Joe Stance, Author at Stance Commercial Real Estate

Supporting Small Business Through Shop Riverside!

Riverside is a neat little city. With a population of nearly 315,000, Riverside ranks 12^th in population within California and yet it holds onto its small town charm at the same time. Located in the heart of the Inland Empire, Riverside is a vibrant college town that offers a wide array of lively restaurants, eclectic music venues, local craft breweries, indie shops, quaint coffee houses and more. Riverside boasts an astounding 24 nationally registered historic sites and more than 100 city landmarks that encapsulate the city’s rich and remarkable history.

Modern in places and historic in others, Riverside really is a unique place to live and work. The residents of Riverside really care about the community and make a constant effort to support local small businesses. And this sense of community is bolstered by a City government that is united and dedicated to making small businesses thrive. This really is what makes this city so unique.

At Stance, we are here to help the city grow and to help guide new businesses through the landscape of this charming college town. That is why we support the City in its Shop Riverside! campaign. We like to position ourselves as more than just a commercial real estate firm. Our passion is with helping small business owners find the perfect property for their business. We take our jobs seriously. We do not want to just sell a property; we want to sell the concept of community. To us, Riverside is more than just a place… it is home!

Shop Riverside!

Shop Riverside, Riverside! The City of Riverside is a proud supporter of businesses large and small, which is why we all love it when you shop within city limits! The benefits of shopping within city limits not only builds a closer community but also a cleaner environment and a stronger economy. Spending your dollars here in Riverside provides a steady lifeline to keep businesses open. And when businesses thrive, they are generating taxes and funds which ultimately circulate back into our local economy. Employers and employees are not the only ones benefiting by your efforts to Shop Riverside; City parks, libraries, police and fire departments all receive a portion, as well. It’s a win-win for all!

A Stronger Economy. Oftentimes, local businesses hire local workers. In addition to staff for the stores, they hire local architects and contractors for building and remodeling, local accountants and insurance brokers to help them run the business, and local ad agencies to promote it. All these factors together create a “multiplier effect,” meaning that each dollar spent in a local store brings more to the local economy.
A Closer Community. Shopping within city limits can lend time for neighbors to connect; less time to travel and more time for connection.
A Cleaner Environment. Having stores in your community means you have opportunities to leave your car parked and do your errands on foot or by bicycle. Fewer cars on the road means less traffic, less noise, and less pollution. If you made just one trip each week via alternative transportation instead of making a round trip by car, you would reduce your annual driving drastically.

Your Riverside Chamber of Commerce

One of the best ways to form business connections in your community is by joining your local chamber of commerce. When you join a Chamber of Commerce, you are afforded the opportunity to network with other business owners. You will also receive discounts on valuable services for your business. And you may even have access to free marketing opportunities or customer referrals.

The Riverside Chamber is committed to helping local companies grow their business by taking the lead in programs and efforts that help create a strong local economy and make our community a great place to do business. The Riverside Chamber provides numerous opportunities for members to increase their contact base and have fun doing it through various meetings, networking events and committees. In addition, the Riverside Chamber makes hundreds of referrals to member companies every month.

As the leading advocate for business in the greater Riverside area, the Chamber also works to create and sustain a favorable business environment in which all businesses can grow and prosper.

As one of the most influential chambers in the state, the Riverside Chamber works closely with local government and other entities to strengthen the local economy. The Chamber is pro-actively involved in every important issue facing Riverside business. One of the largest Chambers in Southern California, the Riverside Chamber is comprised of nearly 1,300 business enterprises, civic organizations, education institutions, and individuals. As a member driven organization, the Chamber is committed to building a stronger local economy through the following means:

Actively promoting and supporting the local community
Fostering the growth and strength of our member organizations
Engaging in federal, state and local officials on behalf of business interests

The Chamber brings people together to solve problems, orchestrate meetings to discuss projects, and work diligently behind the scenes to forge agreements and compromises. Whatever is needed to advance the progress and welfare of the community and local economy - the Chamber is there!

There are MANY advantages to joining the Greater Riverside Chambers of Commerce.

How Do Small Businesses Invest in the Local Economy?

Economic impact modeling tracks the amount of money that is circulated throughout the local economy as a result of some initial spending or investment. One of the simplest metrics used in economic impact modeling is called a “multiplier,” which measures the additional economic impact created as a result of a direct impact. For example, a multiplier of 1.25 would imply that for every dollar spent in the economy an additional $0.25 of economic activity is generated locally, through indirect (business to business), and induced (household) spending.

Just by the nature of being local, small businesses are investing in their local economy. Small, independent businesses are more likely to purchase inputs (goods and services) from local suppliers and distributors, are more likely to hire a local workforce, and are more likely to do business with local financial institutions than are businesses with headquarters elsewhere. These things add up to a bigger multiplier for every dollar spent by the local business.

What Happens When You Shop Local

Here’s what happens when you “shop local”:

More of your money will be kept in your local economy
You embrace what makes your community unique
You create local jobs
You help the environment
You nurture community
You keep your tax dollars local
You create more choice
You took advantage of their expertise
You invested in entrepreneurship
You made your community a destination

Economic Impact of Shopping Local

Small businesses generate $68 of local economic return for every $100 spent with them.
Over $9.3 billion would be directly returned to our economy if every US family spent just $10 a month at a local business.
Businesses with fewer than 500 employees account for 99.7% of all US employers.
108 million shoppers spent $12.9 billion on Small Business Saturday.
Small businesses donate 250% more than large businesses to community causes.
Small businesses employ 58.9 million people.
Local business generates 70% more local economic activity per square foot than big box retail.
Shipping produces 1 billion metric tons of C02 a year.
More than a quarter of small business owners are immigrants.
48% of overall growth of US business ownership is attributed to immigrant business owners.
25% of local businesses closed because of low sales or limited cash flow.
65% of Americans’ shopping budgets is still spent in-store.
73% of searchers trust a local business more because of positive reviews.
65 million local businesses have a Facebook page.
But only 4 million are taking advantage of Facebook advertising products.
61% shop at local businesses because of their unique product selection.
56% of workers at locally owned businesses have high commitment scores.

How Stance CRE Can Help You

Navigating the commercial real estate market can be an intimidating task, especially in a fast-moving market such as the Inland Empire. Any commercial real estate situation can change in the blink of an eye, leaving you to face challenges that you never anticipated. And to make a sale that meets your pricing and timeline goals, there are even more factors to keep in mind.

Stance CRE can be a great resource regardless of which type of business owner you are. We have been adding value to business owners’ decisions right here in Riverside for years. We are not just market experts, we are your neighbors! We are a local business with local interests.

At Stance Commercial Real Estate, we live and breathe Riverside culture. We are not only working in the community, we live here… we love it and we want to help you succeed in it!

Call us today at (909) 772-1212 and let us help you decide which type of role is best for you!

by Joe Stance

Leasing Versus Buying Commercial Real Estate

Riverside is an ever growing market and the potential for success looms throughout this beautiful city of ours. As you look for the right place for your business, your main focus will probably be “location, location, location.” While proximity to your customers and employees will be a priority, there are other factors just as important. When your company decides it is time to search for commercial space, it can sometimes be difficult to decide between leasing and buying.

Each option has a list of pros and cons but the option that is best for your company is largely dependent on your company’s needs and expectations for the future. Over the long term, buying commercial real estate is typically more cost-effective. That said, each leasing also has its advantages and potential drawbacks that you will need to consider with respect to your financial and operational needs.

We at Stance CRE like to arm our clients with as much information as possible before they make their commercial real estate decisions. We know this city well and can guide you through the process from start to finish. So whether you need office, retail or warehouse space, we have compiled an overview of pros and cons of both leasing and buying your commercial space to aid you in the decision-making process.

Buying Commercial Real Estate

Buying commercial real estate gives you dependability and control. That is why investing in a commercial property is often advised for established companies looking to meet future, as well as current, space requirements.

However, the decision to invest in real estate comes with larger upfront costs, as well as additional legal, regulatory, and maintenance responsibilities. Carefully consider your business’s immediate and long-term goals.

Purchasing can help you to:

Potentially realize investment/capital gains as the property value appreciates
Avoid exposure to rising rental costs
Take advantage of tax deductions for commercial mortgage interest and annual depreciation
Tailor the property to your needs without landlord limitations
Sublet the property or some of its units for additional business income
Have more control over how the property is used

Pros of Buying

Building Equity: The good news is that, for the most part, property values appreciate. The longer you remain a property owner, the more money you make. If you decide to lease part of your property to other businesses, you can revise your lease terms and increase rents according to the lease agreement you have with the tenants. You can also decide to sell the building later and earn a profit to buy a new one at a better location.

Appreciating Asset: Owning commercial real estate allows you to benefit from capital appreciation — the increase in your property’s value over time. The rate of appreciation varies with the inflation rate, local supply and demand conditions, interest rates and other factors.

Rental Income: You can start earning rental income immediately when you become a commercial building owner. If you are not using all the space available, you can rent it out to other business owners and make extra income from the monthly rent payments.

Tax Breaks: You can deduct interest and depreciation on your commercial property as a tax break.

Control: When you own property, you have control over it (within the confines of zoning restrictions), which means you don’t have to negotiate with a landlord if you want to reconfigure the space. You’ll also make fixed monthly mortgage payments, instead of a rent payment that can be changed whenever a lease expires.

Cons of Buying

Upfront Spending: If you are buying an office or commercial building, you need first to make a down payment. Just like auto loans, these down payments usually range from 15%-30% of the building’s entire purchase price, especially if you want a loan to finance it. This money can be a lot for a small or growing business, making it almost impossible to own if your margins are thin. for owner-users they may qualify for an SBA loan and only need to put down 10%. For investment users, the down payment is typically closer to the 20%-35% range. If this applies to you, it is in your best interest to look into an SBA loan. These generally only require 10% of the purchase price as a down payment.

Liabilities: You are responsible if someone is hurt on your property, which means you’ll have to pay for a liability insurance policy to protect yourself from lawsuits. If you rent out part of the property, you are subject to property manager liability, which will require additional insurance and property upkeep. Furthermore, many loans may require a personal guarantee, which makes you personally liable to repay the loan if your business cannot.

Loss of Liquidity or Capital: You may be forced to use business capital to make a down payment for the building. Most business owners will take out a loan to finance the purchase. However, you may stretch yourself too much to meet these debt obligations, and this can impact your available credit when you go to purchase future items.

Leasing Commercial Real Estate

Commercial leases typically run from five to 10 years. You can use the property during the lease, subject to any restrictions built into the lease agreement. When there is low inventory, such as the market we are currently in, it can be challenging to find the perfect building to buy so leasing can be a good alternative for the short term.

Leasing can help you to:

Avoid tying up capital in a major asset, and keep lines of credit open
Fully deduct your business’s lease payments as a business expense
Expand and reduce the scale of your operations as necessary
Remove the common risks associated with property ownership
Relocate to a space that is a better fit (or better price) at the end of the lease term

Pros of Leasing

More Liquidity: Your business does not have to make a huge down payment when leasing. As a tenant, you only need to pay the agreed-upon rent and a refundable security deposit, and then move in. The monthly payments leave you with disposable income for business operations.

Tax Breaks: You may deduct these costs as incurred: Lease payments, property insurance, property taxes (depending on the lease type), utilities and maintenance. You can deduct your entire lease payment, in contrast to a mortgage’s interest-only deduction.

More Flexibility: Qualifying for a lease is typically easier than qualifying for a commercial real estate loan, so your options are greater in terms of choosing a space. You can also move when the lease is up without having to sell the property. You might be able to afford to lease a property that is too expensive to buy, which can help you get into a prime or strategic location.

Cons of Leasing

No Equity or Appreciation: You still will not qualify as an owner after many years of paying the monthly rent and renewing the lease agreement. Even if you pay as much money as the price of the building, you will move out one day and leave it behind along with your entire investment.

No Passive Income: You are not the landlord and thus cannot collect rent from others, losing secondary income you could gain from owning property.

Higher Monthly Payments: In the long run, rent payments are costly. You will find that in 10 or 20 years’ time, you have paid enough rent to own that building – but it still belongs to another person. In addition, at the end of the lease term, you will pay the wear and tear charges from your security rent deposit. Also, early termination is very costly and can eat into your profits.

No Control: The lease may have restrictions and even early termination clauses that hamstring the tenant’s ability to control the rental space. You have no control over rent hikes when the lease expires, and if you go out of business, you must continue paying rent or face penalties.

How Stance Commercial Real Estate Can Help You

At Stance Commercial Real Estate, we live and breathe Riverside culture. We are not only working in the community, we live here… we love it and we want to help you succeed in it!

Call us today at (909) 772-1212 and let us help you decide which type of role is best for you!

by Joe Stance

The Rise of Riverside’s Innovation District

Located in the heart of the Inland Empire, Riverside is a vibrant college town that offers a wide array of lively restaurants, eclectic music venues, local craft breweries, indie shops, and quaint coffee houses, and more. Riverside boasts an astounding 24 nationally registered historic sites and more than 100 city landmarks that encapsulate the city’s rich and remarkable history.

Sitting a mere sixty miles east of Los Angeles, Riverside is a city known for its citrus industry, and has grown to be renowned as the city of arts and innovation. Visitors and residents alike enjoy all the amenities that make a college town noteworthy. From downtown museums and performing arts centers to the world-famous Mission Inn Hotel and Spa, the city is the perfect blend of small-town friendliness and big-city fun.

Riverside is flourishing and growing at a steady and exciting pace. As of the 2020 census, Riverside had a population of 314,998. As a college town and affordable Southern California market with a wide variety of social and business advantages, Riverside will only continue to grow. At Stance, we are here to help it grow. To us, Riverside is more than just a place… it’s home!

Let’s take a look at Riverside’s Innovation District.

What is an Innovation District?

According to the Brookings Institute, an innovation district is defined as a “geographic area where leading-edge anchor institutions and companies cluster and connect with startups, business incubators, and accelerators. They are also physically compact, transit-accessible, and technically-wired and offer mixed-use housing, office, and retail.”

Innovation districts facilitate the creation and commercialization of new ideas and support metropolitan economies by growing jobs in ways that leverage their distinct economic attributes. These districts build on and revalue the intrinsic qualities of cities: proximity, density, authenticity, and vibrant places. Given the proximity of many districts to low-income neighborhoods and the large number of sub-baccalaureate jobs many provide, their intentional development can be a tool to help connect disadvantaged populations to employment and educational opportunities.

Innovation districts have the unique potential to spur productive, inclusive and sustainable economic development. At a time of sluggish growth, they provide a strong foundation for the creation and expansion of firms and jobs by helping companies, entrepreneurs, universities, researchers and investors—across sectors and disciplines—co-invent and co-produce new discoveries for the market. At a time of rising social inequality, they offer the prospect of expanding employment and educational opportunities for disadvantaged populations given that many districts are close to low- and moderate-income neighborhoods. And, at a time of inefficient land use, extensive sprawl and continued environmental degradation, they present the potential for denser residential and employment patterns, the leveraging of mass transit, and the repopulation of urban cores.

Riverside’s Innovation District

Entrepreneurship, employment, entertainment and housing, all in one place. This is the vision for Riverside’s Innovation District.

What if you aren’t an entrepreneur, does this still matter to you?

Absolutely! An innovation district not only connects cutting edge businesses with infrastructure and close-at-hand resources, it builds off of the character of historic and culturally rich neighborhoods, connects blue-collar workers to high-paying jobs, and contributes to the growth of affordable, eco-friendly public transportation. Existing community members will benefit from the diversification of housing options in their area, and the aim is to maintain affordable housing while creating opportunity for all Riversiders to participate meaningfully in our economy.

Riverside is the #4 destination for minority entrepreneurs, and the #1 destination for millennials in the entire country. Riverside's Innovation District will leverage the power of our growing population by providing education and technical training that is needed to create a bubble of green and clean air technology jobs, anchored by the California Air Resources Board.

Source: Official Riverside Website

Location

Riverside’s Innovation District consists of a 3-square-mile.

The district includes:

Part of downtown Riverside
An area along North Main Street
An industrial area north of Third Street near the 60/91/215 freeway interchange
The area with old packing houses east of downtown
The Eastside neighborhood
UC Riverside and the area where the California Air Resources Board is building a new facility

Numbers

Population: Nearly 23,000
Number of Businesses: 1,700

Four Institutions of Higher Education

University of California, Riverside
Riverside Community College
California Baptist University
La Sierra University

Entrepreneurship and Employment

Within the Riverside Innovation District, the plan includes running a hybrid electric bus on the University Avenue, close to UCR’s Center for Environmental Research and Technology also called the Innovation Corridor. The corridor will help Riverside to become a smart city in the future.

Buildings

Several vacant buildings within the Innovation District consist of old packing houses from the area’s citrus-growing days. Such structures often require extensive renovations before being occupied. The result, however, is an attractive building that can become an office, retail or live/work space, among other uses.

One such structure is the Sutherland Fruit Co. packing house at 3191 Mission Inn Ave., which is now Old Spaghetti Factory. Other former packing houses and empty lots in the district include:

National Orange Co. Packing House
Riverside Navel Growers Association
Strachan Fruit Co.
Packing House Business Center

Jobs, Dining and Entertainment Options

With four institutions of higher learning within city limits and several others nearby, Riverside is already preparing students for fulfilling jobs in the medical field, engineering, social justice and the arts. Our Innovation District will not only provide the types of jobs that we need to keep all of those graduates here, it will also provide training for and employment in quality technical careers that don't require a college degree.

Currently, Riverside’s 3-square-mile Innovation District is filled with a mix of vintage citrus packing houses, office buildings, educational institutions and residential areas. Given time, it will develop into a home for thousands of additional high-tech, high-paying jobs that will attract even more investment and also add to the quality of life for local residents.

Once the plan is fully realized, city administrators predict that the area’s diverse population will be able to live, work, go to school and play in an area that will be walkable and also have multiple transportation options.

How Stance Commercial Real Estate Can Help You

Navigating the commercial real estate market can be an intimidating task, especially in a fast-moving market such as Southern California. Any commercial real estate situation can change in the blink of an eye, leaving you to face challenges that you never anticipated. And to make a sale that meets your pricing and timeline goals, there are even more factors to keep in mind.

Stance CRE can be a great resource regardless of which type of investor you are. We have been adding value to investment decisions right here in Riverside for years. We are not just market experts, we are your neighbors! We are a local business with local interests.

In the right market, both active and passive options have the potential to generate steady cash-flow and return on investment. At Stance Commercial Real Estate, we live and breathe Riverside culture. We are not only working in the community, we live here… we love it and we want to help you succeed in it!

Call us today at (909) 772-1212 and let us help you decide which type of role is best for you!

by Joe Stance

Investing In Riverside’s Opportunity Zones

Let’s take a look at Opportunity Zones. These investment properties are unique and innovating. From local influence to tax incentives, these properties offer the opportunity to enrich the community and enhance the portfolio of the savviest of investors.

What is an Opportunity Zone?

Opportunity Zones are an economic development tool that allows people to invest in designated areas. Under certain conditions, new investments within these zones may be eligible for preferential tax treatment. The State Governor nominates a limited number of eligible tracts for official designation. The certification and designation of an Opportunity Zone comes from the Secretary of the U.S Treasury via his delegation of authority to the Internal Revenue Service (IRS).

Opportunity Zones provide a new tool for investors, fund managers and communities by utilizing privately sourced funds into eligible economic development and community reinvestment projects.

Opportunity Zones In the City of Riverside

The City of Riverside has four, state-designated opportunity zones which are ready for investments and new commercial and residential investments which can be streamlined and has community support.

One such Opportunity Zone is the Life Art Center. This event venue is designated Historical landmark #41. Located in downtown Riverside California, the Life Art Center is known for hosting enchanting wedding celebrations and other milestone events. Initially constructed in 1909 by renowned architect Arthur Benton, the building has been host to numerous elegant weddings since 1993. The venue exudes old-world charm and has become an instrumental feature in Riverside’s charming landscape. In 2021, the Stance team was enlisted to guide the prospective buyers through the process. With a successful acquisition, the new owners are enjoying Riverside’s quaint downtown culture and thriving market.

Specific Riverside, California Opportunity Zones

Zone 1 – Innovation District / Hunter Park

Main Assets: UC Riverside, Bourns, Solarmax, CARB, Downtown Riverside, Mission Inn, Konica Minolta,
# of Residents: 44,522

Zone 2 – Casa Blanca Auto Mall

Main Assets: Riverside Auto Center – Audi, BMW, Mercedes, Lexux, Porsche, Harley Davidson, Carmax
# of Residents : 2,929

Zone 3 – Arlanza

Main Assets: Riverside Municipal Airport, UTC Aerospace Systems, Arlanza Public Library, 91 Freeway Frontage,
# of Residents : 5,669

Zone 4 – Canyon Springs

Main Assets: Power Retail Center – Target, Walmart, Sams Club, Best Buy, 60/215 Freeway Frontage,
# of Residents: 3,965

Why Invest and Develop in Riverside’s Opportunity Zones?

1. Location, Location, Location

The city encompasses an expanding transit and alternative transportation network, research institutions associated with the University of California – Riverside, and the ever-expanding entertainment destinations in the downtown region. The City is also currently home to several under-utilized former industrial buildings which have the potential to serve as ideal co-working spaces for startup firms and other creative developments. The close proximity to the university will also lend itself to a steady and reliable workforce.

2. Innovation District

Riverside has created an innovation district that is ideal for attracting new investment, retain local talent, encourage entrepreneurship and create jobs. To date, companies such as Konica Minolta, a global technology firm, have relocated to the Innovation District in order to be part of Riverside’s innovation ecosystem and to be close to Riverside’s collegiate talent pool. The Innovation District also boasts several "creative" office locations including ExCITE, Spark Tank, and Mind and Mill.

3. Strategic Partnerships

Riverside is a community that puts collaboration with local businesses at the top of the priority list. The city is proud to regularly team up with a vast network of partners who work to enrich the community and make Riverside a vibrant destination to invest and develop:

- Greater Riverside Chambers of Commerce
- Riverside Downtown Partnership
- Inland Empire Small Business Development Center
- UCR College of Engineering-Center for Environmental Research & Technology

4. Community Benefits

Opportunity Zones can be used as part of an economic development strategy to create jobs, invest in startups, stimulate housing projects, or augment other tax incentive programs.

Tax Advantages of Investing In Opportunity Zones

There are primarily three tax benefits made with the creation of OZs.

Capital Gains Tax Deferral: An investor that re-invests capital gains into a Qualified Opportunity Fund can defer the payment of federal taxes on the realized gains of the investment as late as December 31, 2026
Capital Gains Tax Reduction: An investor that meets timing deadlines and holds their investment in a Qualified Opportunity Fund for at least five years can reduce their tax bill on the capital gains differed by 10%. If the investor holds their investment for at least seven years, the reduction increases to 15%.
Elimination of Taxes on Future Gains: An investor that holds their investment in a Qualified Opportunity Fund for at least ten years will not be required to pay federal capital gains taxes on any realized gains from the investment.

How Stance Commercial Real Estate Can Help You

Call us today at (909) 772-1212 and let us help you decide which type of role is best for you!

by Joe Stance

2022 Commercial Real Estate Tax Benefits

The Most Attractive Tax Benefits of Investing in Commercial Real Estate In 2022

The major benefits of Commercial Real Estate (CRE) - such as rental income, price appreciation, and portfolio diversification – is an attractive opportunity for many investors. Investing in commercial real estate can provide stable, long-term passive income streams, in addition to windfall profits when properties are sold. Over the course of the life of an investment, these tangible benefits can lead to a substantial difference in returns.

But, these are not the only benefits that should be considered. Even if the income and appreciation for a property are relatively limited, there are a number of significant tax benefits and tax deductions that can be realized. Understanding these tax benefits associated with CRE is more complex than it may seem on the surface, but if you are considering an investment, you need to understand the tax implications.

To help you get a firm grasp on the tax benefits involved in commercial real estate investment, the Stance team has put together a list of the different considerations to keep in mind when deciding on which commercial property deal structure is best for your financial goals.

The Two Ways Investors Earn Returns Determine Taxation

The first criteria for determining what taxes will be required on a commercial real estate investment are how the gains were earned.

The two ways investment properties earn money are cash flows and capital gains. Let’s cover the differences between the two and how each might impact you at tax time.

Treatment of Cash Flow

At its core, the premise behind real estate investing is a simple one: an investor purchases a property that produces income from tenant leases and costs a certain amount to operate. If the income is more than the expenses (including debt service), the property produces positive cash flow, which flows through the LLC to investors and is ultimately taxed at the individual levels.

The cash flow a property generates is taxed as ordinary income, so the effective tax rate will be determined by the investor's income tax bracket. Cash flow is the total rents less allowable expenses, which is the net income. As with any other income, these taxes are due at both the federal and state levels.

Treatment of Capital Gains

Income is not the only source of return for a commercial real estate property. If the supply and demand characteristics of the local market are favorable, the property will increase in value. Capital gains are simply the difference between what you paid and sold a property for. In many cases, capital gains are taxed differently than income, but not always.

For example, if you buy a commercial property for $2.5M and sell it two years later for $2.8M, you’ll have a capital gain of $300,000, taxed at a rate of 15% if filing single or married jointly. Comparatively, if this amount was cash flow income, you would pay 35% in taxes if filing as single.

One of the other major tax benefits of a commercial real estate investment is that IRS rules allow an individual investor/taxpayer to use a tax deferral strategy known as a 1031 Exchange. We will discuss this later. Employing this strategy, the taxpayer can defer the entirety of his or her capital gains tax bill by reinvesting the sales proceeds into another property of “like kind.” These “like-kind exchanges” allow an investor’s money to grow tax-deferred over time, and can be repeated indefinitely for maximum tax deferral.

Tax Benefits of Investing in Commercial Real Estate

Investors earn a return on their commercial real estate investment in two ways: the cash flow the property generates and in capital gains from appreciation. The way the profits on a commercial real estate investment are taxed depends on whether that profit is cash flow or capital gains. At Stance, our expert team can go over these tax benefits with you to educate your team on how to get the most bang for your buck!

Depreciation and Write Offs

Possibly the best tax benefit of commercial real estate is depreciation since it is a non-cash expense, providing a substantial write-off without actually having to spend any money for it. Real estate is a physical asset whose condition degrades over time. To account for this, tax rules allow a commercial property owner to depreciate the value of the property a little bit each year and list the amount as an expense on the property’s income statement (similar to interest expense or property taxes). The depreciation expense is written off against ordinary income, so any taxes that are paid on cash flow generated by the property is reduced every year the deduction is applicable.

As a property owner, one of your first and best benefits is your ability to write off the interest payments you make on your mortgage. So, not only are you using someone else’s money to buy commercial property, but you can also write off their profit for providing you with that capital.

Other write-offs include:

Property management fees
Property insurance
Mortgage interest
Property taxes
Legal and other professional fees
Property repairs, capital improvements, and/or ongoing maintenance
Marketing expenses

Interest Expense Deductions

If there is a commercial real estate loan on the commercial property, an investor is allowed to write off the interest each year against their income, potentially providing a substantial write-off. This holds true especially during the early days of the loan when the mortgage payments are almost entirely interest rather than principal.

Section 1031 Exchange Tax Deferment

A 1031 Exchange gathers its name from section 1031 of the IRS code, which says:

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”

With a 1031 exchange, investors can use the capital gain to invest in another property, often one that produces income or the potential for greater capital gains at a later date. This can make a big difference in the total capital you have to invest in your next commercial property. To put it simply, this section allows you to avoid paying capital gains taxes when you sell a property and then reinvest the proceeds into a property of equal or greater value – if you locate and purchase the new property within a specific time frame.

Several reasons make 1031 exchanges attractive to investors. Here are just a few of them:

Improved Cash Flow
Property and Asset Management
Estate Planning
Asset Consolidation and Division
Diversification
Buying a Vacation Home

Reduced Tax Burden for Beneficiaries

Keep in mind—a 1031 exchange is really just a tax deferment, not a total tax write-off. When you do finally sell to cash out, the tax will be calculated on the cost basis of the original commercial property. If, however, the property is passed to beneficiaries, they may get some tax help with what is called a “step-up” cost basis.

A step-up in basis is applied to the cost basis of the asset transferred at death; the higher market value of the asset at the time of inheritance is considered for tax purposes. Instead of the original cost of an inherited asset as its basis, the stepped up basis loophole readjusts it to the value at their death

Opportunity Zones

One lesser known—and somewhat temporary—tax benefit of commercial investment property ownership comes from deploying capital into designated “Opportunity Zones.” Each state has nominated certain localities within its domain, qualifying those zones as Opportunity Zones if that nomination has been certified by the Secretary of the U.S. Treasury. Opportunity Zones were intended to be an economic development tool.

The idea behind identifying Opportunity Zones and giving them preferential tax treatment is simple: to define the areas of greatest need, and then create an incentive for private investment to flow into them. In doing so, the resulting projects create jobs and income that can be further reinvested in a harmonious cycle meant to lift the community out of distress.

To realize the tax benefits from an Opportunity Zone investment, investors must place their money in a “Qualified Opportunity Fund.” Once this is underway, these investors may realize reduced, deferred, or eliminated capital gains taxes on their investment, depending on how long it is held. If it is held for more than five years, there is a 10% tax reduction.

How Stance Real Estate Can Help You

Some of the greatest benefits of investing in real estate are the available tax breaks. Still, the barrier for many is being unaware of these opportunities and how to take advantage of them. Understanding which investment property tax benefits are at your disposal is one of the best ways that real estate investors can achieve long-term wealth. Take advantage of these tax breaks and ensure you stay on the path to financial freedom while protecting yourself from avoidable fees. Hiring the right team from the beginning will help you navigate the leasing process with ease as well as save you time and money. At Stance Real Estate, we live and breathe Riverside culture. We are not only working in the community, we live here… we love it and we want to help you succeed in it!

Call us today at (909) 772-1212 to see how our commercial property management strategies can help you!

by Joe Stance