Retirement Accounts vs. Commercial Real Estate: Why You Don’t Have to Choose—You Can Maximize Both

Retirement Accounts vs. Commercial Real Estate

Why You Don’t Have to Choose—You Can Maximize Both

As we head into the 2024 tax season, I’ve been getting the same question over and over again from many of our investors:

“Should I use my retirement account or invest with cash? If I invest with cash, won’t I just have to pay taxes on everything? How can I maximize my returns and save on taxes?”

I get it. It’s a great question—and one that pops up frequently, especially this time of year when the tax season is looming like a storm cloud. And to be honest, it’s one that took me a while to figure out in the past.

So, I thought it might be time to clear the air and share some insights I’ve picked up over the years. Over the course of countless conversations with investors and a little bit of guidance from our financial director, Brandon (who’s also a CPA), I’ve come to realize that the answer is actually simpler than most people think.

But before we dive into the details, let me tell you about a recent conversation I had with one of our investors. We’ll call him Jim, just for fun. Jim was nervous. He had some cash he was sitting on, but he also had a retirement account. He wanted to know which option was better: put the cash in a traditional investment or open up a self-directed retirement account and use that to invest in real estate.

I could tell Jim was on the verge of making a decision that could cost him.

I said, “Jim, you don’t have to choose. You can do both—use your retirement account and invest with cash, and here’s the kicker: you don’t need to be afraid of paying taxes on the cash you invest, either.”

Jim, of course, raised his eyebrow. “Wait, hold up. If I don’t invest with my retirement account, I’m going to get hit with taxes, right?”

I smiled and said, “Well, part of that is true, but the rest is a little more complicated than it seems. And that’s where commercial real estate comes in.”

I know, I know—you’re probably thinking, “Commercial real estate? Taxes? Where’s the connection?” Well, let me tell you, this is the good stuff. The part that turns those foggy questions into clear, tax-saving answers.

Retirement Accounts—A Great Option, But What About Cash?

First off, I’m not here to tell you that retirement accounts are bad. If you’ve already got one, and you want to add more funds to it, that’s a great move. You’re going to get some fantastic tax benefits from putting money into a retirement account. No argument there.

And if you’re investing with a self-directed retirement account, you can easily invest in real estate and still get those tax advantages. That’s a win-win.

But here’s where the common misconception comes in: a lot of people think that if they don’t use their retirement account and decide to invest with cash, they’re automatically going to pay taxes on everything they earn.

Well, that’s only half true. And here’s where I had to pull Brandon into the conversation.

I asked him, “Okay, Brandon, help me out here. What do I tell Jim? Can he really avoid paying taxes on his cash investment if he’s not using his retirement account?”

Brandon, who always has a way of making the complicated seem simple, grinned and said, “Well, let’s put it this way: cash investments in commercial real estate can be as tax-efficient as investing through a retirement account. You just have to understand how depreciation works.”

I’ll admit, I wasn’t sure what he meant at first. I’d heard of depreciation, of course—who hasn’t? But it sounded like something that only accountants used to make you feel dumb at tax time.

But when Brandon broke it down, I got it. He said, “Commercial real estate allows investors to leverage depreciation to reduce taxable income. And with the right type of property, you can take advantage of something called accelerated bonus depreciation.”

At this point, I was all ears—because accelerated bonus depreciation sounded like magic to me.

Depreciation—Not Just for Old Cars and Furniture

So, let’s talk depreciation for a second. If you’re thinking, “That sounds like one of those accountant terms that makes my brain hurt,” you’re not alone. I get it. But stick with me for a second because this is important.

Here’s what you need to know: Depreciation is a way the IRS lets you deduct the wear and tear on an asset over time. And while that sounds boring, it’s actually one of the biggest tax-saving strategies in real estate.

Now, I can almost hear the wheels turning in your head: “Wait, buildings don’t depreciate the same way a car does, do they?”

Nope. But the IRS doesn’t care about that. The IRS cares about the fact that, over time, a building’s value on paper goes down because of things like wear and tear, maintenance, and age. And the cool part? You get to deduct that depreciation against your income, which can lower your taxable income—without you having to sell anything.

Here’s where it gets even better. Accelerated bonus depreciation is a game-changer. In some cases, you can take a big chunk of depreciation in the first year you own a property, rather than spreading it out over decades. So, if you’re investing in commercial real estate, this could mean a huge upfront tax break.

Brandon said, “It’s like a cheat code for taxes, but it’s 100% legal.”

At that point, I felt like I had my answer to give to Jim—and I’ve been giving the same advice to countless other investors ever since. You don’t need to choose between a retirement account and investing with cash. Both are solid options. You can put your money into a retirement account to get those great tax benefits, or you can invest in commercial real estate and use depreciation to save on taxes.

So, What’s the Big Takeaway?

Here’s the simple truth: Whether you’re using a retirement account or investing with cash, there’s no reason to feel like you have to choose one or the other.

Retirement accounts are fantastic for long-term growth and tax deferral, and you can absolutely use those funds to invest in real estate. But if you’ve got cash on hand and want to avoid the taxes that would come with traditional investments, commercial real estate can provide an equally powerful tax advantage.

Remember, the key is leveraging depreciation and bonus depreciation in commercial real estate to maximize your tax benefits. And if you’re still a little confused on how it all works, check out Brandon’s article for a deep dive into depreciation strategies. You can read it here.

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