Unlocking Tax Benefits: The Advantages of Owning Your Business Property

Posted on September 26, 2024 by Oozle Media

For many business owners, the decision to purchase the building in which their business operates can be a
strategic move with substantial financial benefits. Beyond the immediate advantage of having a stable and
predictable location, owning your business property can offer a myriad of tax benefits that enhance your
overall financial health. From depreciation deductions and interest savings to property tax advantages and
equity growth, the financial incentives are compelling. Furthermore, structuring the ownership through a
separate LLC that you own can provide additional flexibility and control. By setting the rent paid by your
business to the LLC, you can optimize your tax strategy, balancing taxable income between entities and
maximizing your financial efficiency.

Depreciation Deductions

One of the most substantial tax benefits of owning a business property is the ability to depreciate the
building. Depreciation allows you to deduct a portion of the building’s cost over a set period, typically 39
years for commercial real estate. This non-cash expense can significantly reduce your taxable income
each year.

Example: If your building costs $1,000,000, you can deduct approximately $25,641 annually
($1,000,000 ÷ 39) from your taxable income, lowering your overall tax bill.

Interest Deductions

If you finance the purchase of your property, the interest paid on your mortgage is tax-deductible. This
deduction can be substantial, especially in the early years of your mortgage when interest payments are
higher.

Example: On a $1,000,000 mortgage with a 4% interest rate, you could deduct about $40,000 in interest
payments in the first year, providing a significant reduction in taxable income.

Property Tax Deductions

As a property owner, you can deduct the property taxes you pay each year from your taxable income. This deduction is straightforward but can add up to considerable savings, especially in areas with high property tax rates.

Example: If your annual property tax bill is $20,000, you can deduct that amount from your taxable income, lowering your tax liability.

Building Improvements and Repairs

The costs associated with improving and maintaining your property can also offer tax benefits. While improvements need to be depreciated over time, repairs can often be deducted in the year they are made,
providing more immediate tax relief.

Example: If you spend $50,000 on a new roof, you can depreciate that amount over its useful life. Conversely, if you spend $5,000 on a repair, that amount can typically be deducted in the same year.

Equity Growth and Capital Gains

Owning your building means you are building equity in an asset that can appreciate over time. When you eventually sell the property, you may benefit from favorable capital gains tax rates, which are typically lower than ordinary income tax rates. Additionally, you can defer capital gains taxes by reinvesting the proceeds through a 1031 exchange, allowing you to purchase another property without immediate tax liability.

Rent Control through an LLC

One strategic advantage of owning your business property is the ability to structure the ownership through a separate LLC that you own. This arrangement allows you to lease the property to your business, providing flexibility in setting rent payments. By controlling the rent, you can manage the cash flow between your business and the LLC, optimizing tax liabilities. For instance, setting a higher rent can shift income to the LLC, which might be beneficial if the LLC is subject to a lower tax rate or if it allows for better utilization of tax deductions.

Qualifying for Section 179 Deduction

Under Section 179 of the Internal Revenue Code, businesses can deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. While buildings themselves don’t qualify, many improvements to non-residential buildings do, such as HVAC systems, roofs, and security systems.

Example: If you install a new HVAC system costing $100,000, you may be able to deduct the entire amount under Section 179, significantly reducing your taxable income for the year.

Conclusion

The tax benefits of owning your business property are compelling. From depreciation and interest deductions to property tax savings and the potential for equity growth, these advantages can lead to significant financial gains. Additionally, owning the building through an LLC that leases it to your business provides a unique opportunity to control rent payments and optimize your overall tax strategy.

As always, it’s important to consult with a tax professional to fully understand how these benefits apply to
your specific situation and to ensure compliance with all relevant tax laws. Investing in your business property can be a smart financial move, providing both immediate tax relief and long-term financial benefits. If you’re considering this investment, now might be the perfect time to explore how owning your building can work for you.