As tax season fast approaches, property owners need to be aware of exactly how to report the income and expenses of their commercial real estate property. While some of this seems fairly intuitive, it can be pretty overwhelming, with many property owners completely missing huge opportunities to save! It is important that property owners receiving rent understand that they are subject to pay tax by federal and state law, so we thought we would illustrate five key factors to be mindful of this coming tax season.
Owners can claim a number of items as deductions on their property taxes each year, including tax deductions in relation to ownership and maintenance expenses. These deductions can also pave the way for tax benefits and opportunities that many property owners are unaware of. Below, we go over some common deductions that all commercial property owners can use, as well as some of the benefits of depreciation and cost segregation—deductions that often go ignored by thousands of taxpayers every year!
Tax Deductions for Property Owners
1. Advertising Costs: Among the most common sources of tax deductions for commercial property owners are advertising costs. The cost of advertising property is tax deductible, and includes the costs incurred posting ads in newspapers, relevant publications, online advertising spend, advertising with agencies, and placing notices at strategic geographic locations.
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2. Interest: Bank charges, in the case of a loan, are another tax deductible expense. If you’re not sure the total amount spent on interest or fees, contact the loaner and ensure that they provide the proper documentation. These are loans that a property owner used to acquire or renovate property.
3. Repair Costs: Repair costs and not maintenance costs can be considered as tax deductions. Be sure to keep extensive documentation of any accidents or damages to the property that may require repair, and the receipts for the services rendered to repair the unit. It is important to note that costs made for property improvement are deducted when disposing of the property.
4. Depreciation: Segmented depreciation is one way that property owners can use in the first few years to increase their depreciation deductions. Cost segregation and depreciation can be assessed by professionals within the commercial real estate industry. These professionals provide a detailed report from a perspective of the commercial real estate market, engineering and construction concerns, and more. The idea is to locate every opportunity within the business to claim depreciation acceleration deductions on both your federal and state taxes, and can often be extended to equipment, furnishings, inventory, and more.
When accounting for depreciation costs, it is important to know which assets should be included and which should not be included for depreciation deduction. Tax law prohibits depreciation deductions on capital expenditure, including depreciation on fixed assets such as land. However, the property owner can claim special allowances to cater for the depreciation of some the capital assets. Capital allowances, renewals allowances, and wear and tear allowances are the three main types of special tax allowances that are depreciation deductable. There are always specific rules governing the application of these allowances since they do not apply to certain capital assets besides land, but these can often be confusing processes to filing your taxes.
For more information about commercial real estate tax benefits, visit Cost Segregation Simplified.