Mistake #1: Forget to first calculate the capital gains tax on your commercial property
Do this before you plan to sell your commercial property. Before you sell, you want to get the right price. To calculate the right price, you really should take a look at the capital gains tax on your commercial property.
No one should pay more than their fair share of capital gains tax on commercial property.
Without the knowledge you need to plan for capital gains tax on your commercial property, you might be left paying more than your fair share. Learn how savvy investors win with capital gains taxes in our new guide.
Get a step-by-step guide that explains how capital gains tax on commercial property works and the tools savvy investors use to beat them.
Don’t wait to call your CPA or Qualified Intermediary (QI) about your commercial property capital gains tax
So you’re going out to market, you’re going to sell your property and 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 capital gains 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 a qualified intermediary (QI) because there are two primary forms of tax that you’re going to face.
There are two primary forms of tax: capital gains tax on commercial property and cost recovery tax on commercial real estate
Capital Gains Tax on Commercial Property
The first type is capital gains tax on your commercial property, and this tax is one that we all hear about. It’s in the news, it goes from 15 to 20 percent and then your state may have its own capital gains commercial property rate. You want to make sure that you understand how much capital gains taxes on your commercial property will be.
Cost Recovery Tax on Commercial Real Estate
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. The IRS has what’s called the cost recovery tax, and that’s where they calculate the total depreciation, and then they ask you to pay 25% of that back, at the time of sale. So when you combine the following capital gains taxes on your commercial property:
- Cost recovery tax
All together, you can have a sizable tax bill. So before you go to market and set your price, make sure you understand what your tax liability may be. The best way to get that information is to talk to an experienced advisor.
Get the guide that explains how capital gains tax on commercial property works.
Mistake #2: Choose an unreliable CPA or Qualified Intermediary (QI) to advise about capital gains tax on your commercial property
All real estate investors want to make successful financial decisions in commercial real estate investments. At MANSARD we meet a number of investors who are thinking of selling their commercial real estate and they don’t want to pay any capital gains tax on their commercial property. Many people have this problem. Unfortunately, the IRS is a silent partner in your investment property, but there are some ways to defer the capital gains. You may have heard a 1031 Exchange is a one way to do that, but your concern is avoiding some of the mistakes that come with the process of a 1031 Exchange.
Many investors will go to someone like an accountant. They think they can get all of the guidance they need for a 1031 Exchange from a CPA. Investors don’t just need any CPA, accountant, an attorney, or a broker who claims they can handle your 1031 exchange in an administrative way. Investors need to find a Qualified Intermediary (QI) who have experience with the capital gains tax on commercial property in your area.
What are some of the things investors should look for in a QI – a qualified intermediary?
You’re looking for a QI that is a credible, bonded, and insured resource. Make sure your QI has:
- Technical expertise. You want to make sure your QI has current knowledge and they have the experience doing 1031 Exchanges.
- Excellent coverage for Errors and Omissions insurance. You need a margin for any errors that the QI can make, and have an insurance policy to cover that for you.
- A fidelity bond. This will cover investors in case there’s any kind of theft or embezzlement of the money.
- Availability that matches your timeframe. You want to contact a reliable QI before you take your property to market. They should have time to make a plan with you before beginning the process.
Here’s a story:
“So, you know, one of the mistakes that we saw at our firm was a client was planning to do a 1031 Exchange and called their CPA and said, “Hey, I wanna take advantage of this rule and not pay my taxes,” and the CPA said, “You’re all set – no problem – I’ve got it all taken care of.” The client then went and closed on the property. We went back a week later to meet to get the information on who to contact for the qualified intermediary service, and the client said, “Oh, just call my CPA.” We called the CPA, and the CPA said, “What are you talking about?” This guy ended up having a $500,000 tax problem. He had to pay to the IRS because he had called his CPA and the CPA didn’t do the process correctly. So, if you’re thinking about doing an exchange, when should you be in touch with the QI? At what point in the process should you reach out to one?”
How do you find an excellent Qualified Intermediary (QI) for capital gains tax on commercial property?
You want to speak with professionals who have years of experience with the 1031 exchange process. At MANSARD we have commercial real estate investment brokers who have walked through the 1031 exchange process many times. An attorney with similar 1031 experience could be a reliable QI or connect you with a reputable QI.
Get our guide for tips to find the right buyers to sell your high-value commercial real estate with confidence.
Mistake #3: Make a bad real estate investment in the rush to avoid capital gains tax on commercial property
One of the other big mistakes is getting into a 1031 exchange and suddenly facing the 30-45 day identification period. Sometimes, people end up making bad decisions about commercial real estate during this time crunch. It is always better to make a plan ahead of time, and wait to begin the 1031 exchange so you have access to the best investments in the current market.
Investors may think, “I could buy this property, even though it’s not a great investment. I’d rather do that, than pay the alternative taxes.” We certainly would never want you to be in that position. If you were going to complete a 1031 Exchange, we want to make sure that you’ve planned it well, so that you avoid some of these common mistakes that investors make.
So, just to recap, calculate the capital gains taxes on your commercial property long before you consider selling. Make sure that you’re using a qualified intermediary, who’s a credible, bonded, and insured resource. You want to make sure you’re not relying on inexperienced CPAs, accountants, or attorneys in another field. Be sure to plan well in advance of your commercial real estate sale so that you don’t end up in a position of either making a bad investment decision or paying taxes.
What we want for all of our clients and for you is to make sure that you’re making financially successful commercial real estate decisions.
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Frequently Asked Questions about Top Commercial Real Estate Companies
I am a Certified Commercial Investment Member (CCIM). The certification is designated for those recognized as experts in the disciplines of commercial and investment real estate. With over 19 years of successful experience as a broker, I have brokered the sale of over 1,000 properties.
I utilize a variety of strategies to bring buyers to the deal. I have access to a strong and vast network of industry professionals. I have relationships with buyers and others who refer clients to me. Additionally, I use LoopNet, MLS and Costar and other online resources.
We are commercial property agents and do not provide legal advice. We do, however, work with skilled and experienced real estate attorneys and seek their counsel as necessary.
Commercial property brokers need information from their clients. For example, a commercial broker will ask their clients to provide important details about the history of the property and other facts crucial to its sale. Open and responsive communication makes selling a commercial property much easier.
The length of time it takes to sell a property is dependent upon many factors, like the amount of due diligence required to get the property ready to sell. A sale typically averages 6-12 months in the bidding process.
A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred.
Your broker will consider many factors such as the location of your property, the year it was built, the type of property, and the size of the property. Your broker should be taking a market approach, which means they are looking at recent sales of other properties that match many of the characteristics of your commercial property to determine the sale price.
Properties are broken down into three classifications. Each property classification reflects a different risk and return because properties are graded according to a combination of geographical and physical characteristics. These letter grades are assigned to properties after considering factors such as age of the property, location of the property, tenant income levels, growth prospects, appreciation, amenities, and rental income. There is no precise formula that dictates which properties are placed into which class. Grade A space is the most expensive and presents the least amount of risk. Conversely, Grade C is the least expensive but has the most amount of risk. In most instances, it would be cost prohibitive to try and invest enough money into your property for the purpose of moving it up a grade.
There are important benefits to working with a commercial property broker. An experienced and astute broker will have strong relationships with other industry professionals to help locate buyers, will thoroughly understand market trends, and has tried and true marketing techniques and resources.
Agents get paid by the property owners via commission. An agent’s commission does not affect the purchase price.
Links to greater Boston real estate market trends:
- Schedule a consultation with a top commercial real estate broker
- Get an office market update for Greater Boston
- Find out the top 5 questions to ask your commercial real estate broker
- Sales trends to watch in the Boston commercial real estate market