By Ted Stricker, CFP®
Selling commercial real estate is a complex endeavor and business owners need to be aware of the myriad of considerations and decisions that must be made before, during and after the process. Not only do these include the legal and real estate sale aspects, but taxes and personal planning concerns are an important part of the process as well.
At Bernath + Rosenberg, having worked with many business owners as clients over our long history, we understand the challenges faced by business owners when it comes to selling their business, and we know firsthand what it takes to achieve a successful transaction. It’s often a lengthy process that involves proper preparation, valuation, marketing, negotiation, and many tax and financial issues.
Let’s take a look at some of the important steps a business owner should take when selling commercial real estate.
Prepare the Business and Property
As with any real estate, you increase your chances of a favorable sales price by making sure you and your property are prepared for a potential buyer. This is achieved by:
- Understand your needs and have realistic expectations: Clearly define your needs and goals for the sale, as well as alternate terms and conditions. Potential buyers will have theirs, so have flexibility in how the sale might be achieved. Consult with your agent as to market conditions and set a realistic sales price.
- Prepare the property for sale: Make necessary repairs, especially to conform to existing building and safety codes; these have likely changed over the years. Talk with your agent about what improvements can be made that would boost buyer appeal and property value.
- Gather necessary documentation: Compile financial records (including tax returns or tax aspects), leases, contracts, tax and utility bills, mortgage statements, construction or improvement costs, and operating expense spreadsheets. Have these organized and available for prospective buyers.
- Consider the inherent “goodwill” of your property: Location, access to highways or other desirable infrastructure, consistent income streams, and other features could be important to prospects as selling points.
- Get a professional appraisal: Don’t rely just on the real estate agent; get a professional appraisal of your property
- Consider your internal rate of return: Work with your wealth manager or tax professional to determine your rate of return on the property over the time you’ve owned it. Remember to take taxes into account. As we continually remind clients: It’s not what you earn, it’s what you keep.
Build a Team of Professionals to Help
No man is an island. This especially applies to selling a business property or the business itself. You’ll need an array of professional expertise to assist you in a smooth transaction, aside from the real estate agent. These include:
- A real estate attorney: Be sure they have extensive experience with your type of property and your property’s location. Commercial real estate is vastly different from residential home properties. (Same goes for your real estate agent.)
- Consider utilizing a business broker: A business broker may have extensive connections and resources to sell your building and/or your business.
- Consult with your tax professional (yes, before the sale): This is critical. There are many tax aspects to selling commercial property. A good CPA can help you understand potential tax liabilities beforehand and assist with strategies to help lower tax liability or even defer taxes on the sale. Make sure you keep your CPA involved throughout the process, especially during negotiations where price, terms, and conditions may change.
- Talk with your wealth manager and financial planner about the sale: Once you’ve sold the property, there will be the question of what to do with the proceeds. What implications will the proceeds have on your personal (or business) financial situation and how should the proceeds be utilized for your and your family’s financial objectives? Involve your CPA as well to achieve tax-efficient strategies going forward.
Consider the Tax Aspects of the Sale
As mentioned, there are many tax considerations with the sale of commercial real estate. These include:
1. Capital Gains Taxes
When you sell a property at a profit (meaning sales price minus the cost basis, which could be higher than the purchase price with improvements during ownership), regardless of the remaining mortgage, capital gains taxes will be due. These are broken down into:
- Short-term capital gains: If you’ve owned the property for less than a year, your gains are taxed as ordinary income (from 10% to 37% in 2025).
- Long-term capital gains: If you’ve held the property for more than a year, your profits are taxed at 15% or 20%, depending on your income level.
2. Depreciation Recapture
This tax often catches sellers by surprise. You likely deducted depreciation expenses each year to lower annual tax liability. Upon the sale, the IRS requires you to pay tax on the aggregate of these deductions at a rate of 25%. This tax is in addition to any capital gains taxes.
3. Net Investment Income
In the year of sale, if your income exceeds $200,000 individually or $250,000 married filing jointly, you may need to pay an additional 3.8% in net investment income tax.
There are a few ways to defer tax liability, but these require special experience and guidance. Such strategies include a Section 1031 like-kind exchange transaction (where the proceeds of a commercial sale are (relatively) immediately “rolled over” into a purchase of a similar property), using installment payment techniques to spread the tax liability over several years, and investing the proceeds into “qualified opportunity zone” investments.
All in all, selling commercial property is no small matter and is best accomplished with the guidance of a professional team to guide you in preparing and accomplishing your objectives.
Are You a Business Owner Considering Selling Your Business or Commercial Property? Talk With Us.
Business and tax consulting are core services at Bernath + Rosenberg. We’re here to help you!
Our experienced team of Certified Public Accountants and CERTIFIED FINANCIAL PLANNER® professionals stays current with the latest in tax laws and financial strategies to help you pursue a rewarding and comfortable retirement, save on tax liability, and plan for your family’s future, according to your unique and special objectives.
To get started and make the most of your hard work, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining innovative approaches and solutions that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA-related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax/accounting/CPA-related services.
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