PHILADELPHIA - It’s no secret that no one likes paying taxes - capital gains taxes are no different. When you are selling a commercial property, you not only want things to go smoothly, but you want the most money for the transaction, too.
Capital Gains Taxes Can Be A Burden
When you are selling a commercial property, capital gains taxes can be a burden if you don’t have sufficient knowledge.
Capital gains taxes are different for long-term and short-term capital gains. While short-term capital gains are taxed at the ordinary tax bracket of the taxpayer, long-term capital gains taxes can range from 0% to 20%, depending on the taxpayer's income.
Strategy Is The Key To Success
For the best chance of a successful real estate transaction, you should work with a lawyer before you sell. Dealing with capital gains taxes is all about strategy, which a Philadelphia real estate attorney can help you with.
A seller working with an attorney throughout the selling process has a higher chance of success navigating capital gains. An attorney’s advice can be invaluable, and if anything goes wrong, you will have a legal team behind you each step of the way. You can also expect all necessary documents to be prepared ahead of time to ensure a successful transaction.
Turn Capital Gains Taxes Into Opportunities
Because there is no exemption from capital gains taxes on commercial properties, you can only avoid, minimize, or defer them. While the taxes aren’t forgiven completely, there are ways to work around them using tax-saving opportunities. If executed with an attorney by your side, dealing with capital gains can offer huge savings.
The best way to handle capital gains is to turn them into opportunities. One strategy is to deduct capital losses to reduce, and therefore offset, the capital gains tax basis. While you can get creative with your income, engaging in a 1031 exchange is another option. In fact, utilizing a 1031 exchange is one of the best ways to reduce the impact of capital gains taxes on commercial real estate.
A 1031 exchange permits you to defer the payment of capital gains taxes so long as you purchase a commercial property of equal or greater value. While similar to a 1031 exchange, a 1031 tax-deferred exchange allows equity to be replaced with additional debt.
You can also defer capital gains taxes by investing in the Opportunity Zones program, which was created as a result of the Tax Cuts and Jobs Act of 2017. This program allows you to defer paying capital gains taxes until December of 2026 so long as you reinvest your money into an Opportunity Fund.
Other options to deal with capital gains when selling a commercial property include a 721 exchange, which allows the exchange of investment property for Real Estate Investment Trust shares or an Operating Partnership. A 453 Installment Sale tax deferral defers capital gains taxes by breaking up payments over multiple installments.
However, for the greatest chance of success, you should create an exit strategy before making a commercial real estate investment at all - and the best way to come up with that exit strategy is to work directly with a real estate attorney ahead of time.