A second wealth building component in this example is the appreciation of the property itself.
Historically, real estate values have increased over time. Let’s assume that over a three year period the
doctor’s professional building increased in value to $1,200,000.00 and the monthly mortgage payments had
reduced the outstanding debt to $950,000.00. The doctor would have increased his net worth by $250,000.00.
Another huge benefit of this scenario is that when the property is eventually sold to turn that equity into
cash, the majority of the gain is taxed as long-term capital gain that has preferential tax treatment.
Currently the maximum long-term capital gain rate is 15%. Compare this to an additional $250,000 in income
that the doctor might have earned from operating his practice. Odds are, the doctor would be paying taxes at
more than double that rate on the additional income.
While the above example may be enticing, it gets even better. Current IRS tax rules for commercial real
estate allow investors to avoid paying any tax at all on the sale of commercial property while maintaining
or increasing their net worth. All commercial real estate investors need to know about a 1031, or like kind,
exchange. A 1031 exchange allows an investor to sell a property at a gain and then roll that gain into a
like-kind property without any tax consequences. The gain generated by the first transaction is deferred
into the new property. In other words an investor would owe no capital gains tax on the sale of a property
using a 1031 exchange. If the investor later sold the acquired property, the taxes would be due at that
time. It is important to note that “like kind” doesn’t mean that an office property must be exchanged for an
office property. It means that real estate must be exchanged for real estate. You could not exchange real
estate for personal property (i.e. an airplane) and defer capital gains tax. An investor contemplating a
1031 exchange must declare that he is doing the 1031 exchange at the time the sale closes on the first
Another valuable tax saving tool available to commercial real estate investors is cost segmentation.
Although underutilized, it can offer significant annual tax savings. Cost segmentation has to do with
depreciation. It allows a property owner the opportunity to front load depreciation deductions by segmenting
all the components of a building and determining appropriate depreciation schedules for each component. This
allows the owner to generate increased tax deductions that otherwise would be spread out over 27 to 39
The above are only a few examples of the benefits of commercial real estate ownership. Historically, a
barrier to ownership has been the high cost of commercial property for small business owners. Today that is
no longer the case. Recognizing a demand created by small investors desiring to take advantage of commercial
real estate ownership, the addition of office, retail, and industrial condominium developments has been one
of the fastest-growing segments in the industry. The variety of available properties and their pricing today
offers opportunities for a much broader range of investors.
All of us at one time or another have remarked that “the rich keep getting richer”. Many times the
difference between the rich and others is that they take the time to learn the system and the tools
available to help them build wealth. There is no reason today, however, that every business owner or
investor cannot take advantage of the very same wealth building tools.
Where to start: UFirst Credit Union’s small business loan officers are experts at SBA lending and will
quickly and easily guide you to the wealth that you are seeking through commercial real estate ownership.
* Members should seek the services of a tax professional regarding their
specific tax situation. Examples and discussion based on tax code at the time the information was