Investing in cash-flowing commercial properties can be highly lucrative, and as 2024 approaches, there’s a valuable opportunity to leverage 2023 depreciation for substantial tax savings. Depreciation, a powerful tax tool, allows investors to reduce their taxable income on income-generating properties. Here's how commercial property owners can maximize their deductions in 2024 through strategic depreciation.
1. The Appeal of Cash-Flowing Commercial Properties
Commercial properties—including office buildings, industrial warehouses, multi-family complexes, and retail centers—are prime assets for cash flow. Here’s why they make a great investment:
- Reliable Income Streams: Well-leased commercial properties offer consistent cash flow through long-term tenants.
- Appreciation Potential: In growing markets, commercial assets tend to appreciate, enhancing the property’s long-term value.
- Scalability: Unlike single-unit properties, commercial assets can provide multiple income sources within a single property, reducing vacancy risk and increasing revenue stability.
2. Why Depreciation Matters for Commercial Properties
Depreciation allows owners to deduct a portion of the asset’s cost each year, spreading it over the property’s useful life. While this reduces taxable income annually, it also provides additional strategic tax advantages:
- Cost Segregation Studies: By separating property components—such as fixtures, mechanical systems, and land improvements—from the building structure itself, investors can accelerate the depreciation of certain assets. This technique enables large deductions within the first few years of ownership, increasing tax savings sooner.
- Bonus Depreciation: Available for qualified property improvements, bonus depreciation lets owners deduct a significant portion of eligible expenses in the first year. Even though bonus depreciation phases down after 2023, owners can still take advantage of it with new purchases or improvements in 2024.
3. Strategies for Maximizing 2023 Depreciation for 2024 Deductions
- Accelerated Depreciation on Improvements: Renovations or upgrades to commercial properties in 2023 could qualify for accelerated depreciation. Make sure improvements are classified properly to maximize deductions in 2024.
- Qualified Improvement Property (QIP): Certain interior improvements to non-residential commercial properties qualify for a 15-year recovery period. Bonus depreciation is also an option for QIP, making tenant fit-outs or modernizations a tax-efficient strategy.
- Retrospective Adjustments: The IRS allows property owners to adjust prior-year depreciation schedules if they missed maximizing deductions. This "lookback" strategy can result in a tax refund, providing additional cash flow in 2024.
4. Prepare for 2024 with Proactive Tax Planning
Maximizing depreciation in commercial real estate isn’t just about reducing tax liability. These strategies free up funds that can be reinvested to grow your portfolio. Key benefits include:
- Increased Cash Flow: Tax savings generated through depreciation allow owners to reinvest in new properties, tenant improvements, or property management.
- Enhanced Asset Value: With extra funds available, you can invest in high-value property enhancements that attract quality tenants, potentially allowing for higher rents and greater property appreciation.
- Competitive Leasing Terms: Tax savings can provide flexibility to offer favorable lease terms, helping you maintain high occupancy rates and attract long-term tenants.
At Sage Street Realty, we understand the importance of leveraging every opportunity to increase cash flow and reduce tax burdens for our investors. By strategically maximizing depreciation on commercial properties, you can keep more of your earnings working for you in 2024. Our team is here to help you make the most of your commercial property investments and guide you in navigating these valuable tax benefits. Reach out to us to learn more about how Sage Street Realty can support your investment goals with expertise and resources for success.
