Tax Aspects of Commercial Real Estate Financing
Tax Optimization in Commercial Real Estate Financing
Disclaimer: The following text does not provide tax advice and is therefore not intended as a substitute for tax advice. Anyone with specific tax questions and concerns is advised to seek professional tax advice.
Every investment in commercial real estate is a numbers game. Commercial real estate financing is no different from private financing. The only thing that matters to investors is what pays off on paper. Of course, there is also room for tax optimization in commercial real estate financing. This is because interest and repayments are generally tax-deductible — the property itself can also generally be written off and there is a lot of potential to improve your investment when it comes to taxes. Yet, of course, all of this only works under certain conditions.
That's why you'll find everything you need to know about the tax aspects of commercial real estate financing here: an overview of topics such as trade tax, interest, repayment, depreciation, VAT and real estate transfer tax.
- Deducting Interest
- Claim Repayment & Depreciation?
- Depreciation
- VAT Deductible
- Property Transfer Tax
- Perfect Fit financing
- FAQ
Trade Tax in Commercial Financing: Deduct Interest & Save Taxes
What is a trade tax? Trade tax is a municipal tax levied on the profit of a business. It generally amounts to 3.5% of the trade income. The trade income is calculated from the sum of sales revenue, operating expenses and trade losses.
As the interest on commercial real estate financing is generally deductible as operating expenses, it reduces the trade income and therefore the trade tax burden.
How Interest Expenses Reduce the Tax Burden: An Example
A company has a commercial income of 100,000 euros. The interest for commercial real estate financing amounts to 20,000 euros. The trade tax is 3.5% of the trade income, i.e. 3,500 euros.
If the company deducts the interest as operating expenses, the remaining trade income is EUR 80,000. The trade tax on 80,000 euros is 2,800 euros.
In this example, the company has saved 700 euros in trade tax by deducting the interest.
Can I Claim the Repayment of a Commercial Real Estate Loan Against Tax?
No, the repayment of a commercial real estate loan cannot be claimed for tax purposes. This is simply because the repayment is a repayment of the loan and therefore not a business expense.
How is Depreciation Claimed for Tax Purposes in Commercial Real Estate Financing?
In commercial real estate financing, on the other hand, depreciation can generally be spread over the property's useful life. The useful life of commercial real estate is generally 33 1/3 years.
Depreciation can be claimed as a business expense in the tax return. To do this, companies must state the acquisition cost of the property, the useful life and the depreciation method.
Save Taxes With Straight-line & Declining Balance Depreciation
The acquisition costs of a commercial property can generally be depreciated for tax purposes. Depreciation is a profit-reducing expense that lowers the company's profit and thus reduces the tax burden.
There are two depreciation methods for commercial real estate:
Straight-line depreciation: with straight-line depreciation, the acquisition costs are depreciated evenly over the useful life of the property. The useful life of commercial real estate is generally 33 1/3 years.
Declining-balance depreciation: With declining-balance depreciation, the acquisition costs are depreciated more in the first few years than in subsequent years. The declining balance method of depreciation is only possible for buildings constructed after December 31, 1924.
The choice of the correct depreciation method depends on various factors, such as the amount of the acquisition costs, the useful life of the property and the company's expected tax situation. As a rule, straight-line depreciation is the better choice as it is easier to calculate and involves fewer risks. However, declining balance depreciation can lead to greater tax relief in some cases.
It is important that companies seek advice from tax advisors in order to choose the best depreciation method for them.
When Is VAT Deductible For Commercial Real Estate Financing?
VAT on commercial real estate financing is generally deductible. This means that companies can deduct the VAT incurred on the acquisition or construction of a commercial property as input tax.
However, input tax deduction is only possible if at least 10% of the property is used for business purposes. In addition, the property must be an asset that is used to generate income. If this requirement is met, the VAT can be claimed as input tax in the tax return. To do this, companies must keep the invoices from the seller or construction company and declare the VAT in the tax return.
Deduct Property Transfer Tax For Commercial Real Estate Financing?
No. This is because the real estate transfer tax for commercial real estate financing is a transaction tax that is levied on the purchase of land. It is therefore an incidental purchase cost and not a business expense.
Perfect Fit Financing For Every Urbyo Deal
The first step to real estate investment is the right financing. If this matches your goals and strategy, you can of course continue to optimize your deal. If you need specific tax advice, every investor should always consult a tax advisor. After all, this was only an initial overview.
But if you are looking for the right financing as a basis, you can easily turn to Urbyo's financing professionals.
