Real Estate Tips |5 min read

Commercial Real Estate Loans: How to Maximize Your Tax Return

Commercial real estate loans, such as hard money loans, have one hidden secret: you can make tax deductions on their interest. That’s right. You can count off commercial real estate loan interest payments as a business expense. Let’s get into how this works below.

Main Takeaways

  • You can write off your loan as a business expense as long as you are legally responsible for it, plan on paying for it within a designated timeframe, work formally with a lender, and spend your money instead of saving it.

Table of Contents

How to Maximize Your Tax Return with a Commercial Real Estate Loan Interest Write-Off

As hard money lenders in Maryland, we’ve witnessed many investors save money with commercial real estate loan interest write-offs. According to the IRS, you simply must meet a few core criteria to qualify for them.

1. You Must Be Legally Responsible for Your Loan

Your loan must be in your name in order for you to gain tax write-offs from it. In other words, the borrower must be the one who benefits from the tax deductions.

2. You Must Plan on Paying the Debt Off in a Clear-Cut Timeframe

You must have a clear, explicit game plan for when you will pay off your debt. This way, you show actionable accountability for your loan.

3. You Have to Spend Your Money, Not Save It

If you spend your commercial real estate loan funds, that counts as a tax-deductible business expense. However, if you have not applied those funds, it only counts as an investment. This fact remains even if you have repaid your loan’s principal and interest. Luckily, if you have concrete plans to renovate or flip your property, this shouldn’t be a problem.

4. You Must Have a Professional Working Relationship with Your Lender

You should have a formalized, working relationship with your lender to qualify. It might sound glaringly obvious, but believe it or not, it’s not so clear to some people. After all, some people borrow from friends or family. In these cases, even if you’re using these funds for business purposes, you’re not getting those funds from a purely business relationship.

Because of this conflict of interest, the makeshift lender often gives you an informal loan. These commercial real estate loans lack adequate checks and balances, like documentation, interest, or repayment requirements. For all the IRS knows, the borrower could have used this under-the-table arrangement for illegal tax evasion.

How Interest Payment Write-Offs Work with Hard Money Loans

Now, we’ll focus on one of the top types of commercial real estate loans: hard money loans.

By nature, borrowers pay hard money loans more efficiently than other types of commercial real estate loans because they’re short-term loans. Sometimes, borrowers even repay them within the same tax year. This means you can deduct all your interest within one tax filing. Or, you could split the write-off between two filings.

Then, depending on your hard money loan’s terms, your lender may calculate the loan interest based on the standard annual percentage rate (APR) or factor rate. The calculation method will decide how much interest you pay in the end. Because of that, you should ask your lender how much interest you’ve paid overall before you file your taxes.

Other Ways to Benefit from Commercial Hard Money Real Estate Loans

Hard money loans can be the answer to how to maximize your tax return. However, that’s far from all they offer. For the below reasons, they can be more accessible and efficient than traditional commercial real estate loans.

Flexible Loan Terms

One big advantage of hard money loans is more flexible terms.

For example, hard money lenders usually can provide you with a loan catered to your needs. Depending on your investment objectives, hard money lenders can modify the length of your term, the interest rates, and loan-to-value, all for your individual goals. Thanks to that, you and your lender can collaborate to tailor your loan terms towards your unique goals.

Furthermore, if you discover you must adjust your term, you and your lender can work on that together.

Efficient Repayment Terms

Shorter repayment terms can help you get to the finish line more quickly. After all, traditional mortgages can drag on for years. Scarily, this means the loan would hang over your head for decades and decades. However, you don’t have to worry about this with hard money loans. Hard money loan terms are known for being shorter, and repayable in just a year or two.

So, these efficient repayment terms could be a better fit for home flippers than long-term mortgages. In addition, they can use hard money commercial real estate loans as bridge loans until they qualify for mortgage loans.

Access Capital Quickly

Hard money commercial real estate loans allow investors to access capital nearly immediately. Because of this, investors can jump on hot-button investment opportunities they may otherwise be unable to access. This could be essential to snatching time-sensitive projects before competitor investors do.

Eligibility in Flexibility

Hard money commercial real estate loans are independently sourced. They aren’t backed by institutional bureaucracy like bank-funded loans are. So, if investors face extenuating circumstances or less-than-ideal credit, they can still qualify for these loans when they might be turned away from others. After all, they simply require their collateral as value. Because of this, all kinds of investors could access the capital critical for their ventures.

Negotiating Power

Because hard money commercial real estate loans allow investors to close deals quickly, they may be able to leverage that fastness in their business dealings. For example, if they get to the dealing table before other investors, they could secure better prices, impress industry insiders, and gain competitive portfolio additions.

Secure Lucrative Deals with MHML

You can shed a significant chunk of hard money commercial real estate loan costs through tax benefits. When you have a legitimate loan expense with a legitimate lender, your interest payments can become a write-off.

If you need funding to get you off the ground running with that latest project, we can help. Our loans are designed to be lightning-quick and convenient so you can close a deal before it’s too late. Call us today to make sure that that home you’ve been eyeing doesn’t slip away.

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