Guide to Capital Gains Taxes on Commercial Properties

Capital gains tax on commercial property depends on several factors. Factors include how long the property was held and the taxpayer’s income level. When a commercial property is sold for more than its original cost basis, the profit, or capital gain, is subject to taxation. Knowing how these gains are calculated can help you identify potential exemptions and strategies to help reduce your tax liability. For larger or more complex transactions, consider working with a financial advisor.

What Is the Capital Gains Tax?

The capital gains tax is imposed on the profit made from the sale of a capital asset, such as commercial property. The amount of tax owed depends on the duration of time the asset was held before selling. There are two primary types of capital gains tax: short-term and long-term.

Short-Term vs. Long-Term Capital Gains Tax

Short-term capital gains tax applies to assets held for one year or less. These gains are taxed at the individual’s ordinary income tax rate, which can be as high as 37%. That’s a significant tax burden if the property was only held for a brief period.

On the other hand, long-term capital gains tax applies to assets held for more than one year. The tax rates for long-term gains are generally lower than short-term rates, making it more favorable for investors who hold their assets for extended periods. The long-term capital gains tax rates are determined by income level, with different rates applying to different income brackets.

2025 Long-Term Capital Gains Tax Rates

2025 Long-Term Capital Gains Tax Rates

Strategies for Avoiding Capital Gains Tax on Commercial Properties

Unlike residential sales, there’s no direct capital gains exclusion or deduction available when selling commercial real estate. Instead, the entire gain from the sale is subject to capital gains tax. However, there are ways to delay capital gains taxes on land sales and commercial properties.

1. 1031 Exchange

A 1031 exchange lets property owners defer capital gains tax by reinvesting the sale proceeds of a commercial property into a similar property of equal or greater value. A qualified intermediary facilitates the process by holding the sale proceeds and ensuring proper reinvestment. The investor must identify the new property within 45 days of the sale and complete the transaction within 180 days.

2. Opportunity Zone Investments

The federal government designates Opportunity Zones as economically distressed areas to encourage investment through tax incentives. When investors reinvest capital gains into a Qualified Opportunity Fund (QOF) that targets these zones, they can defer capital gains taxes until December 31, 2026. Or until they sell or exchange the investment, whichever comes first. If investors hold their QOF investment for at least 10 years, they can exclude any gains earned from the fund from their taxable income entirely.

3. Installment Sale

An installment sale allows the seller of a commercial property to receive payments over time rather than as a lump sum. This can spread the capital gains tax liability over several years. It can potentially reduce the overall tax rate if the seller falls into a lower federal income tax bracket.

4. Offset Gains With Losses

Tax-loss harvesting involves selling other investments at a loss to offset the gains from the sale of commercial property. This strategy can reduce or even eliminate the taxable gain, effectively lowering the overall tax burden.

5. Charitable Donations

Donating the property to a charitable organization before the sale can also reduce capital gains tax. The donation may be tax-deductible, and the donor may avoid paying capital gains tax on the appreciated value of the property. This strategy is most effective for those with philanthropic goals.

Beware of Depreciation Recapture

When you own a commercial property, you can depreciate its value over time for tax purposes. This reduces your taxable income each year. However, when you sell the property, the IRS requires you to “recapture” this depreciation, meaning you must pay taxes on the amount of depreciation you took.

Here’s how depreciation recapture works: If you sell a commercial property for more than its depreciated value, the IRS taxes the portion of your gain that comes from depreciation as ordinary income, up to a maximum rate of 25%. 

Bottom Line

Capital gains taxes on commercial properties vary depending on whether the gain is short-term or long-term. The IRS taxes short-term gains — earned from properties held for one year or less — at ordinary income rates. In contrast, it taxes long-term gains on properties held for more than one year at typically lower capital gains rates. You can use various strategies to manage and potentially reduce these taxes. A financial advisor or real estate professional can help you explore the most effective options based on your specific situation.

Tips for Tax Planning

• If you want to minimize capital gains, a financial advisor can help optimize your portfolio to lower your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. 
• If you want to figure out how much you could owe in short- and long-term capital gains, a SmartAsset’s free calculator can help you get an estimate.

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