When selling a commercial property there are advantages and disadvantages. Let’s explore the financial consequences (good and bad) of selling a commercial property.
Advantages of Selling a Commercial Property
You may Create a Taxable Gain. If your adjusted basis is lower than the contract price of the property then you may have a tax to pay. It is important to know if you have any losses or other tax credits that can offset the taxable gain. If you do, you may want to take advantage of those losses while you can, and the sale, even with a potential taxable gain, might be the best way to go. If you have a taxable gain and no losses to offset the gain, you might want to look to other options that could help reduce or eliminate the gain.
To illustrate this example, lets assume you sell a property for $750,000. Your adjusted tax basis (what you paid for the property adjusted for any improvements and depreciation) is $395,000. This means you will have a taxable gain of $355,000. Your tax is likely to be based on at least a 33% bracket or a total of $117,150, or more. You may consider Benefits of a 1031 Exchange as a way to defer your taxable income.
You establish a Capital Loss. Selling a property at a loss is rarely a benefit, but there are times that cutting your losses by getting rid of a property is a smart move. Not all losses can be used to offset gains, you have to double check al the current tax codes to see if there is an opportunity.
Disadvantages of Selling a Commercial Property
You have A taxable gain But No Proceeds to Cover it. This is not a nice situation to be in, and happens when your tax exceeds the amount of cash you are lets with after the closing. Usually this occurs when there is a low down payment, and the seller has mortgaged over his or her tax basis. Because the IRS allows yo to borrow money on property without having to pay any tax on that money, the extent to which that borrowed money exceeds your book value (adjusted tax basis) in the property will then be taxed. The fact that you spent that money five years ago is no consolation, as you may have to dig into your pocket to pay the tax.
To illustrate this example lets assume you have a property that cost you $500,000. The present value due to its income is $750,000. You have depreciated the property for 15 years and your adjusted tax basis is $100,000. Two years ago you borrowed $550,000 and have spent all of it. You sell the property for $750,000 at $200,000 cash to your mortgage your gain is $650,000 and at 33 percent tax bracket your tax is $214,500. After you pay the tax you are in the hole $14,500.
Investing In Commercial Real Estate?
Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Team, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.