Investment in Commercial Real Estate - CRE Income Fund

1. The Importance of Depreciation when Investing in Commercial Real Estate Another tax benefit of investing in private real estate is the ability to shield income generated by investment properties through depreciation. This allows real estate investors to take advantage of the long-term benefits of substantial cash flow with a low tax burden. Depreciation is the decline in value of an asset over time. For example, a new car depreciates in value the minute it’s driven off the lot. Generally speaking, the term depreciation implies a loss, but the opposite is true when it comes to real estate investing. All aspects of a real estate property depreciate except for the land. For example, the appliances and fixtures in a rental unit of a multifamily building will become outdated over time. The land, however, is a fixed cost and will not depreciate. IRS tax law allows real estate owners to take a deduction for the property’s depreciation to smooth out eventual capital expenditures. The value of a real estate investment could increase in value over time while the value of the building depreciates, which would simultaneously reduce the property’s tax basis. To put this in perspective, if an investor acquires a property for $10 million and then depreciates it by $2 million, the cost basis for tax purposes would be $8 million. The depreciation tax savings works the same way for investors in the CRE Income Fund. For example, say we buy a medical building for $10 million and four years later we sell it for $12 million. In those intervening four years, we would depreciate the building on our books by approximately $350,000 annually or $1.4 million over the four-year period. In this case, the asset’s cost basis would be reduced from $10 million to $8.6 million. The $1.4 million book gain on the sale — from $8.6 million to $10 million — would be taxed at 25 percent under what’s known as an unrecaptured Section 1250 gain. The $2 million in profit — from $10 million to $12 million — would be subject to the 20 percent long-term capital gains rate. Both rates are typically less than an ordinary income tax our accredited investors pay.

2. Point being, investing in commercial real estate is intentionally tax-efficient, designed as a reward for equity holders, or the owners of the real estate, who assume more risk than lenders. When evaluating an investment opportunity, investors should keep in mind to compare them after all fees and taxes are accounted for. In some cases, a fund that targets lower pre-tax returns may be a better investment, after taxes are accounted for. About CRE Income Fund At CRE Income Fund, we are dedicated to helping our clients navigate the often-intimidating world of commercial real estate investing. We work with clients across the board to personalize and diversify their portfolios, leading to maximum returns and financial confidence. If you’re seeking a passive real estate investment option and have a long-term time horizon, we’re here to help. If you’d like to learn more about our investment opportunities please contact us at (866) 4-CREFUND or info@creincomefund.com for more information.