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  • Writer's pictureColin Dubel

Single Purpose Entities & Their Tax Benefits

A Single Asset or Single Purpose Entity (SPE) in commercial real estate lending refers to a legal structure that limits the borrower's liability to a single property or a specific business purpose. In other words, the entity is created solely to own and manage a particular property or conduct a particular business, and its assets and liabilities are segregated from those of its owners or affiliates.

Lenders require an SPE structure to mitigate their risks and increase the likelihood of loan repayment. By creating an SPE, borrowers are effectively ring-fencing the property or business that is the subject of the loan, and this structure provides lenders with more control over the asset and the borrower's operations.

SPEs also provide lenders with greater legal protection in the event of default or bankruptcy. If the borrower defaults on the loan, the lender can foreclose on the property without worrying about any cross-default provisions that could affect other assets owned by the borrower. Similarly, if the borrower files for bankruptcy, the SPE structure ensures that the lender has a priority claim on the property or business before any other creditors.

Overall, SPEs provide lenders with a higher degree of security and comfort, which can result in more favorable loan terms and lower interest rates for the borrower.

There are several tax benefits of using an SPE to purchase commercial real estate, including:

  1. Pass-Through Taxation: An SPE is typically structured as a partnership or limited liability company (LLC), which means that the income and losses of the entity "pass through" to the individual investors. This can result in significant tax savings since the income is taxed at the individual level, rather than at the corporate level.

  2. Deductible Expenses: As a real estate owner, an SPE can deduct a variety of expenses related to the property, including mortgage interest, property taxes, depreciation, and maintenance costs. These deductions can offset rental income and reduce the amount of taxable income.

  3. Capital Gains Tax Deferral: If an investor sells their interest in an SPE, they may be able to defer capital gains taxes by using a 1031 exchange. This allows the investor to reinvest the proceeds from the sale into a similar property and defer paying taxes on the gains until a future date.

  4. Depreciation Benefits: Commercial real estate is typically depreciated over a period of 39 years for tax purposes. This means that the owner can deduct a portion of the cost of the property each year, which can result in significant tax savings over time.

It's important to note that the tax benefits of using an SPE to purchase commercial real estate can vary depending on a variety of factors, including the structure of the entity, the type of property, and the investor's individual tax situation. It's always a good idea to consult with a tax professional before making any significant real estate investments.

If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at or 949-735-6415.


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