Capital gains on commercial real estate are taxes paid on profits from selling a property for more than its original purchase price. The tax rate depends on how long you owned the property and your income level.
When you sell commercial real estate, the IRS calculates your capital gain by subtracting the property's original purchase price and any improvements from the sale price. This difference is your profit, subject to capital gains tax.
For example, if you bought a commercial building for $500,000, invested $200,000 in renovations, and sold it for $1 million, your capital gain would be $300,000 ($1 million - $500,000 - $200,000).
Capital gains are divided into two categories based on how long you held the property:
| Type | Holding Period | Tax Rate (2024) |
|---|---|---|
| Short-term capital gains | Less than one year | Your ordinary income tax rate (up to 37%) |
| Long-term capital gains | One year or longer | 0%, 15%, or 20% (depending on income) |
Commercial real estate owners often claim depreciation deductions, which reduce taxable income during ownership. When selling, the IRS may recapture these deductions as ordinary income, taxed at higher rates (up to 25%).
For instance, if you claimed $100,000 in depreciation over the years, the IRS could tax $100,000 of your gain at ordinary income rates before applying capital gains taxes.
Investors use several strategies to lower their tax burden, including:
I once helped a client defer $500,000 in capital gains through a 1031 exchange, allowing them to reinvest in a larger property without immediate tax consequences.
Many investors confuse capital gains with depreciation recapture or assume all gains are taxed equally. Short-term gains are taxed at higher ordinary income rates, while long-term gains benefit from lower rates.
According to the IRS, long-term capital gains tax rates range from 0% to 20% in 2024, depending on income. Short-term gains follow your ordinary income tax bracket, which can reach 37%.