular income tax rate on the property instead of the capital gains tax rate. The issue with this is that regular income tax rates are typically higher than capital gains taxes, leading to less profit. The more you depreciate your property, the more likely a chance that you will have to pay more in the depreciation recapture tax.
Interest Expense Deductions
Any interest that you pay on commercial property has the potential to be deducted from your federal taxes. For example, if you’re paying $5,000 a month in mortgage loans and $1,000 of that is interest, then you can deduct $12,000 from your taxes at the end of the year. This kind of tax break is especially helpful if you have a high-interest rate on a loan, like a construction loan. Speak with your mortgage lender or another tax professional to see if your commercial property for sale in Lee County, FL might qualify!
Tax Credit Programs
There are several different tax credit programs available that can reduce the amount of your taxes if you qualify and participate in them.
When it was created in 2017, the Opportunity Zones program was meant to help stimulate growth in lower-income communities throughout the United States. Participating in this program allows investors to defer capital gains taxes on qualifying properties until December of 2026 as long as they invest in an Opportunity Fund. Opportunity Funds invest in real estate in the Opportunity Zones. If investors hold their property in this Opportunity Zone for at least five years, they can qualify for an additional 10% break on their capital gains tax after the deadline of December 2026 has passed. Speak with your financial advisor and your realtor–there may be some commercial property for sale in Lee County, FL that qualifies!
LIHTC, HTC, and NMTC Tax Credits
The LIHTC, HTC, and NMTC are other tax credit programs that investors can participate in if their properties qualify.
The LIHTC is the Low Income Housing Tax Credit. This program allows qualified investors who have low-income properties to take advantage of a dollar-for-dollar tax deduction on their income taxes. This LIHTC credit can often be combined with the Opportunity Zones tax credit. The NMTC, or New Markets Tax Credit, is along these same lines. Qualifying investors can receive this tax credit for bringing new commercial property and business into low-income areas. Contact your local tax agency to see if any of your properties may qualify.
The final tax credit program is the HTC or the Historic Tax Credit. This tax credit program is a bit more niche, as it focuses solely on historic buildings. If you’re an investor that has purchased a historic property and renovated it for commercial purposes, then you might qualify for this tax break. Speak with your financial advisor before making any decisions!
Doing a 1031 Exchange in Florida is a business-savvy way to begin investing and generate revenue early on property investment. A 1031 Exchange is a way to invest in real property without having to immediately worry about the tax implications of that investment. In short, the 1031 program allows you to defer capital gains taxes when you purchase and sell a property.
However, it’s important to realize that certain deadlines must be met and certain requirements must be adhered to when completing a 1031 Exchange. You must have a new property picked out to purchase within 45 days after selling a property, and within 180, you must close on that new property. There isn’t a lot of time to wait around and dilly-dally when using this system!
It’s also vital to understand that in a 1031 Exchange, you do not hold the money. A third party, like an investment company or a specific 1031 Exchange company, will hold the money throughout the process and after.
There is no limit on how many of these exchanges you can do per year, but speak with your financial advisor on how best to proceed before making any decisions.
Finding What’s Best For You
Whether you’re looking for commercial property for sale in Lee County, FL, commercial real estate in Cape Coral, or any other real estate in Lee County, then Alec Salameh has got you covered. Our expertise here at Coldwell Banker in Fort Myers assures that you have the most accurate and up-to-date information about the real estate market that we can offer. Our expert team can help you find the best commercial property for sale in Lee County, FL, and direct you to the right professionals to assist you in getting the most bang for your buck.
If you’re interested in speaking with Alec Salameh here at Coldwell Banker in Fort Myers, then contact us today.