Commercial real estate (CRE) ownership offers substantial opportunities for wealth building, but navigating the tax landscape is crucial to maximizing returns. With evolving tax laws, including the One Big Beautiful Bill Act (OBBBA) of 2025, owners can leverage various deductions, credits, and strategies to minimize liabilities. This article outlines the tax savings tips, drawing from current IRS guidelines and industry best practices. Always consult a tax professional for personalized advice, as rules can vary by situation.
1. Conduct a Cost Segregation Study
Cost segregation accelerates depreciation by reclassifying building components (e.g., plumbing, electrical systems) into shorter recovery periods of 5, 7, or 15 years instead of the standard 39 years for commercial properties. This front-loads deductions, improving cash flow. For properties acquired or improved in 2025, combining this with bonus depreciation can yield even greater savings. Studies show potential tax deferrals of 20-50% of the building's cost in the first few years. Ideal for new purchases or renovations, but retroactive studies are possible without amending returns.
2. Leverage Bonus Depreciation
Under the OBBBA enacted in July 2025, 100% bonus depreciation is reinstated for qualified property placed in service after January 19, 2025. For assets before that date, it's 40%. This allows immediate expensing of items like machinery, equipment, or certain improvements, reducing taxable income significantly. CRE owners can apply it to personal property identified via cost segregation. Track phase-in dates carefully to time acquisitions and maximize deductions.
3. Utilize Section 1031 Like-Kind Exchanges
Defer capital gains taxes by exchanging one investment property for another of like kind. This strategy preserves equity for reinvestment without immediate tax hits. In 2025, rules remain intact, but strict timelines apply: identify replacement property within 45 days and close within 180 days. It's particularly useful for upgrading CRE portfolios. Note: Personal property exchanges were eliminated post-2017, so focus on real estate.
4. Claim the Qualified Business Income (QBI) Deduction
Section 199A provides a 20% deduction on qualified business income from pass-through entities like LLCs or S-corps. For CRE owners, rental activities qualify if they meet "trade or business" criteria (e.g., 250+ hours of activity annually). REIT dividends also get the 20% deduction without hour requirements. In 2025, this remains a key benefit, potentially slashing effective tax rates. Document activities meticulously to substantiate eligibility.
5. Deduct Mortgage Interest
Interest on loans secured by commercial properties is fully deductible as a business expense, reducing taxable income. With rising interest rates, this can be a substantial write-off. Limits apply for large loans (over $750,000 for some, but business debt is generally exempt from personal caps). Pair it with refinancing strategies to optimize rates and deductions. Track payments accurately to avoid IRS scrutiny.
Commercial real estate ownership can create wealth but requires understanding tax strategies to maximize benefits. Utilizing cost segregation studies, bonus depreciation, like-kind exchanges, the QBI deduction, and mortgage interest deductions can improve financial outcomes. With evolving tax laws, particularly under the One Big Beautiful Bill Act of 2025, staying informed and consulting tax professionals is essential for protecting investments and ensuring sustainable growth in commercial real estate.