The Benefits of Depreciation for CRE Investors by Kevin Sanz, CCIM, MSIRE

Posted on September 01, 2021

While investors often turn to commercial real estate for its appreciation potential, it is the annual depreciation of the property’s value that yields significant tax benefits. In fact, savvy investors recognize that depreciation deductions can be just as important as the income their properties generate.

Depreciation provides one of the most significant benefits to real estate investors because it allows them to write-off, or deduct as an expense, a percentage of a property’s decline in value over time (39 years for commercial property). Those deductions reduce reportable income, which, in turn, reduce investor’s annual tax liabilities. When make certain qualifying improvements to the interior portions of commercial properties placed in service since 2018, they may also take advantage of a first-year 100 percent bonus depreciation deduction that they may use to offset income and even create net operating losses investors may carry back or forward to other years. This bonus depreciation deduction (available through tax year 2026) may also benefit net lease tenants, such as restaurants and retailers, that complete large renovations or build out leased space.

A word of caution: claiming bonus depreciation may require hiring an expert to conduct a cost segregation study and separate out the component of the qualifying improvement property (QIP) from the costs of the building itself. However, these costs are miniscule when compared to the size of the depreciation deduction and tax refund investors can claim today rather than claiming much smaller amounts 30 years from now.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.