Key Tax Considerations for Commercial Real Estate Owners

21 February 2026

Owning commercial real estate can be a lucrative venture, but when it comes to taxes, things can get a little tricky. If you're not careful, tax obligations can take a big bite out of your profits. The good news? With the right knowledge and strategy, you can maximize deductions, reduce liabilities, and keep more money in your pocket.

In this article, we’ll break down the most important tax considerations for commercial real estate owners. Whether you’ve been in the game for years or are just getting started, understanding these concepts will help you make smarter financial moves.

1. Depreciation: A Tax Benefit You Shouldn’t Ignore

One of the biggest tax benefits of owning commercial real estate is depreciation. The IRS recognizes that buildings deteriorate over time, so they allow owners to deduct a portion of the property's cost each year.

How Does Depreciation Work?

In the U.S., commercial properties are typically depreciated over 39 years. This means each year, you can deduct 1/39th of the building’s cost (excluding the land) from your taxable income. While this doesn’t provide an immediate windfall, over time, this deduction adds up to serious tax savings.

Bonus Depreciation & Section 179

If you make improvements to your property—like upgrading HVAC systems or modernizing office spaces—you may qualify for bonus depreciation or Section 179 expensing. These allow you to deduct a larger portion (or even 100%) of the cost of improvements in the year they are made rather than spreading it out over decades.

2. 1031 Exchanges: Deferring Capital Gains Taxes

If you’re thinking about selling a property, there’s a way to avoid paying hefty capital gains taxes—at least for now. It’s called a 1031 exchange, and it’s one of the best tax-saving tools in real estate.

What Is a 1031 Exchange?

A 1031 exchange allows you to sell a property and reinvest the proceeds into a “like-kind” property without immediately paying capital gains taxes. Essentially, you’re deferring taxes by rolling your profits into another investment.

Key Rules for a 1031 Exchange:

- The new property must be of equal or greater value than the one you’re selling.
- You have 45 days to identify replacement properties and 180 days to close on one.
- The process must be handled by a qualified intermediary—you can’t take possession of the funds in between transactions.

By continuously using 1031 exchanges, investors can defer taxes indefinitely and grow their portfolios more efficiently.

3. Mortgage Interest Deduction: A Huge Tax Saver

If you have a mortgage on your commercial property, you can deduct the interest you pay on the loan each year. This is a significant deduction, especially in the early years of the loan when interest payments are highest.

For example, if you own a property with a $2 million mortgage at a 6% interest rate, your first-year interest payments could be around $120,000—all of which could be deductible from your taxable income.

However, keep in mind that tax laws can change, and deductions on business interest expenses may be subject to limitations under IRS rules.

4. Property Taxes: A Fixed (But Manageable) Expense

Property taxes can be one of the biggest recurring expenses for commercial real estate owners. While you can’t eliminate them, you can take steps to reduce your burden.

How to Manage Property Taxes:

- Challenge the assessment – If your property’s value is overestimated, you may be able to appeal and lower your tax bill.
- Look for exemptions and incentives – Some municipalities offer tax breaks for specific types of commercial properties or improvements.
- Factor taxes into your lease agreements – If you own rental property, consider structuring leases where tenants share the tax burden through triple-net leases.

5. Passive Income & The Real Estate Professional Status

Commercial real estate income is often considered passive income, meaning it may be subject to passive loss limitations. This can limit the deductions you can take against other income unless you qualify as a real estate professional in the eyes of the IRS.

How to Qualify as a Real Estate Professional:

- You must spend 750+ hours per year actively managing your properties.
- More than 50% of your total working time must be in real estate activities.

If you qualify, you may be able to deduct real estate losses against your regular income, reducing your overall tax burden significantly.

6. Opportunity Zones: A Hidden Tax Break

If you’re looking for long-term tax advantages, investing in Qualified Opportunity Zones (QOZs) might be the right move. These zones were created to encourage development in underserved areas by offering tax incentives for investors.

Benefits of Investing in an Opportunity Zone:

- Defer capital gains taxes on proceeds reinvested in a QOZ.
- Reduce taxable gain if you hold the investment for at least 5-7 years.
- Eliminate capital gains tax on the appreciation of the QOZ investment if held for 10 years or more.

It’s a smart way to grow wealth while also benefiting communities in need of economic development.

7. Cost Segregation: Accelerating Depreciation to Slash Taxes

Want to supercharge your depreciation deductions? Cost segregation is a tax strategy that allows commercial property owners to accelerate depreciation by breaking down assets into different categories.

Instead of depreciating everything over the standard 39-year period, certain assets (such as lighting, flooring, and landscaping) can be depreciated over 5, 7, or 15 years. This means larger deductions sooner, boosting your cash flow in the early years of ownership.

A cost segregation study, typically done by a tax professional, can help identify which parts of your property qualify for faster depreciation.

8. State & Local Taxes: Don’t Overlook Them

Federal taxes are just one piece of the puzzle—state and local taxes can also impact your bottom line. Different states have different tax laws, and some are more investor-friendly than others.

State-Level Tax Considerations:

- No income tax states (like Texas or Florida) can offer big savings.
- Some states impose additional real estate transfer taxes—factor this in when buying or selling.
- Local business taxes may apply if you operate your property as a rental or business entity.

It’s important to stay informed about state-specific tax laws and consult with a tax professional to ensure compliance.

Final Thoughts

Understanding tax considerations in commercial real estate isn’t just about compliance—it’s about maximizing profits and keeping more of your hard-earned money. From depreciation and 1031 exchanges to property taxes and cost segregation, knowing the right strategies can make a world of difference.

If you’re serious about real estate investing, work with a knowledgeable CPA or tax advisor who specializes in commercial real estate. A solid tax strategy could mean the difference between simply owning property and truly building wealth.