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Tax on Commercial Real Estate Sale

Have you got commercial land for sale? When you are selling a piece of commercial real estate, there are many things that you need to know to make sure the sale goes as smoothly as possible. One of the most important things to understand with tax on commercial real estate sales is the law and its application to commercial real estate transactions. 

This blog post will discuss what a commercial real estate property is, what a real estate sale is, what commercial real estate property taxes are, and how it works with real estate. We will also provide some tips on how to minimize your tax liability when selling commercial lot.

What is a Real Estate Transaction?

A real estate sale is a transaction where the ownership of a piece of property changes hands. To complete a real estate sale, both real estate investors, the buyer, and the seller must agree to the terms of the sale (purchase price) or find the fair market value (FMV). The terms of the sale will include:

  • The property’s price.
  • The date of the sale.
  • Any other conditions that must be met to complete the sale.
capital gain on sale of commercial property

Tax Implications for Commercial Real Estate Sales

Commercial property purchases and sales can be complicated to understand. The tax on commercial real estate sales is a topic many people are unaware of. When you sell your property whether that be commercial office spaces or industrial buildings, the tax implications can be significant. When site owners or commercial real estate investors contemplate the sale of a commercial property, it is important to understand the transaction’s tax.

Depending on the circumstances, the sale of commercial properties can be subject to different tax rates. In addition, they may be able to take advantage of certain tax breaks or reap other financial benefits by carefully structuring the sale of their commercial property. Given the potentially high value of commercial real estate or office spaces in today’s market, it is important to consult with a certified tax professional to make sure that you understand all of the tax implications before proceeding with a sale.

Here is what you need to know about the taxes on commercial real estate sales.

Determine the Gain or Loss

When you sell your property, the first thing you need to do is determine the gain or loss of the sale. To calculate the gain or loss, you will need to know the property’s selling price and cost basis. Generally, the cost basis is what you paid for the property and any improvements you made to it.

Gain on the Sale

When having a gain on the sale, then you will owe taxes on that gain. The amount of taxes on sale of business property owed will depend on your tax bracket. If you find yourself in the 15% tax bracket, you will owe 15% of the tax gain. If you are in the 25% tax bracket, you will owe 25% of the tax gain.

Loss on the Sale

When having a loss on the sale, you may be able to use that loss to offset other gains. For example, if you sold another piece of property for a profit, then you could use the loss from the first sale to offset the gain from the second sale. This can help to lower your overall tax bill.

Capital Gains Taxes

In addition to the tax on the gain from the sale, you may also need to pay federal capital gains taxes and state capital gains taxes on commercial property. The term capital gains tax refers to the tax on the profit from the sale of an investment property. Capital gains tax rates are usually lower than the tax rate for ordinary income.

When it comes to capital gains, there are two types: long-term and short-term. The tax rates for capital gains depend on your filing status and income category. Reporting capital gains typically happens on your income tax return using IRS Form 4797, Sale of Business Property.

You can defer capital gains tax by performing a 1031 exchange and even be able to invest up to 200%, in multiple estates, of the original property.

capital gain on commercial property

How Are Capital Gains Taxes Calculated

Capital gains taxes are at all times calculated based on your profit from selling the capital asset. For example, if you sell a commercial building for $500,000 and your basis in the property is $250,000, your capital gain would be $250,000. The capital gains tax rate would then be applied to that amount. Long-term capital gains are taxed lower than short-term capital gains, so it’s important to know which category your gain falls under.

Long Term Capital Gain Tax on Commercial Real Estate Sale

Long-term capital gains are realized from the sale of a long-term capital asset held for more than one year. Long-term capital gains tax percentages are lower than the tax rate for short-term capital gains. This is because long-term capital assets have a greater potential to appreciate in value than short-term assets.

For this reason, investors often hold onto long-term assets for a longer period in order to maximize their return on investment. However, long-term capital assets can also be more volatile than short-term assets, which means that they may also experience larger losses.

Long-term capital gains are always taxed at 0%, 15%, or 20 percent, depending on your taxable income and marital status. To be able to qualify for the long-term capital gains tax rate, you must hold the asset for more than one year. If you sell the asset before the one-year mark, you will owe your short-term capital gains taxes. Long-term capital gains have the potential to save you money in taxes, so it’s important to understand how they work. When tax planning, consider the long-term effects of your investment decisions.

Taxable Income: Single

The long-term capital gains tax rate is 20% for single filers with incomes of more than $459,750. The 15% capital gains rate applies to earnings between $41,675 and $459,750 for a single individual. For single tax filers with incomes below $41,675, you can benefit from the zero percent capital gains rate. 

Taxable Income: Married

For married couples filing jointly, the tax brackets are somewhat higher. However, most will hit their investment income with the marriage tax penalty. The good news is that couples with incomes of $83,350 or less remain in the 0% tax bracket. However, couples with incomes between $83,350 and $517,200 will have a 15% capital gains rate. Those with earnings above $517,200 will be subject to a 20% long-term capital gains tax. This can be a significant penalty, so it’s important to be aware of it when planning your finances.

Taxable Income: Head of Household

If you’re the head of household, you’ll find yourself in a similar tax bracket as single filers. The rate is 0% for heads of households with taxable income of $0 to $55,800, 15% for taxable income of $55,801 to $488,500, and 20% for taxable income over $488,500. This means that if you have a significant amount of money invested in long-term capital assets, you could be subject to a higher tax rate on those gains. 

As you can see, there are a number of different tax rates that apply to long-term capital gains. The tax rate that you’ll pay depends on your taxable income and filing status. If you’re planning on selling a long-term capital asset, consider the tax implications before making any decisions.

sale of commercial property capital gain

Short Term Capital Gain Tax on Commercial Real Estate Sale

Short-term capital gains are those that are realized from the sale of an asset that was held for less than one year. The tax rate when it comes to short-term capital gains is higher than the tax rate for long-term capital gains. This is because short-term capital gains are considered to be more speculative than long-term capital gains, which are typically realized from the sale of an asset that was held for more than one year.

As a result, short-term capital gains are subject to a higher tax rate to discourage speculation. However, short-term capital gains can still provide a significant return on investment, and investors should weigh the potential return against the applicable tax rate before making any decisions.

Additionally, short-term capital gains are typically taxed as ordinary income rates. The IRS (Internal Revenue Service) requires that if you sell an asset after holding it for less than a year, any gains or losses are treated as short-term capital gains or losses. The good news is that up to $3,000 of short-term losses can be deducted against regular income each year. This provides a great opportunity to lower your taxes with tax-loss harvesting, which is the process of selling investments with a lower value to recover the loss and cancel any other capital gains.

Conclusion

Selling commercial real estate can unquestionably be a complex transaction, and there are many things to consider before deciding to sell. However, by understanding the tax implications of a sale, you can be prepared for what lies ahead. An office space for sale or an industrial building ready to go, there are always subtle extras to know about in order to stay on the right path.

In the same way, to avoid paying a high tax bill, it is important to consult with a qualified professional tax advisor before selling your commercial property. They can help you understand all of the tax on commercial real Estate Sales and help you structure the sale to reduce your tax liability and ensure a smooth transaction.

Whether you want to sell commercial property fast or take your time, If you have a commercial real estate property that you are planning to sell, contact Point Acquisitions to get an obligation-free offer within 72 hours!

About The Author

Jesse Shemesh

With a wealth of experience in nurturing diverse commercial real estate investment portfolios across multiple markets, I actively engage in the development and execution of deals spanning all asset classes. My expertise lies in collaborating with strategic partners, including corporate real estate professionals, fund managers, developers, and investors, to source, identify, and entitle opportunities. At Point Acquisitions, we take pride in our unique, proprietary platform that specializes in property acquisitions, generating a steady stream of organic deal flow that sets us apart from the competition. As a seasoned professional in the real estate industry, I am dedicated to creating lasting partnerships and delivering exceptional results for all stakeholders.

Disclaimer

Please note that Point Acquisitions is not a tax expert or tax advisor. The information on our blogs and pages is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Any information provided does not constitute professional advice or create an attorney-client or any other professional relationship. We recommend that you consult with your tax advisor or seek professional advice before making any decisions based on the information provided on our blogs and pages. Point Acquisitions is not responsible for any actions taken based on the information provided on our blogs and pages.

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