What to Do with Commercial Real Estate You Inherited: Your Financial Path Forward

Inheriting commercial property can feel like both a blessing and a challenge. Whether the inherited real estate is a family-owned business property or a portfolio of commercial properties, you’re now faced with important decisions that could impact your financial future. 

From dealing with tax liabilities to deciding whether to keep or sell the property, there are many factors to consider. The good news? With proper planning, you can turn your inheritance into a valuable asset without letting it become a burden.

What Are the First Steps When You Inherit Commercial Real Estate?

Inheriting real estate can be an overwhelming experience, especially when it comes to managing inherited commercial property. Whether you’ve inherited a commercial property outright or share it with other heirs, your first steps are important in minimizing costs and making informed decisions. Here are the key steps to take:

Understand the Estate Taxes

If you inherit commercial real estate, you may owe estate taxes depending on the property’s value and the total value of the estate. In 2024, the federal estate tax exemption is $13.61 million per person, meaning estates below this threshold are not subject to federal estate tax. However, if the total estate value exceeds this amount, federal estate tax rates start at 18% and increase to a maximum of 40% on the amount over the exemption​ (Hinckley Allen).

In New York State, the estate tax exemption is $6.94 million in 2024. Notably, New York has a “cliff” rule: if the estate’s value exceeds 105% of the exemption (i.e., $7.287 million), the entire estate becomes subject to New York’s estate tax, with rates ranging from 3.06% to 16%​ (Adler & Adler, PLLC).

​Assess Any Existing Debt

Inherited properties often come with financial obligations such as outstanding mortgages or liens. If the property has a mortgage, the responsibility for payments typically transfers to the inheritor. Additionally, any existing tax liens or judgments must be addressed before selling or transferring the property.

Inheriting a property with a $1 million mortgage balance means the heir would need to continue payments or face foreclosure. Liens can complicate ownership transfers and need to be settled before completing any sale, potentially impacting the property’s marketability​.

Get a Property Valuation

For inherited property, determining its fair market value is crucial for tax calculations and informed decision-making. The IRS allows a “step-up in basis” for inherited properties, where the value at the time of inheritance is used as the basis for future capital gains tax. This can significantly reduce the taxable amount if the property is sold later.

If you inherit a property initially bought for $500,000, but its market value at inheritance is $2 million, your “stepped-up basis” is $2 million. If you sell the property at $2.5 million, capital gains tax only applies to the $500,000 increase​.

Consult a Tax Professional

Given the complexities of estate taxes, potential debts, and valuation processes, consulting a tax professional is highly recommended. They can guide you on strategies like trusts to minimize estate tax liability and advise on timing and financial strategies that align with state-specific rules, such as New York’s estate tax cliff.

A tax advisor’s input can help you avoid pitfalls, maximize exemptions, and ensure compliance with state and federal tax laws​.

Should You Keep or Sell an Inherited Commercial Property?

After inheriting commercial property, one of the biggest decisions you’ll face is whether to keep or sell it. Both options have their advantages and challenges, depending on your financial situation and goals.

Pros of Selling the Property:

• Immediate Cash Flow: Selling the commercial property provides an influx of cash, which can be useful if you’re not interested in becoming a landlord or dealing with the tax implications of ownership.
• Avoid Maintenance Costs: Owning commercial property comes with ongoing maintenance requirements, which can be costly and time-consuming.
• No Property Management Hassle: Managing tenants, handling repairs, and staying on top of rent collection can take significant time and effort, especially if you have other responsibilities.

Cons of Selling the Property:

• Potentially Lower Sale Price: Depending on the state of the real estate market, you may not get as much as you’d hoped for. Market conditions can fluctuate, and selling quickly might result in a lower selling price.
• Capital Gains Tax: If the property has appreciated in value, selling it may subject you to capital gains tax. This could reduce your overall profit from the sale.

Pros of Keeping the Property:

• Passive Income: Renting out the property could provide consistent rental income, giving you a steady stream of passive income.
• Long-Term Appreciation: Over time, the real estate market tends to increase in value, meaning the property could be worth more if you hold onto it for a few years.

Cons of Keeping the Property:

• Ongoing Costs: Property taxes, utility bills, and maintenance costs will continue to pile up, cutting into your profits.
• Management Responsibilities: Even if you hire a property manager, you’ll still need to be involved in decisions regarding repairs, upgrades, and tenant issues.

Ultimately, the decision comes down to your personal goals. If managing a commercial real estate investment property isn’t something you want to take on, selling your commercial property could be the best route. However, if you’re open to managing rental properties and have the resources to do so, keeping the property could offer long-term financial benefits.

What Are the Financial Challenges of Keeping the Property?

If you decide to keep your inherited commercial property, it’s important to be aware of the financial challenges that come with owning commercial property. While the idea of generating rental income can be appealing, the ongoing costs and responsibilities can quickly add up.

Maintenance and Capital Improvements

Routine Maintenance: Basic upkeep (such as landscaping, cleaning, and minor repairs) can range from $2 to $3 per square foot annually. For a 5,000-square-foot property, this would total approximately $10,000 to $15,000 per year.

Capital Improvements: Major updates like a new roof or HVAC system can be substantial one-time costs. A commercial roof replacement can cost $8 to $15 per square foot, meaning for a 5,000-square-foot property, a roof replacement could cost between $40,000 and $75,000. Upgrading an HVAC system can add another $20,000 to $30,000 depending on the system’s size and efficiency.

Property Taxes

Property taxes on commercial real estate are often based on assessed value and can vary widely by location. On average, commercial property tax rates range from 1% to 3% of the property’s assessed value annually:

For a commercial property valued at $1 million in a region with a 2% tax rate, the annual property tax would be $20,000. Tax rates can also increase over time, making property taxes a growing expense.

Utility Bills and Insurance

Utilities: Commercial properties often have higher utility costs, particularly if heating, cooling, and lighting systems need to run during operating hours. Utilities for a 5,000-square-foot space can easily total $12,000 to $15,000 per year depending on usage and local energy rates.

Insurance: Commercial property insurance typically costs $1,000 to $3,000 per year per $1 million of property value. For a $1 million property, insurance could be around $1,500 to $3,000 annually. This can increase based on factors like location, building age, and tenant activities.

Legal Compliance and Regulations

Inspections and Permits: Depending on the region and building type, annual inspection fees can range from $500 to $1,500. Certain upgrades may be mandated by local ordinances—for instance, fire safety upgrades can cost $5,000 to $10,000 or more, especially if a sprinkler system or alarm system needs updating.

Non-Compliance Fines: Failure to comply with regulations can result in fines ranging from $500 to $5,000 or more per infraction, depending on the violation’s severity and jurisdiction.

How Do You Determine the Value of Your Inherited Property?

Before making a decision on whether to sell or keep your inherited commercial property, you’ll need to determine its value. Knowing the fair market value of the property helps guide your decision-making, whether you’re aiming to sell for profit or rent it out.

Here are the common ways to calculate the value of inherited real estate:

1. Comparable Properties (Comps): This method involves comparing your commercial property to other similar properties in the area that have recently been sold. It’s a quick way to estimate what buyers might be willing to pay for your property in the current real estate market.
2. Income Approach: If your property is generating rental income, you can use the income approach to estimate its value. This method takes the annual rental income and multiplies it by a capitalization rate (cap rate) to get the property’s value. The cap rate depends on the property type and market conditions.
3. Cost Approach: The cost approach calculates how much it would cost to rebuild the property from the ground up, factoring in the land’s value and construction costs. This approach is helpful for unique properties or those without many comparable sales nearby.
4. Market Trends and Conditions: Keep an eye on market trends and how the real estate market is performing in your area. Rising demand for commercial properties can increase the property’s value, while market downturns might lower it.
5. Tax Appraisal: If you’ve recently inherited the property, an official tax appraisal may already exist. While this figure can give you a starting point, it’s always a good idea to cross-reference it with market conditions to get a more accurate estimate.

How Does Point Acquisitions Make Selling Easier?

Selling an inherited commercial property on your own can be a long, complicated process, but Point Acquisitions simplifies every step. Here’s how we make the process hassle-free:

• No Repairs or Upgrades Needed: Unlike traditional sales where you might have to invest in capital improvements or repairs, Point Acquisitions buys properties as-is. This saves you time and money, allowing you to sell quickly without extra costs.
• Fast and Transparent Offers: We provide competitive, upfront offers without the need for lengthy negotiations or uncertainty. You don’t need to wait for potential buyers to secure financing or worry about fluctuating market conditions. We streamline the sale so you can close faster.
• Avoid High Selling Costs: When you sell with us, you avoid common selling costs like real estate agent commissions and marketing fees. We handle the entire process in-house, saving you money and maximizing your profit.
• Expert Guidance: Our team is experienced in commercial real estate and can guide you through every step of the process, from the initial offer to closing the deal. You won’t need to navigate legal and regulatory hurdles alone, our experts handle everything for you.
• Quick Closings: Time is money, and waiting months to sell can be stressful. At Point Acquisitions, we focus on closing deals quickly, often within weeks, giving you access to your funds sooner rather than later.

Selling an inherited commercial property doesn’t have to be time consuming. With Point Acquisitions, you can skip the traditional roadblocks and experience a fast, easy sale that leaves you free to focus on your next steps.

Ready to Sell Your Inherited Commercial Property?

Deciding what to do with inherited commercial real estate is never easy, especially when you’re faced with the challenges of property taxes, possible deferred maintenance, and management responsibilities. While renting the property out can provide passive income, the ongoing expenses and challenges can outweigh the benefits for many owners. For those looking to simplify their financial situation and gain immediate cash flow, selling the property is often the smartest choice.

With Point Acquisitions, the process of selling your commercial property is straightforward, transparent, and fast. Our team, led by Jesse, offers competitive offers without the stress of repairs, capital improvements, or long wait times. Whether you want to free yourself from the responsibilities of owning commercial property or simply want to turn your inheritance into liquid assets, we’re here to help.

Ready to take the next step? Contact us today at 866-280-3063 or email us at info@pointacquisitions.com to get started. Let Point Acquisitions make selling your property the easiest decision you’ll make.