Avoid this mistake when selling: capital gains tax commercial real estate
Do this before you plan to sell your commercial property
Before you go to sell, you want to get the right price, but to know that you’re going to do that, you really should take a look at your tax situation. Subscribe to our channel for tips to find the right buyers to sell your high value commercial real estate with confidence.
Don’t wait to call your CPA about your commercial real estate capital gains tax
So you’re going out to market, you’re going to sell your property, the right buyer shows up, they’re going to pay the right price, and then you call your CPA and you get the bad news. You have a six or seven-figure tax bill. It’s not something that you had considered when you were valuing your property. So before you go to market, the first thing you want to do is consult with your CPA or your tax advisor because there are two primary forms of tax that you’re going to face.
There are two primary forms of tax: capital gains tax and cost recovery tax
One is capital gains tax on your commercial real estate, and capital gains tax is one that we all hear about. It’s in the news, it goes from 15 to 20% and then your state may have its own capital gain commercial real estate rate. So you want to make sure that you understand how much that’s going to be. But the second piece that you want to look at is the amount of depreciation that you’ve taken on your property during your holding period.
See, what happens is the IRS has what’s called the cost recovery tax, and that’s where they take the total depreciation taken, and then they ask you to pay 25% of that back at the time of sale. So when you combine your state, your federal, and your cost recovery tax, all those together, you can have a sizeable tax bill. So before you go to market, before you set your price, make sure you understand what your tax liability may be. The best way to get that information is to talk to your advisor.