Tax Implications of Buying Commercial Real Estate for Your Business

Buying the building your business operates from is one of the biggest financial decisions a small business owner will make, and the tax structure you choose at acquisition determines the tax outcome for years. Commercial real property (offices, retail, warehouses, manufacturing facilities) is depreciated over 39 years under IRC 168, which means the standard annual depreciation on a $1 million building is only about $25,641 per year. A cost segregation study can dramatically accelerate this by reclassifying 15-40% of the building cost to 5, 7, and 15-year personal property and land improvements, which qualify for 100% bonus depreciation under OBBBA. The entity structure matters significantly: holding the property in a separate LLC (typically a single-member LLC or a partnership with the owner’s spouse) and leasing it to the operating company creates asset protection (creditors of the business can’t reach the real estate) and provides flexibility if the business is later sold (the owner keeps the building and continues collecting rent from the buyer). However, the self-rental rule under IRC 469 recharacterizes self-rental income as non-passive, which can affect the ability to use passive losses from other activities.

How do you maximize deductions on commercial property?

Can Section 179 or bonus expense a commercial building?

Not the building itself. A commercial building is 39-year property, which puts it outside bonus (bonus stops at a 20-year recovery period), and it isn’t Section 179 property. The choice only exists for the pieces a cost segregation study moves into 5-, 7- and 15-year classes, and for certain improvements you add after the building was first placed in service.

Those shorter-life components get 100% bonus by default if you acquired them after January 19, 2025. Section 179 reaches building improvements only by election, and only for qualified improvement property plus roofs, HVAC, fire protection and alarm systems, and security systems on nonresidential property. If the building sits in a separate LLC that leases it to your operating company, check whether that renting counts as a trade or business. Section 179 doesn’t cover property you hold only to produce rental income when renting isn’t your trade or business. One narrow exception on the building side: the part of a manufacturing plant used directly in production may qualify for a separate elective 100% write-off for qualified production property.

Which parts of a commercial building stay on regular MACRS?

The building shell almost always does (the one exception is production space in a qualifying manufacturing plant). Nonresidential real property is depreciated straight line over 39 years with the mid-month convention, and there’s no Section 179 or bonus option for it. The shorter-life components only land on regular MACRS if you elect out of bonus, and that election covers the whole class of property for the year and can be revoked only with IRS consent.

The 163(j) election in the table above has a cost that’s easy to misread. An electing real property trade or business must use ADS for its buildings and its qualified improvement property. The building never got bonus anyway, so what you actually give up is bonus on QIP, such as an interior office build-out, which would otherwise be 15-year property eligible for 100% bonus. The component side is covered in cost segregation for small business owners and cost segregation studies on commercial real estate.

• Cost Segregation Study for Small Business Owners: Accelerating Building Depreciation
• Cost Segregation Studies: Accelerating Depreciation on Commercial Real Estate
• Car Wash Tax Deductions: Equipment, Water, and Chemical Expenses

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.