Commercial vs. Residential Rentals: The Basics

The residential real estate market is crazy right now. Many people are seizing the opportunity to snatch up houses they plan to use to bring in rental income. Perhaps they want to list the property on Airbnb or VRBO, or maybe they’re more interested in renting to long-term tenants. Either way, residential rentals can be a good source of income for those who go into them with their eyes open.

The commercial real estate market is also hot. It goes without saying that commercial rental properties require a larger outlay of cash and often involve long-term financing. But they also provide a substantially higher stream of revenue. Commercial rentals may be a good option for investors as long as they do their homework before committing to the purchase.

Learn the Difference

So what’s the difference between residential and commercial rentals? Here’s what you need to know before investing hard-earned dollars in either one.

Residential rentals

Residential real estate consists of places where people live: single-family homes, townhomes, condos, duplexes, mobile homes, and multifamily units of four or fewer families. Residential rentals also include apartments in a mixed-use development where businesses are on the ground floor and residential living space is on the upper floors. These mixed-use developments are increasingly more common in cities throughout the country.

Residential rentals have a much lower cost of entry than commercial rentals do, which is why they’re attractive to the everyday investor. These properties are easily managed by an off-site owner or leasing manager.

Commercial rentals

Commercial properties are places where people do business. Offices, malls, retail shops, industrial spaces, and warehouses fall into the commercial real estate category. So do retail and office space in a mixed-use project and multifamily units of more than four families. Commercial rentals also include special use facilities such as casinos, student housing, buildings used for government or religious organizations, and sports stadiums.

Commercial property may be owner-occupied, with the building owner having office space on the premises. But these properties are more often managed by a commercial real estate management company or facilities manager on behalf of an absentee landlord.

How Does Rental Property Affect Your Taxes?

Any rental property impacts your tax liability. You’ll have to pay taxes on the income you receive from your rental property. You’ll also want to depreciate the property over time to recapture some of the taxes paid. Many of the expenses associated with rental properties are deductible, which lowers your tax liability. And if you sell a rental property, you may have to pay capital gains tax.

These are just a few of the tax implications of owning rental property. A licensed CPA can advise you of other impacts specific to your situation.

Call Adams Accounting Solutions Before Writing the Check

Adams Accounting Solutions specializes in helping clients assess the tax implications of owning residential or commercial rental property. We’re experts when it comes to understanding how rental properties impact your financial future.

If you’re thinking of investing in a rental property, give us a call first. We’ll walk you through the process, answer questions, and help you make the best decision for your situation. We look forward to working with you!