How capital gains are calculated for commercial real estate
Capital gains are the profits that you make when you sell a commercial real estate property and its business for more than what you paid for it. To calculate your capital gains, you need to know two things: your adjusted basis and your realized amount.
- Your adjusted basis is the original purchase price of the property and the business, plus any improvements or additions you made, minus any depreciation deductions you claimed over the years.
- Your realized amount is the sales price of the property and business, minus any selling expenses, such as commissions, legal fees, or closing costs.
The difference between your realized amount and your adjusted basis is your capital gain. For example, if you bought a property and a business for $1 million, made $200,000 worth of improvements, claimed $300,000 in depreciation, and sold them for $1.5 million, paying $50,000 in selling expenses, your capital gain would be:
The amount of tax you pay on your capital gain depends on how long you held the property and the business, your taxable income, and your filing status. There are two types of capital gains: short-term and long-term.
- Short-term capital gains are for assets that you held for less than a year. They are taxed as ordinary income, at the same rate as your regular income tax bracket.
- Long-term capital gains are for assets that you held for more than a year. They are taxed at a lower rate than ordinary income, ranging from 0% to 20%, depending on your income level and filing status.
There are also some factors that can affect your capital gains tax, such as exemptions, deductions, deferrals, and strategies. For more information, you can check out these web pages:
How to reduce capital gains tax
There are several strategies that you can use to reduce or defer your capital gains tax on commercial real estate and business. Some of the most common ones are:
What Is A 1031 Exchange?
A 1031 exchange is a tax strategy that allows you to defer paying capital gains tax when you sell an investment property and buy another one of similar like property. It is named after Section 1031 of the Internal Revenue Code, which sets the rules and requirements for this type of transaction. A 1031 exchange can help you preserve and grow your wealth by reinvesting your profits without losing a portion to taxes. For more information, you can check out these web pages:
- What Is a 1031 Exchange? Know the Rules - Investopedia
- 1031 Exchange: Rules And Basics To Know – Forbes Advisor
- 1031 Exchange – Overview & FAQs | Thomson Reuters