At Senior Living Fund, I focus primarily on selective senior housing investments, Still, I have a passion for commercial real estate (CRE) in general for many reasons. First, it holds tremendous income potential. Whether you’re enjoying cash flow from a rental property or interest payments from an equity investment, the returns on CRE are unparalleled. Second, CRE also allows investors to gain equity in valuable property while having someone else—be it retail, medical offices, or multi-use property tenants—to foot the bill. Sure, you need to be smart about selecting the “right” properties. But CRE is my favorite method of collecting passive income—and a lot of it—over time.

With income always comes the issue of taxes. Many of us naturally assume that the income benefits of CRE will be quickly compromised by the subsequent tax liabilities. In fact, the opposite is true. CRE holds potential for not just profit, but for tax benefits, as well. The following are my top seven tax benefits of investing in CRE.

• 1. Depreciation

We all know a new car begins to depreciate in value the moment it’s driven off the lot. The same is true in the world of CRE. What does that mean? Basically, depreciation allows you to offset taxable income by counting depreciation as a business expense. A simple example:

Say you own an income-generating residential rental property valued at $500,000. The IRS says that property will depreciate over 27.5 years, or in this case, about $18,000 per year. That means your rental income will be offset by $18,000 of devaluation each year. That’s a significant tax savings you won’t likely find in another other investment market. Of course, this is a simplified estimate; the IRS allows for devaluation of the building only, not the land it sits on. Total savings will also depend on your specific investment property. Visit the IRS site for more information and specific devaluation timelines.

• 2. Avoiding Payroll Tax

This is a pretty simple one:When it comes to owning a business—or even working for a corporate entity—social security and Medicare taxes can eat up much of our earned income. The good news, because there are no employees, payroll doesn’t apply to commercial real estate. That’s why it’s one of my favorite ways to earn income. In fact, Senior Living Fund recently launched its first Fixed Income Fund focused on senior housing. Contact us at [email protected] for more details.

• 3. Tax-free Appreciation

Another great thing about commercial real estate: you won’t pay taxes on its appreciation—no matter how much value it accumulates—so long as you hold onto it. This isn’t true with one’s salary, for instance. In general, the more we make, the more we pay. But with CRE, the more we hold, the more we get to keep. Going a step further, capital gains taxes are generally lower than income taxes anyway. So, even if you did sell, you may likely be paying less than you would in income taxes, regardless.

• 4. 1031 Exchange Potential

One of the smartest ways to keep the wealth earned on CRE is through what’s known as a 1031 exchange. The 1031 allows you to invest the income earned from the sale of one property into another similar property, while deferring taxes on the gain. The longer you reinvest, the longer you avoid taxes. Again—it’s a great way to hold on to wealth, even if your need for a certain building or structure may change. Senior Living Fund recently launched its own 1031 Exchange offering, allowing qualified investors to reinvest their real estate income into a value-add community near Daytona Beach, Florida. Contact us at [email protected] to learn more.

• 5. Refinanced Borrowing

Often, when people need money, they think of selling something they already own to pay for it. But with CRE, it often makes sense to do the opposite. By refinancing/borrowing from a high-performing rental income property, for instance, you enjoy your tenant paying off the loan (just as you enjoyed them building your equity the first time around), you get to keep the future appreciation value of the property, and you don’t pay taxes on the cash you borrow because it’s considered a loan. Yes, you must be careful to borrow from properties with strong long-term potential. But in the meantime, you’re both saving on the loan and enjoying the benefits of holding on to the value that’s growing over time.

• 6.Self-Directed IRA Investments

Many people don’t realize they can use self-directed IRAs to invest in real estate. In fact, Senior Living Fund has many investors who use self-directed IRAs to avoid income taxes and earn money! Talk to your financial adviser about specifics.

• 7. Death Benefits

A lot of people today worry about leaving their heirs with taxable assets that could quite literally ruin them financially. While that may be true with some assets, it’s not for CRE. If your heirs inherit your property, they will not pay capital gains tax on the appreciation of the property. For instance, if you purchased a home for $50,000 and died with it valued at $400,000, they would be able to sell it for the full $400,000 with no capital gains taxes at all. That’s astounding. Yes, estate taxes may apply. But as of 2018, more than $11 million is excluded from estate tax. Excluding major real estate moguls, it’s not something your heirs will need to worry about.

As with any investment, it’s important to do your leg work, talk to your financial advisers, and determine which type of investment (active, passive, etc.) works best for you. But the fact remains, CRE holds a wealth of potential in not just income, but tax benefits, as well. Please feel free to reach out to me at [email protected] to learn more.