The office market crash is coming, and it’s going to be brutal. Commercial real estate values in America’s biggest cities are taking a nosedive as remote work reshapes our world. NYC offices could lose nearly half their value by 2029!
From our experience, one of the most overlooked factors in protecting long-term gains and reducing exposure to unexpected liabilities is understanding the tax implications of different commercial real estate structures. What’s more, it’s also essential for survival.
This guide breaks down exactly how your investment structure affects your bottom line, helping you minimize what you pay to Uncle Sam while maximizing returns in an increasingly challenging market.
We’ve previously explored the real estate opportunity fund structure as a potential shield against market volatility. This article bridges the gap between that topic and our upcoming piece on capital stack organization in commercial real estate deals.
Both supplement our comprehensive resource on commercial real estate investment structures, giving you a complete tax optimization toolkit for 2025 and beyond.
Read on!
Short Summary
- Commercial real estate investment structures like LLCs, partnerships, corporations, and REITs each carry unique tax implications.
- Pass-through entities like LLCs and partnerships allow income to flow directly to investors, avoiding double taxation.
- The Tax Cuts and Jobs Act significantly impacted the commercial real estate sector, especially with changes to depreciation and deductions.
- Property owners can reduce taxable income through smart strategies like cost segregation studies, interest expense tax deductions, and claiming property management expenses.
- Capital gains tax rates vary depending on holding periods and entity type, but tools like 1031 exchanges can help defer capital gains taxes.
- Investors may qualify for tax incentives such as the New Markets Tax Credit Program, Opportunity Zone benefits, and historic tax credit options.
Understanding Tax Implications Of Different Commercial Real Estate Structures
Before choosing how to set up a commercial real estate investment, it’s important to know how each structure impacts your taxable income, liabilities, and long-term returns. Some setups give more flexibility, others offer better protection, or bigger tax bills.
LLCs, Partnerships, Corporations, And REITs: What They Really Mean
Most commercial property investors go with either an LLC, a partnership, a corporation, or a REIT. Here’s the basic breakdown:
- LLCs (Limited Liability Companies): These are super popular with investors who want personal liability protection and pass-through taxation.
- Partnerships: Similar to LLCs, but used more in joint ventures. Partners split profits and pay taxes on their share.
- Corporations: These get hit with entity-level taxation unless you’re talking about S-Corps, which can pass profits to shareholders.
- REITs (Real Estate Investment Trusts): They’re great for spreading investment across big portfolios. REITs don’t pay federal income taxes on most income if they distribute 90% of profits to investors.
We’ve seen people jump into C-Corp structures to attract institutional capital. Problem is, the tax liability often eats into cash flow. One setup doesn’t fit all; structure impacts how much you pay in income taxes, capital gains, and even on rental income.
Pass-Through Vs. Entity-Level Taxation
Say someone owns a small multi-tenant building through an LLC. Their rental income, expenses, and depreciation deductions flow to their personal return. Compare that to a C-Corp owner who pays corporate tax, then gets taxed again on dividends.
That’s the “double tax” scenario.
How The Tax Cuts And Jobs Act Shook Things Up
The Tax Cuts and Jobs Act changed the game. We’ve worked with setups where the 20% Qualified Business Income (QBI) deduction saved folks thousands. It gave pass-through entities a major boost in tax efficiency, especially for those in commercial real estate investing.
Basic Tax Treatment By Structure
Here’s a simple comparison:
| Structure | Taxation Type | Key Benefits | Key Considerations |
| LLC | Pass-through | Flexible, personal liability protection | May require self-employment tax |
| Partnership | Pass-through | Good for joint ventures | Shared liability unless limited |
| C-Corp | Entity-level | Attractive to large investors | Double taxation risk |
| REIT | Entity-level (with exception) | No tax on most income if 90% distributed | Must meet compliance rules |
When deciding on your setup, don’t just think about today’s savings. Think about future sales, capital gains tax, and how to defer capital gains taxes later. Always consult a qualified tax professional. The right advice upfront can shape your whole investment strategy.
Essential Tax Deductions For Commercial Property Owners
Knowing what to deduct, and how to do it, can seriously lower your tax burden as a commercial real estate investor. A few smart moves can offset a large portion of your taxable income and improve overall cash flow.
Depreciation Strategies For Commercial Buildings
A commercial building wears down over time, and the IRS lets you account for that through depreciation deductions. Most commercial buildings are depreciated over 39 years.
But here’s the kicker:
Let’s say someone owns a warehouse. Instead of spreading out the write-off evenly for decades, they might apply a cost segregation study. That allows faster depreciation of certain components like flooring, lighting, or HVAC systems.
In some cases, that can create six figures of savings in the first year alone.
Interest Expense Tax Deductions On Commercial Mortgages
Mortgage payments aren’t fully deductible, but mortgage interest deductions are. So, if you’re paying down a large commercial mortgage, the interest portion might qualify as a write-off. It’s a big win, especially with higher interest financing.
For example, if a property owner took out a $2 million mortgage with a 7% interest rate, the first year’s interest expense tax deductions could reduce their investor’s tax bill by thousands.
Property Management Expenses And Maintenance Costs
Here are a few typical write-offs tied to running a commercial real estate operation:
- Property management expenses, including certain software or staffing fees
- Routine maintenance costs like HVAC repairs or elevator servicing
- General property repairs that keep things rentable
- Landscaping, janitorial services, and many other operating expenses
These help lower income taxes by reducing taxable income, especially for properties with heavy upkeep needs.
Cost Segregation And Its Impact On Tax Liability
A proper cost segregation study breaks your property into different asset classes. That can accelerate depreciation and reduce your current-year tax liability.
We’ve seen investors who bought office parks take advantage of this and dramatically improve their real estate tax strategy. In those cases, it freed up capital for upgrades or even new purchases.
Work with an experienced tax professional when structuring deductions. The wrong approach could trigger audits, or leave deductions on the table.
Capital Gains Considerations For Commercial Real Estate Investment
When it’s time to sell a property, understanding capital gains rules can make or break your return. From holding periods to tax deferral tools, a few well-timed strategies can shrink your tax liability and stretch your profits.
Capital Gains Tax Rates By Holding Period
Capital gains tax rates depend heavily on how long you’ve held the asset.
Sell in under 12 months? That’s short term capital gains, and you’ll pay federal income taxes at your ordinary rate.
Hold for more than a year? You’re looking at long-term capital gains, typically taxed at 15% or 20%, depending on your income bracket.
For example, an investor flipping an office space in just 9 months would pay significantly more in taxes than one holding it for 18.
Defer Capital Gains Taxes Through 1031 Exchanges
A 1031 exchange is one of the best tools in commercial real estate investing. It allows you to defer capital gains taxes by rolling profits into another commercial property.
Here’s how it works in real life: imagine someone sells a retail strip center and reinvests the proceeds into a warehouse within the required 180-day window. That move keeps their gains growing tax-free, at least for now.
Depreciation Recapture Tax On Sale
If you’ve claimed depreciation deductions, you’ll likely owe depreciation recapture tax when you sell. It’s taxed at a flat 25% rate.
Let’s say someone took $400,000 in depreciation on a building. Upon sale, that $400K gets taxed separately from the gain. If not planned for, it can surprise even seasoned real estate investors.
How Structure Affects Capital Gains Treatment
Your entity structure plays a huge role in how much you pay.
- An LLC or partnership often allows pass-through taxation, meaning capital gains show up on your personal return.
- A corporation could mean double taxation. First at the corporate level, then again on dividends.
- A REIT passes gains directly to shareholders, who then report it on their own returns.
To reduce your tax burden, it’s worth mapping out exit strategies long before a sale. A qualified tax professional can help design a plan that keeps your investor’s tax bill in check.
Tax Incentives And Credits That Enhance Investment Returns
Smart investors don’t just focus on cash flow. They also know where to find hidden tax benefits.
A few federal programs can dramatically improve your return, especially if you know how to navigate the rules and match them to your commercial real estate investment structure.
New Markets Tax Credit Program (NMTC)
The New Markets Tax Credit Program is designed to encourage private investment in low-income communities.
- Investors can receive a tax credit worth 39% of the investment over seven years.
- Eligible projects include everything from mixed-use developments to health clinics.
We’ve seen developers create funding stacks using NMTCs to rehab old industrial sites in underserved areas, resulting in strong returns and community impact.
Historic Tax Credits And Qualifying Properties
Preserving history can pay off—literally. The historic tax credit offers a 20% tax credit based on qualified rehab expenses for certified historic structures.
- To qualify, the building must be income-producing and listed on the National Register of Historic Places.
- Credits can be applied against taxable income, boosting profitability without relying on rent hikes.
An investor, for example, might take on an old courthouse conversion and offset six figures in taxes over a few years using this program.
Opportunity Zone Benefits From The Jobs Act
The Jobs Act introduced Opportunity Zones, which give real estate investors a unique chance to reduce or eliminate capital gains tax on reinvested profits.
- Hold for 5 years? Exclude 10% of gains.
- Hold for 10 years? Pay zero capital gains tax on new appreciation.
This makes it ideal for patient investors building equity in emerging neighborhoods.
Matching Structures To Tax Incentives
Not every entity can use every incentive equally. For example:
- LLCs and partnerships can often allocate credits to members or partners.
- Corporations may need to structure deals to avoid losing the benefit to entity-level taxation.
- REITs face strict rules but can participate through specialized vehicles.
Before investing, we recommend walking through each scenario with an experienced tax professional. That small step can have a big impact on your long-term tax outcomes.
Final Thoughts
Understanding the tax implications of different commercial real estate structures can make or break your investment strategy. From choosing the right entity to taking advantage of incentives, every detail matters.
We’ve walked through the essentials, from capital gains considerations to deductions and credits, so you’re better equipped to make smart, tax-savvy decisions.
Got questions or planning your next move? Check out our homepage for more practical insights and helpful tools to support your investing journey.
Frequently Asked Questions
What’s The Best Structure For A Commercial Real Estate Investment?
It depends on your goals. LLCs are popular for liability protection and tax flexibility, while REITs are better suited for passive investors seeking regular dividends.
How Can I Defer Paying Capital Gains Taxes On A Property Sale?
You can use a 1031 exchange to reinvest proceeds into another property, which allows you to defer capital gains taxes under current tax laws.
Are Cost Segregation Studies Really Worth The Effort?
In many cases, yes. A cost segregation study can accelerate depreciation and reduce your tax burden, which means improved cash flow in the earlier years of ownership.
Can I Still Claim Deductions If My Commercial Property Is Vacant?
Yes, as long as it’s available for rent or being actively marketed. You can typically still deduct maintenance costs, property tax, and other operating expenses.
