What Tax Deductions Can Commercial Real Estate Investors Claim?
Commercial real estate investors have access to more tax deductions than nearly any other asset class. The IRS allows CRE owners to deduct expenses ranging from mortgage interest and depreciation to operating costs, professional fees, and even travel related to property management. When used strategically, these deductions can shelter significant portions of rental income and, in some cases, offset income from other sources entirely.
This guide covers every major tax deduction available to commercial real estate investors in 2026, including the Section 199A pass-through deduction, cost segregation strategies, and commonly overlooked write-offs that could save you thousands annually. Whether you own a single multifamily property or a diversified portfolio, understanding these deductions is essential to maximizing your after-tax returns.
Key Tax Deduction Categories for CRE Investors
27.5 to 39 Years
Depreciation Period
Residential vs commercial
Up to 20%
199A Deduction
Qualified business income
No Dollar Cap
Interest Deduction
For most CRE investors
$2,500 to $5,000
De Minimis Safe Harbor
Per item expensing
For investors financing acquisitions through permanent loans or SBA programs, the interest deduction alone can represent one of your largest tax benefits. Combined with depreciation and operating expense write-offs, CRE investors routinely reduce their effective tax rate well below their marginal bracket.
How Does the Mortgage Interest Deduction Work for Commercial Properties?
The mortgage interest deduction is one of the most valuable tax benefits for commercial real estate investors. Unlike residential mortgage interest, which faces caps under the Tax Cuts and Jobs Act (TCJA), commercial property mortgage interest is generally fully deductible against rental income with no dollar limit for real estate businesses.
Every dollar of interest you pay on a commercial mortgage directly reduces your taxable rental income. For a $2 million loan at 7.5% interest, that translates to roughly $150,000 in deductible interest during the first year alone. This deduction applies to acquisition loans, refinance loans, and construction financing.
Annual Mortgage Interest Deduction by Loan Size
| Loan Amount | Interest Rate | Annual Interest | Tax Savings (37% Bracket) | Tax Savings (24% Bracket) |
|---|---|---|---|---|
| $1,000,000 | 7.00% | $70,000 | $25,900 | $16,800 |
| $2,000,000 | 7.25% | $145,000 | $53,650 | $34,800 |
| $3,000,000 | 7.50% | $225,000 | $83,250 | $54,000 |
| $5,000,000 | 7.50% | $375,000 | $138,750 | $90,000 |
| $10,000,000 | 7.00% | $700,000 | $259,000 | $168,000 |
What qualifies as deductible interest:
- Interest on acquisition debt for commercial properties
- Interest on refinanced commercial mortgages
- Construction loan interest during the building phase
- Bridge loan interest during transitional periods
- Points and loan origination fees (amortized over the loan term)
- Prepayment penalties when paid
Important limitations to know: The business interest limitation under Section 163(j) caps business interest deductions at 30% of adjusted taxable income for businesses with gross receipts exceeding $30 million. However, real estate businesses can elect out of this limitation by choosing the Alternative Depreciation System (ADS) for their properties. Most CRE investors with properties under this threshold are unaffected.
Use our commercial mortgage calculator to estimate your annual interest costs and the resulting tax benefit based on your loan terms.
What Is Commercial Real Estate Depreciation and How Much Can You Deduct?
Depreciation is the single most powerful tax deduction in commercial real estate. It allows you to deduct the cost of your building over its useful life, even though the property may actually be appreciating in market value. This creates a "phantom expense" that reduces taxable income without requiring any cash outlay.
The IRS assigns a 39-year depreciation schedule for commercial properties and a 27.5-year schedule for residential rental properties (including multifamily buildings with five or more units). Under straight-line depreciation, you divide the building's depreciable basis by its useful life to determine the annual deduction.
Calculating your depreciation deduction:
- Determine your total property basis (purchase price plus closing costs and improvements)
- Subtract the land value (land is not depreciable)
- Divide the building value by 39 years (commercial) or 27.5 years (residential rental)
For a $3 million commercial property where land represents $600,000 of value, the depreciable basis is $2.4 million. Annual straight-line depreciation equals $61,538 per year for 39 years.
Accelerated depreciation through cost segregation:
A cost segregation study can dramatically accelerate depreciation by reclassifying building components into shorter recovery periods. Personal property components (5, 7, or 15-year assets) can be depreciated much faster than the standard 39-year schedule. Bonus depreciation, currently at 40% for 2026, allows partial first-year expensing of these reclassified assets.
Cost segregation typically reclassifies 20-40% of a building's value into shorter-lived categories. On a $2.4 million depreciable basis, moving 30% ($720,000) to 5-year and 15-year property classes can generate first-year deductions exceeding $300,000 compared to roughly $61,000 under straight-line depreciation.
Learn more about maximizing this benefit in our commercial real estate depreciation strategies guide.
Want to structure your financing for maximum depreciation benefit? Contact Clearhouse Lending to discuss loan options that pair well with cost segregation strategies.
Which Operating Expenses Are Tax Deductible?
Nearly every ordinary and necessary expense you incur to operate, maintain, and manage your commercial property qualifies as a tax deduction. These operating expenses are deducted in the year they are paid or incurred, directly reducing your taxable rental income.
Common Deductible Operating Expenses
| Expense Category | Typical Annual Cost | Deduction Timing | Documentation Required |
|---|---|---|---|
| Property Management Fees | 4-10% of gross rents | Year incurred | Management agreement, invoices |
| Property Taxes | 1-3% of assessed value | Year paid | Tax bills, payment receipts |
| Insurance Premiums | $1,500-$5,000 per $1M value | Year paid | Policy declarations, receipts |
| Repairs and Maintenance | 1-2% of property value | Year incurred | Invoices, before/after photos |
| Utilities (Landlord-Paid) | Varies by property type | Year paid | Utility bills, payment records |
| Legal and Accounting Fees | $2,000-$15,000+ | Year incurred | Invoices, engagement letters |
| Advertising and Marketing | $500-$5,000+ | Year incurred | Invoices, ad records |
Property management costs include management company fees (typically 4-10% of gross rents), on-site staff salaries, leasing commissions, and advertising expenses for vacant units. If you self-manage, you can deduct the reasonable value of office space, software subscriptions, and supplies used for property management.
Maintenance and repair expenses are fully deductible in the year incurred, provided they maintain the property in its current condition rather than improving it (more on this distinction below). Common deductible repairs include fixing plumbing leaks, patching roofs, repainting, replacing broken fixtures, and routine HVAC servicing.
Utility expenses paid by the landlord, including electricity, gas, water, sewer, and trash removal, are deductible. For properties where tenants pay utilities directly, any common-area utility costs borne by the owner remain deductible.
Insurance premiums for property coverage, liability insurance, umbrella policies, flood insurance, and loss-of-rent coverage are all deductible. Workers compensation premiums for property employees also qualify.
Property taxes paid to state and local governments are fully deductible against rental income with no cap. Unlike the $10,000 SALT deduction limit for personal taxes, investment property taxes have no ceiling.
Professional services including accounting fees, legal fees, property inspections, appraisal costs, and consulting expenses related to your CRE investments are deductible. Tax preparation fees allocable to your rental activities also qualify.
What Is the Difference Between Repairs and Improvements?
The distinction between repairs and capital improvements is one of the most consequential tax decisions CRE investors face. Repairs are deducted immediately in full, while capital improvements must be depreciated over their useful life, sometimes spanning 15 to 39 years. Getting this classification right can shift tens of thousands of dollars in deductions between tax years.
Repairs (immediately deductible): Repairs restore property to its original condition without extending its useful life or adding new functionality. The IRS applies three tests. If an expense does not result in a betterment, restoration, or adaptation to a new use, it qualifies as a repair.
Examples of deductible repairs:
- Patching a leaking roof section
- Fixing broken windows or doors
- Repainting interior or exterior walls
- Replacing damaged carpet in individual units
- Repairing plumbing or electrical issues
- Routine HVAC maintenance and minor component replacement
Capital improvements (must be depreciated): Improvements add value, extend the property's useful life, or adapt it to a new use. These costs are added to your depreciable basis and written off over the applicable recovery period.
Examples of capital improvements:
- Full roof replacement
- HVAC system replacement
- Adding a new parking lot or structure
- Elevator installation or complete modernization
- Converting office space to retail (adaptation)
- Major structural renovations
The safe harbor rules: The IRS provides a de minimis safe harbor allowing you to expense items costing up to $2,500 per item (or $5,000 with audited financial statements) regardless of whether they technically constitute improvements. This is particularly useful for appliances, fixtures, and small equipment purchases.
How Does the Section 199A Pass-Through Deduction Benefit CRE Investors?
The Section 199A qualified business income (QBI) deduction, sometimes called the pass-through deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income from rental real estate activities. For CRE investors structured as pass-through entities (LLCs, S-Corps, partnerships, or sole proprietorships), this deduction can significantly reduce their effective tax rate.
Section 199A Deduction Impact by Net Rental Income
$100K Income
7,400
$200K Income
14,800
$300K Income
22,200
$500K Income
37,000
$750K Income
55,500
$1M Income
74,000
How the 199A deduction works for rental properties:
If your commercial property generates $200,000 in net rental income (after all other deductions, including depreciation), the 199A deduction could provide an additional $40,000 write-off, reducing your taxable income to $160,000. At a 37% marginal tax rate, that is $14,800 in tax savings from this single provision.
Qualification requirements:
- The rental activity must rise to the level of a trade or business (regular, continuous, and substantial activity)
- The IRS Safe Harbor (Revenue Procedure 2019-38) requires 250+ hours of rental services per year with documented records
- Rental income must flow through a pass-through entity (not a C-Corp)
Income limitations: For 2026, the QBI deduction phases out for specified service trades or businesses above certain income thresholds. However, rental real estate is generally NOT classified as a specified service trade or business, meaning the full deduction is available regardless of income level, subject to the W-2 wage and property basis limitations for higher earners.
The W-2 wage and basis test: For taxable income above the threshold ($191,950 single, $383,900 married filing jointly for 2026), the deduction is limited to the greater of: (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. CRE investors benefit significantly from option (b) because their high property basis often supports a substantial deduction even without paying W-2 wages.
Need help estimating how your financing structure affects your QBI deduction? Schedule a consultation with Clearhouse Lending to align your loan terms with your tax strategy.
What Travel and Vehicle Expenses Can You Deduct?
CRE investors who travel to manage, inspect, or maintain their properties can deduct a range of transportation and travel expenses. The IRS allows these deductions when travel is primarily for business purposes related to your rental activities.
Local travel deductions:
- Mileage driven to and from properties for management, maintenance, or tenant meetings (67 cents per mile for 2026 or actual vehicle expenses)
- Parking fees and tolls related to property visits
- Public transportation costs for property-related travel
Out-of-town travel deductions (when travel is primarily for business):
- Airfare, train tickets, or car rental costs
- Hotel accommodations for the business portion of the trip
- 50% of business meal costs when meeting with tenants, contractors, or professionals
- Incidental expenses like tips, baggage fees, and business phone charges
Documentation requirements are strict. The IRS requires contemporaneous records for all travel deductions, including date, destination, business purpose, and amount spent. A mileage log (digital apps like MileIQ are acceptable) is essential for vehicle deductions. Without proper documentation, these deductions will not survive an audit.
What you cannot deduct: Commuting from your home to a regular office is not deductible. However, driving from your home office (if you have a qualifying home office) to your rental properties is deductible as business travel, not commuting.
What Commonly Missed Deductions Should Every CRE Investor Know?
Many commercial real estate investors leave money on the table by overlooking legitimate deductions. These commonly missed write-offs can collectively save thousands of dollars per year.
Commonly Missed CRE Tax Deductions
These overlooked deductions can save CRE investors $5,000 to $50,000+ annually: loan origination fees and closing costs (amortized), cost segregation study fees, entity formation and maintenance costs, continuing education and industry memberships, home office deduction, bad debt from uncollectible rent, environmental remediation costs under Section 198, and real estate professional status election for unlimited passive loss usage.
Loan origination fees and closing costs: Points, loan origination fees, and certain closing costs on commercial mortgages are deductible. These are typically amortized over the loan term rather than deducted in the year paid. If you refinance or sell before the loan matures, the remaining unamortized balance becomes deductible in that year.
Cost segregation studies: The fee for conducting a cost segregation study is itself deductible as a professional expense, while the study can unlock hundreds of thousands in accelerated depreciation.
Entity formation and maintenance costs: Legal fees for forming LLCs, annual state filing fees, registered agent fees, and entity maintenance costs are deductible as business expenses.
Continuing education: Courses, seminars, conferences, books, and subscriptions related to real estate investing and property management are deductible. This includes membership fees for real estate investment associations and industry publications.
Home office deduction: If you manage your properties from a dedicated home office space, you can deduct a proportionate share of your home expenses (mortgage interest, utilities, insurance, repairs) or use the simplified method ($5 per square foot, up to 300 square feet).
Bad debt deductions: Uncollectible rent from commercial tenants can be deducted as a bad debt loss once you have exhausted reasonable collection efforts.
Environmental remediation costs: Costs for asbestos removal, lead paint abatement, or other environmental cleanup can be currently deducted rather than capitalized under Section 198.
Real estate professional status: Qualifying for real estate professional tax status unlocks the ability to use rental losses to offset W-2 and other active income without limitation, a benefit worth tens of thousands for high-income investors.
How Should You Structure Your Tax Strategy for Maximum Deductions?
Building an effective CRE tax strategy requires coordinating multiple deductions and timing them to maximize benefit across tax years. The following framework helps investors capture every available deduction.
CRE Tax Deduction Strategy by Investment Phase
Acquisition Year
Conduct cost segregation study, claim bonus depreciation, deduct closing costs, capture partial-year operating expenses
Holding Period
Maximize repair deductions, document all travel expenses, claim 199A deduction, review insurance coverage annually
Refinance Events
Deduct unamortized original loan costs, begin amortizing new loan fees, evaluate interest deduction optimization
Disposition
Execute 1031 exchange to defer gains and recapture, consider installment sales, evaluate Opportunity Zone reinvestment
Year of acquisition: Front-load deductions with a cost segregation study and bonus depreciation. Deduct all eligible closing costs. Capture a partial year of operating expense deductions and property taxes.
Ongoing holding period: Maximize operating expense deductions by properly classifying repairs versus improvements. Document all travel and vehicle expenses meticulously. Claim the Section 199A deduction annually. Review insurance coverage to ensure all premiums are captured.
Refinance events: Deduct remaining unamortized costs from the original loan. Begin amortizing new loan costs over the replacement loan term. Evaluate refinance options to potentially increase interest deductions while pulling out tax-free equity.
Disposition planning: Consider 1031 exchanges to defer capital gains and depreciation recapture taxes. Installment sales can spread gains across multiple tax years. Opportunity Zone investments may provide additional deferral and exclusion benefits.
Use our DSCR calculator to model how deductions affect your property's cash flow and after-tax returns. Understanding the interplay between financing structure and tax benefits is critical for optimizing your investment.
Ready to maximize your commercial real estate tax deductions? Contact Clearhouse Lending to discuss financing strategies that complement your tax plan, from cost segregation-friendly loan structures to refinancing for improved cash flow.
Frequently Asked Questions About CRE Tax Deductions?
Can I deduct mortgage interest on a commercial property? Yes. Mortgage interest on commercial investment properties is fully deductible against rental income with no dollar cap for most CRE investors. This applies to acquisition loans, refinance debt, bridge loans, and construction financing. The Section 163(j) business interest limitation only affects businesses with over $30 million in gross receipts, and real estate businesses can elect out.
How many years do you depreciate commercial real estate? Commercial (nonresidential) property is depreciated over 39 years using straight-line depreciation. Residential rental property (including multifamily with five or more units) uses a 27.5-year schedule. A cost segregation study can reclassify 20-40% of building components into 5, 7, or 15-year recovery periods for accelerated deductions.
What is the Section 199A deduction for rental property? The Section 199A pass-through deduction allows eligible CRE investors to deduct up to 20% of their qualified business income from rental activities. For a property generating $200,000 in net rental income, this could mean an additional $40,000 deduction. The rental activity must qualify as a trade or business, typically requiring 250 or more hours of documented rental services annually.
Are property taxes on commercial real estate fully deductible? Yes. Property taxes on commercial investment properties are fully deductible against rental income. The $10,000 SALT deduction cap that applies to personal income taxes does not apply to property taxes paid on investment or business real estate. There is no limit on this deduction.
Can I deduct the cost of repairs and maintenance? Repairs that maintain the property in its current condition are fully deductible in the year incurred. This includes fixing leaks, repainting, replacing broken fixtures, and routine maintenance. Capital improvements that add value or extend the property's useful life must be depreciated instead. The de minimis safe harbor allows expensing items up to $2,500 each ($5,000 with audited financials).
What happens to depreciation deductions when I sell the property? When you sell, the IRS recaptures depreciation at a 25% rate (Section 1250 recapture) on any gain attributable to depreciation previously claimed. A 1031 exchange can defer both capital gains taxes and depreciation recapture by reinvesting proceeds into a like-kind replacement property.
Can I use rental property losses to offset my W-2 income? Generally, passive rental losses can only offset passive income. However, investors who qualify as real estate professionals (750 or more hours per year in real estate, with material participation in each rental activity) can use rental losses to offset any income, including W-2 wages. Additionally, the $25,000 passive loss allowance is available for active participants with adjusted gross income below $150,000.
Should I do a cost segregation study on my commercial property? A cost segregation study is generally worthwhile for commercial properties with a depreciable basis of $1 million or more. The study typically costs $5,000 to $15,000 but can unlock $100,000 to $500,000 or more in accelerated first-year deductions. The study fee itself is also tax deductible.
Sources?
- IRS Publication 946, "How to Depreciate Property," Internal Revenue Service, updated 2025. irs.gov/publications/p946
- IRS Revenue Procedure 2019-38, "Safe Harbor for Rental Real Estate Enterprises for Section 199A," Internal Revenue Service. irs.gov/newsroom/irs-issues-guidance-on-section-199a
- Section 163(j) Business Interest Limitation, Tax Cuts and Jobs Act of 2017, 26 U.S.C. 163(j). law.cornell.edu/uscode/text/26/163
- KPMG, "Tax Deductions for Commercial Real Estate: 2025 Planning Guide," KPMG Real Estate Advisory. kpmg.com
- National Association of Realtors, "Investment Property Tax Benefits Reference Guide," 2025. nar.realtor