On My Commercial Property, Should I Try for a Tax Exchange or Just Pay the Capital Gains Tax?

Many commercial property investors purchased properties years ago. Those investments have produced income and appreciated over the years. An accounting function of the commercial real estate business is each year your accountant has been depreciating the property's value on a tax basis. You now want to get out of the business or maybe relocate and…

Many commercial property investors purchased properties years ago. Those investments have produced income and appreciated over the years. An accounting function of the commercial real estate business is each year your accountant has been depreciating the property's value on a tax basis. You now want to get out of the business or maybe relocate and you need to decide, should you pay the gains tax or create an exchange, an exchange which could be tax free! The first question I must ask myself is what will I do with the money? How will I structure the sale? What options do I have?

Let's say you need the income from the property, a tax free exchange may be the way to go. But maybe you have several options with this one thought. You can exchange your property for a like type investment (where in the country does not matter) and consider a full NNN deal on your new purchase. A NNN deal is when the tenant has full responsibility for maintenance, taxes and repairs as if they owned the property. You just receive a monthly rent check with no obligations to the tenant or the property. These type of deals usually offer a lower capitalization rate. Another option: You could sell your property and take a basic down payment and offer private finance. This method would give you (for example) 6% interest and you only pay gains tax as you exceeded the basis point of your estimated amount on file. I would suggest a balloon in 3-5 years so you can adjust the interest rate for the current times. We have seen cases when initially the finance is offered as interest only for the first 3-5 years. You have no gain at that point and make interest income without any property obligation. You can then close the door to more private finance and have the new property owner finance you out of the deal through traditional lending.

There have been times we have recommended a seller just pay the tax! Sometimes depending on your particular situation it may be a better route to just pay the tax. For example: You have a pension and social security and just want a junk of money in a safe CD. The gains tax is 15% of the difference of your basis value less capital improvements. Your gains tax is much less then income tax, but the cash flow decrees to whatever the CD offers.

Commercial exchanges have very specific time frames and rules. We just had a call from a seller who said “I just closed on the sale of my commercial building and I want to exchange it for another”. Big mistake once the closing check went into the sellers account the exchange is no longer viable. Commercial exchanges, selling off portfolio's and deciding what avenue to take is a process that should be done with a commercial real estate company that you can have good communications with.