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Originally published: October 2023 | Updated: November 2025
Owning a shopping plaza offers investors significant tax benefits that can significantly improve their returns.
Shopping plaza owners can lower their tax bills through depreciation, cost segregation, mortgage-interest write-offs, and a wide range of operating-expense deductions. These tax tools often make shopping plazas significantly more profitable than many other investment options.
Unlike stocks or bonds, commercial real estate offers unique ways to reduce taxable income while building long-term wealth. That’s a pretty big deal for anyone looking to grow their portfolio with less money going to the IRS.
The tax benefits of commercial real estate ownership go way beyond just collecting rent. Shopping centers generate income from various tenants and allow owners to deduct expenses such as maintenance, property management fees, insurance, and utilities.
All these deductions add up quickly and significantly reduce the tax owed on rental income—allowing owners to keep more of the cash their property generates.
Owning a shopping plaza provides several tax advantages, including depreciation, operating-expense deductions, mortgage-interest write-offs, 1031 exchange deferrals, and potential tax credits.
Shopping plaza investors have access to major tax advantages across several categories. Depreciation lets owners write off the building’s cost over 39 years for commercial properties.
Mortgage interest deductions cover the interest paid on loans used to buy or improve the property. Owners can generally deduct 100% of eligible mortgage interest paid on loans used to acquire or improve the property.
Operating expense deductions include everyday costs like:
Capital improvements—such as roof replacements, HVAC upgrades, or parking lot reconstruction—must be depreciated over time in accordance with IRS guidelines. These projects often qualify for extra deductions.
One thousand thirty-one exchanges let you sell one property, buy another, and push off paying taxes on your profits. That’s a huge tool for growing your portfolio without losing a chunk to taxes right away.
Tax deductions mean you pay less to the IRS each year. For example, if your shopping plaza brings in $100,000 in rent and you have $40,000 in deductible expenses and depreciation, your taxable income drops to $60,000.
At a 25% tax rate, that’s a $10,000 annual tax savings. Not bad, right?
Depreciation usually gives the biggest cash flow boost for shopping plaza owners. A $2 million building can generate about $51,000 in annual depreciation over 39 years.
Because depreciation is a non-cash expense, even profitable properties may show ‘paper losses,’ which can offset other income and reduce overall tax liability.
The tax savings free up more cash for you to reinvest in upgrades or new deals. It’s a faster way to build wealth compared to stocks or bonds, which just don’t offer these kinds of tax breaks.
Depreciation allows shopping plaza owners to deduct a portion of the building’s value each year under the 39-year MACRS depreciation schedule. This non-cash expense lowers taxable income and boosts after-tax cash flow.
Bonus depreciation and cost segregation can accelerate these deductions for larger early-year tax savings.
Commercial properties, such as shopping plazas, use the Modified Accelerated Cost Recovery System (MACRS) for depreciation. The IRS says you’ve got to use a 39-year schedule for nonresidential real estate.
Owners divide the building’s depreciable basis (excluding land) by 39 to calculate the annual depreciation deduction under MACRS. It’s a simple formula that cuts your taxable income year after year.
Example calculation:
For the first year, you use a mid-month rule—if you place the property in service mid-month, you only get half that month’s depreciation, plus the full amount for the rest of the year.
MACRS provides consistent annual deductions until the property is sold or fully depreciated.
Bonus depreciation lets you write off qualifying property costs right away, instead of waiting years.
This strategy can substantially accelerate tax savings, especially for qualifying building systems and tenant-improvement components.
Qualifying items include:
The bonus depreciation percentage changes depending on when you put the property in service. For 2023, you can take 80% bonus depreciation, but that drops by 20% per year until 2027.
The property must be new to you and have a recovery period of 20 years or less. Used equipment works too, as long as you haven’t used it before.
You can choose not to take bonus depreciation if the regular MACRS schedule makes more sense for your tax situation. This choice applies to the entire property class for the year.
Land is the biggest part of a shopping plaza that you can’t depreciate. The IRS considers land to have an unlimited life, so no deductions there.
Appraisals break out the value of land versus the building. Typical land percentages:
Other things you can’t depreciate:
Permanent land improvements—such as landscaping, grading, or initial site-preparation work—are generally not depreciable and instead increase the property’s basis.
Many owners misclassify land and building components, leading to incorrect depreciation calculations. Proper cost allocation ensures accurate deductions and maximized tax benefits.
Make sure you split costs correctly between the building and land to get the real tax benefits.
Dean Commercial Real Estate helps you analyze shopping-plaza tax benefits and make smarter investment decisions with expert guidance tailored to your goals. Contact us today for support.
If you’re ready to get started, call us now!
Cost segregation studies break down building components into different depreciation buckets so you can speed up deductions.
This approach makes the most sense for properties worth more than $500,000 and works best if you do it early in your ownership.
Normally, commercial real estate depreciation takes 39 years. Cost segregation finds assets with shorter lives so you can write them off faster.
5-Year Property:
7-Year Property:
15-Year Property:
The rest of the building sticks to the 39-year schedule. Most shopping plazas see 15-35% of their costs moved into these shorter categories—sometimes more, sometimes less.
Owners should look into cost segregation for commercial properties if the numbers work out. Costs vary based on property size and complexity, but the long-term tax savings often outweigh the investment for qualifying properties.
Best times to do it:
Property should meet these requirements:
Probably not worth it if:
Retail shopping centers are good candidates because they typically have extensive tenant improvements and specialized systems.
Cost segregation front-loads depreciation to create immediate tax savings. Over the years, the total depreciation has stayed the same.
Year One Benefits:
Long-Term Considerations:
A $2 million shopping plaza could deliver $75,000 in first-year tax savings. Without cost segregation, owners would spread those deductions over decades.
Shopping plaza owners can deduct most day-to-day operating costs from rental income. That includes maintenance, management fees, and utilities.
The IRS draws a line between deductible repairs and capitalizable improvements. Mortgage interest is also one of the biggest deductions available.
Shopping plaza owners get to deduct a wide range of operating expenses from their rental income. These deductions reduce taxable income dollar-for-dollar—always a welcome relief.
Fully Deductible Expenses:
Property taxes are another big deduction. Owners just deduct what they paid that year.
Security services, landscaping, snow removal, and parking-lot maintenance are also fully deductible as necessary operating expenses.
Administrative expenses, such as phone bills and postage, count. Bank fees for property-related accounts are also deductible.
Pest control and routine HVAC servicing both fall under maintenance. These help keep the property producing income.
The IRS separates deductible repairs from capitalizable improvements. The key is whether the work extends the property’s life or boosts its value.
Deductible Repairs:
Capitalizable Improvements:
Improvements to commercial property must be depreciated over 39 years. Owners can only deduct a small part each year, not the whole cost at once.
The “betterment, adaptation, or restoration” test helps sort it out. If work increases the value, adapts the property for new use, or restores it after major deterioration, it’s an improvement.
When multiple repairs are completed as part of a larger renovation project, the IRS may classify them collectively as capital improvements rather than deductible repairs.
Mortgage interest is one of the largest deductions for shopping plaza owners. The IRS lets you deduct all interest paid on loans secured by income-producing property.
Interest deductions cover:
During construction, owners have to capitalize loan interest into the property’s cost basis. Once the property starts generating rent, mortgage interest becomes fully deductible.
If owners use loans to buy or improve the plaza, the interest on those loans qualifies. Interest on personal loans doesn’t count unless the loan is secured by property.
Owners need good records showing how they used the loan proceeds. For mixed-use loans, the interest must be split between business and personal use.
Prepayment penalties on commercial mortgages are treated as interest expense in the year they are paid.
A 1031 exchange lets shopping plaza investors defer capital gains taxes by rolling sale proceeds into another qualifying property. Investors must follow strict IRS timelines and property rules to keep the tax deferral.
The IRS sets two main deadlines for 1031 exchanges. First, investors have 45 days from the sale to identify replacement properties.
They must put the identification in writing and give it to a qualified intermediary. Owners can pick up to three properties of any value, or more if they stick to certain valuation rules.
Second, investors must buy the replacement property within 180 days of selling the original one. These periods overlap—they don’t run back-to-back.
Missing either deadline disqualifies the exchange, and all deferred capital gains and depreciation-recapture taxes become immediately due.
Commercial real estate investors really need to plan to avoid missing these deadlines. The IRS doesn’t grant extensions.
Shopping plaza investors can swap into a wide range of commercial real estate. Office buildings, apartments, warehouses, and retail centers all count as like-kind.
The new property must be held for investment. Personal use doesn’t qualify.
Investment Value Requirements:
Single-tenant net lease properties can offer steady income. Industrial properties have a different risk profile but retain the tax benefits.
Raw land held for investment works too, but owners lose out on immediate cash flow compared to income-producing buildings.
Sometimes, a 1031 exchange doesn’t make sense. If owners need cash right away, the process ties up all proceeds in the next property.
Investors planning to leave real estate altogether shouldn’t bother with exchanges. This strategy only fits those who want to stay in the game.
Sometimes, the market just doesn’t offer good replacement properties. Rushing into a bad deal to meet the deadline can wipe out any tax advantage.
Situations to avoid exchanges:
If capital gains rates are low, it might be smarter to pay taxes now. Future tax-law changes may impact the benefits of deferral strategies, so investors should review options with a tax professional.
Get personalized insights from our Dean Commercial Real Estate team to maximize depreciation, deductions, and long-term tax savings on your shopping-plaza investment. Contact us now for guidance.
If you’re ready to get started, call us now!
Shopping plaza owners have access to several tax credits and incentives. Federal energy programs offer tax reductions, historic properties can qualify for big rehab credits, and local governments sometimes provide property tax breaks to spur development.
The 179D energy deduction gives commercial property owners significant tax breaks for new or upgraded energy systems. Owners can deduct up to $5.00 per square foot if their property meets certain energy efficiency targets.
To qualify, the building must save at least 25% more energy than required by standard codes. Deductions apply to lighting, HVAC, and building envelope improvements.
Qualifying improvements include:
Owners need third-party energy modeling and certification. They can claim the deduction in the year the property goes into service.
Some older shopping plazas may qualify for federal historic rehabilitation credits if the property meets the National Park Service’s eligibility requirements.
Owners must spend more than $5,000 or the building’s adjusted basis, whichever is higher. The National Park Service has to approve all work to make sure it preserves the historic character.
Key requirements include:
Owners can claim credits over five years. If they can’t use the full amount, they often sell credits to investors at 85-90 cents on the dollar.
Many cities offer property tax abatements to developers investing in struggling areas. These programs freeze or cut property taxes for 5-15 years, depending on the deal.
Tax increment financing (TIF) districts let developers use future property tax increases to pay for today’s improvements. The extra taxes from development cover infrastructure and construction costs.
Common local incentives include:
Private investors in distressed areas can get dollar-for-dollar credits through the New Markets Tax Credit program. These credits apply over 10 years to federal income taxes.
State enterprise zones may offer even more perks, like lower business license fees and faster permitting.
The legal structure investors pick for shopping plaza ownership really shapes their tax bill and deductions. Different business types come with varying tax obligations and savings requirements.
LLCs and partnerships are pass-through entities for tax purposes. The business itself doesn’t pay federal income tax.
Instead, profits and losses are reported directly on the owners’ personal tax returns. Each member reports their share of everything—income, deductions, credits—on their own returns.
Partnership structures offer several advantages:
LLCs provide liability protection in addition to those benefits. Members get K-1 forms showing their share of income, expenses, and deductions.
The pass-through structure allows investors to claim their share of income, deductions, and depreciation directly, which may offset other qualifying income depending on IRS passive-activity rules.
The Qualified Business Income deduction lets eligible pass-through entity owners deduct up to 20% of their business income.
If you own a shopping plaza through an LLC or partnership, you might qualify for this hefty tax break.
QBI deduction requirements include:
Real estate rental activities are usually eligible businesses for QBI. Most shopping plaza owners meet the active participation rules needed to claim the deduction.
High-income taxpayers start losing the deduction at certain levels. Single filers hit the limit at $182,050, while married couples face a limit of $364,100.
Property basis calculations really matter for getting the most out of the deduction. The depreciable basis of your plaza buildings and improvements directly affects the QBI benefit you can claim.
How you structure ownership of a shopping plaza shapes your estate planning options. Pass-through entities give you more flexibility for handing off ownership to heirs.
Key estate planning benefits include:
LLCs allow investors to gift membership interests while retaining management control. This approach removes future appreciation from your taxable estate but still lets you call the shots.
Partnerships open the door to more complex succession plans. You can set up different classes of ownership to separate income rights from voting power.
Family limited partnerships offer additional estate-planning perks. Parents can transfer plaza ownership to kids and claim discounts for lack of marketability and minority interests.
The stepped-up basis rule gives heirs a real edge. Inherited shopping plaza interests get a new tax basis equal to fair market value at death, wiping out built-in capital gains.
Selling a shopping plaza brings two big tax bills: depreciation recapture on earlier deductions and capital gains tax on your profit. With smart planning, you can avoid these tax hits by timing transactions or using exchange programs.
When you sell a shopping plaza, you pay back part of the depreciation deductions you took while owning it. The IRS charges a flat 25% tax rate on all depreciation claimed.
Say you claimed $500,000 in depreciation over ten years. You’d owe $125,000 in recapture taxes—even if you didn’t make a profit on the sale.
Depreciation recapture hits all commercial property sales. You can’t dodge it by offsetting with capital losses. The recapture amount is the lesser of your total depreciation claimed or your actual gain on sale.
Key recapture facts:
Capital gains tax kicks in on the profit above your original purchase price plus improvements. The rate depends on how long you have owned the property.
If you held the property longer than a year, you get long-term capital gains rates: 0%, 15%, or 20%, based on your income. Most shopping plaza owners fall in the 15% or 20% bracket.
To figure your gain, subtract selling costs from the sale price, then subtract your original basis (purchase price plus improvements) from that number.
Capital gains calculation:
Knowing your capital gains tax rate helps you plan your exit—or at least avoid surprises.
The 1031 exchange is the strongest way to defer both depreciation recapture and capital gains taxes. You have to identify replacement properties within 45 days and finish the exchange within 180 days.
Shopping center 1031 exchanges require careful planning, but they can defer all federal taxes indefinitely. The catch? The replacement property must be worth at least as much as the sale price.
Installment sales let you spread tax payments over several years if the buyer pays over time. This method works well for big plazas when buyers want to finance the deal.
Tax reduction strategies:
Opportunity zone investments let you put off capital gains taxes until 2026. If you hold the new investment for ten years, you might avoid taxes on its growth. That sounds pretty appealing.
Dean Commercial Real Estate offers guidance to shopping plaza investors seeking to optimize their tax strategies. Their team knows the complex tax landscape that comes with commercial property ownership.
The firm works with tax professionals specializing in commercial real estate investments. They help clients spot deductions and credits specific to shopping plazas.
Dean’s advisors get involved in strategic depreciation methods, such as cost segregation studies. These studies accelerate depreciation timelines for certain parts of property.
The company walks investors through 1031 like-kind exchanges when they sell shopping plazas. This move lets investors defer capital gains taxes by putting proceeds into similar properties.
Key Services Include:
Dean CRE provides ongoing guidance to help investors maintain compliance, optimize tax strategies, and adapt to changing regulations throughout the property’s lifecycle. They keep an eye on changing tax laws that might affect shopping plaza investments.
The team aims to maximize after-tax returns while staying compliant with regulations. Their experience helps investors sidestep tax pitfalls that can eat into profits.
Secure long-term tax advantages and stronger returns with Dean Commercial Real Estate’s full-service shopping-plaza acquisition support. Schedule an appointment with our Huntsville team to get started.
What tax benefits do shopping-plaza owners receive?
Shopping-plaza owners receive several tax advantages, including depreciation deductions, interest write-offs, deductible operating expenses, and the ability to defer capital gains through 1031 exchanges. These incentives reduce taxable income, increase after-tax cash flow, and help investors preserve equity while scaling their commercial real-estate portfolios.
How does depreciation work for a shopping plaza?
Commercial shopping plazas are depreciated over 39 years under the MACRS schedule, allowing owners to deduct a portion of the property’s value each year. This non-cash deduction reduces taxable income and boosts cash flow. Bonus depreciation and cost segregation can accelerate these benefits for larger early-year savings.
Should I use a cost-segregation study for my shopping plaza?
A cost-segregation study is beneficial if your shopping plaza includes significant improvements or was recently purchased. It identifies building components eligible for shorter depreciation timelines, accelerating tax deductions. This strategy often produces substantial first-year savings and is especially valuable for investors seeking stronger early cash returns.
What operating expenses are tax-deductible for shopping-plaza owners?
Deductible expenses typically include repairs, maintenance, property management fees, insurance, utilities, advertising, and professional services. Mortgage interest is also deductible. These write-offs directly reduce taxable income, making accurate financial tracking essential for maximizing a shopping plaza’s annual tax benefits.
Can I use a 1031 exchange when selling a shopping plaza?
Yes. A 1031 exchange lets shopping plaza owners defer capital gains and depreciation recapture taxes by reinvesting sale proceeds into another like-kind property. Investors must follow strict timelines—45 days to identify and 180 days to close—to qualify. This strategy preserves equity and supports long-term portfolio growth.
Are there tax credits or incentives available for shopping plaza improvements?
Owners may qualify for federal energy-efficiency credits, historic-rehabilitation incentives, or local business-development abatements. These credits can significantly reduce tax liabilities, especially when upgrading lighting, HVAC systems, or exterior improvements. Eligibility varies by project type and region, so reviewing local incentive programs is essential.
What tax issues should I expect when selling a shopping plaza?
Selling a shopping plaza triggers capital-gains tax and depreciation recapture, which can reduce net proceeds. Investors often mitigate this impact through 1031 exchanges, strategic timing, or estate-planning tools. Understanding these tax liabilities in advance helps optimize exit strategies and protect long-term equity.
