Tax Advantages of Commercial Real Estate and Alternative Investments

Tax strategy isn’t just about saving money; it’s about building a foundation for long-term wealth. While paying taxes is our responsibility, commercial real estate (CRE) gives investors unique ways to reduce or defer their debts. The real advantage is knowing how to tap into these benefits, yet only a few know how to make the most of them. As an investor, understanding how to ease the tax load on your portfolio is vital to getting more out of every dollar.

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Successful investors care more than rental income and property appreciation; they take full advantage of real estate’s tax perks. From deductions and credits to clever deferrals, these benefits can significantly impact your returns and help you build lasting wealth.

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At Alliance CGC, we’ve helped countless investors navigate the complex tax landscape and maximize returns.

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Tax Considerations for Alternative Investments

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While traditional investments like stocks and bonds are taxed uniformly, alternative investments, such as real estate, art, and cryptocurrency, have unique tax implications.

• Real estate: Rental income and capital gains offer tax advantages, including deductions for depreciation and the possibility of using 1031 exchanges.
• Cryptocurrency: Digital assets are taxed on gains from sales, trades, or exchanges, making careful tracking essential. The evolving regulatory landscape requires proactive planning.
• Collectibles: Items like art and coins are taxed at a higher capital gains rate (up to 28%) compared to other assets, making strategic buying and selling crucial.

As you explore alternative investments, talking to a financial advisor and a tax advisor is wise. This way, you can understand the tax implications and how to maximize your returns clearly.

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How Is CRE Taxed?

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CRE can be an incredible way to build wealth, especially when you understand the tax benefits that come with it. The income you make from CRE usually comes in two forms: The cash flow generated by the property and the profit from selling it, known as capital gains. Each has its tax treatment, and understanding the difference can impact your returns.

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Income From Cash Flow

Let’s talk about the regular income you’re earning from your property first. This is the “net cash flow” — the money after covering all expenses like maintenance, management, and other costs. This income is treated like any other business income, meaning it’s taxed according to your personal income tax bracket. So, both the federal and state levels will want their share, just like they would from any other source of income. While this cash flow is the bread and butter of your investment, it’s taxed as ordinary income, which is something to keep in mind as you calculate your earnings.

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Profit From Appreciation (Capital Gains)

Now, moving on to the big payday — when you sell the property for more than you paid. That difference is your capital gain. Say you picked up a property for $2 million and eventually sold it for $3 million; you’re looking at a $1 million capital gain. But here’s the thing: Calculating your actual gain can get you more involved. Why? Because depreciation lowers the property’s value on paper over time and affects how much you’re taxed when you sell.

Capital gains are often taxed lower than regular income, which can be a massive advantage for you as an investor. These gains only get taxed when you sell, so understanding how the timing impacts your taxes can give you some serious leverage. Of course, consulting an industry professional is key — they’ll help you navigate these rates and ensure you’re set up to get the most out of your investment, just like Alliance CGC can do.

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Tax Advantages of CRE

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Depreciation

Depreciation is one of the most potent tax benefits in CRE. Even though your property may appreciate in market value, the IRS allows you to deduct a portion of its value annually over its "useful life." For commercial properties, this period is typically 39 years.

For example, if you purchase a building for $1.95 million, excluding the land’s value, you can claim an annual depreciation deduction of $50,000 ($1.95 million ÷ 39 years). This deduction reduces your taxable income, effectively increasing your after-tax returns.

However, depreciation comes with a caveat: recapture tax. When you sell the property, you’ll owe taxes on the depreciation claimed. Fortunately, the recapture rate is often lower than regular income tax rates, ensuring that depreciation remains a net benefit.

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1031 Exchange

While deductions like depreciation and mortgage interest can lower income taxes, they don’t apply to capital gains. That’s where a 1031 exchange comes in. Through a 1031 exchange, you can sell a property and reinvest the proceeds into another “like-kind” property without paying capital gains tax immediately. The process can be repeated as often as needed, allowing you to defer capital gains taxes indefinitely — potentially for a lifetime.

To qualify, you must follow specific guidelines, such as ensuring the new property has a similar or greater debt-to-equity ratio than the one you sold. Different types of 1031 exchanges — like-kind, delayed, reverse, and improvement — cater to various investor needs.

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Step-Up in Basis for Inherited Commercial Property

With a 1031 exchange, investors can defer capital gains taxes by reinvesting in another property. However, taxes will still be due whenever the property is sold eventually. But if you pass the commercial property on to your heirs instead, they gain a tax advantage known as a “step-up” on a cost basis. 

This step-up means the property’s value for tax purposes is reset to its market value at the time of inheritance rather than the original purchase price you paid. So, suppose your heirs decide to sell the property. In that case, they’ll only owe capital gains tax on any increase above this new, higher basis, potentially saving them a substantial amount in capital gains tax compared to what you would have owed.

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Mortgage Interest Deduction

If you’ve taken out a loan to purchase commercial property, you’re likely paying mortgage interest. Fortunately, you can write off these interest payments against your income. This deduction can be particularly valuable in the first few years of the loan when interest payments are highest relative to principal payments. However, it’s important to remember that these deductions aren’t always guaranteed, so consulting a tax professional can help maximize your savings.

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Nonmortgage Tax Deductions

CRE investors can also benefit from other tax deductions, covering repairs, maintenance, and property management costs. Travel expenses related to the property, like hotel stays and even some meals, may also be deductible.

These aren't immediate deductions for more significant improvements, such as renovations or new furnishings. Instead, they’re depreciated over the property’s useful life, adding a long-term tax benefit rather than a one-time deduction.

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Real Estate Tax Losses

If you incur losses on a commercial property, you might be eligible to use those losses as tax deductions. However, the amount depends on your income level:

• If you make up to $100,000 a year, you can typically deduct up to $25,000 in losses.
• If you make between $100,000 and $150,000, you may still claim deductions, though the amount is limited.
• Investors with incomes over $150,000 generally can’t claim these losses.

An exception exists if you’re classified as a “real estate professional” by the IRS. To qualify, you must work at least 750 hours a year in real estate at positions, such as property manager, broker, or agent. There’s no cap on deductible losses for qualifying professionals, making this a favorable route for full-time investors.

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Opportunity Zones

The Opportunity Zones program was established under the Tax Cuts and Jobs Act of 2017 to encourage investments in low-income communities across the United States. By investing in an Opportunity Zone Fund, you can defer eligible capital gains until the end of 2026. Plus, if you hold your investment for five to seven years, you’ll get a 10%-15% reduction in capital gains tax. Hold it for at least 10 years, and any gains on the Opportunity Zone investment are tax-free.

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Federal Tax Credit Programs

Certain federal programs offer tax credits for specific investment types:

• Low-Income Housing Tax Credit (LIHTC) provides a dollar-for-dollar tax deduction for investments in qualifying low-income properties. Sometimes, this credit can be combined with Opportunity Zone benefits.
• The Historic Tax Credit (HTC) offers credits based on eligible expenses for restoring historic buildings for commercial purposes.
• New Markets Tax Credit (NMTC) provides a tax credit for commercial projects in low-income communities.

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Qualified Business Income (QBI) Deduction

The QBI deduction, introduced by the Tax Cuts and Jobs Act of 2017, lets qualifying investors deduct up to 20% of their net rental income from pass-through entities, like limited liability companies (LLCs), S corporations (S-corps), partnerships, and sole proprietorships. A pass-through business is one where the income passes directly to the owner’s tax return rather than being taxed at the corporate level.

This deduction applies to active and passive investors who report income on a personal tax return. Unlike other deductions, it’s a significant benefit that reduces your taxable income but doesn’t affect your adjusted gross income (AGI). Because not all income qualifies, it’s best to consult a tax professional to understand eligibility and maximize your tax savings.

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Why Invest in CRE?

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• Stability and income: Unlike volatile stock markets, CRE generates consistent cash flow through rental income and appreciates steadily over time.
• Tax efficiency: Depreciation, mortgage interest deductions, and tax deferral strategies reduce tax burdens significantly, increasing net returns.
• Portfolio diversification: CRE offers a low correlation with traditional assets, balancing risk during market fluctuations.
• Long-term growth: With the right strategies, CRE investments compound wealth while offering unmatched tax advantages.

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Alternative investments, especially CRE, can offer a powerful way for investors to strengthen and diversify their portfolios. Unlike traditional assets like stocks and bonds, alternatives tend to have a lower correlation to broader markets, which means they’re less affected by stock market volatility. This quality makes them valuable for balancing risk, as they often remain steady even when traditional markets fluctuate. Additionally, alternatives typically offer a higher potential return, appealing to investors open to taking on some added risk in exchange for greater rewards. CRE stands out in this space because it appreciates over time and generates consistent income through rental payments, making it an attractive option for those focused on long-term, stable growth.

For investors seeking growth opportunities beyond the typical stock and bond markets, alternative investments, especially CRE, provide a balanced blend of stability, higher return potential, and diversification, making them an ideal addition to a well-rounded portfolio.

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Maximize Your Tax Advantage With Help From Industry Experts

Maximizing tax advantages and returns in commercial real estate requires more than just capital — it demands the guidance of a seasoned investment team. At Alliance CGC, we know how to unlock your investment's full potential strategically. Our experience across diverse, recession-resilient assets and our proven track record — 28% historical internal rate of return (IRR) and $500 million in assets under management — equip us to guide you through complex tax structures and unique investment strategies, helping you maximize the potential and advantages of every opportunity.

Partnering with Alliance CGC means accessing high-quality assets like medical offices, retail, and industrial properties that provide consistent income, tax efficiencies, and solid returns. Don’t miss out on the advantages you deserve. Let us help you build a resilient, profitable portfolio that grows and protects your wealth. Join Alliance CGC today and secure your investment advantage.

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