I am not your CPA. I want to be super clear about that. But I talk to sellers every week who have questions about what they’ll owe in taxes when they sell, and I think it helps to at least understand the basics before you get deep into a conversation with your accountant.
-
Calculate Your Adjusted Basis: Purchase price plus improvements minus depreciation taken. Knowing your basis tells you exactly how much profit you’ll owe tax on. -
Estimate Total Depreciation: Every year you’ve owned the building, you’ve depreciated 3-4% of value. Multiply that by years owned to estimate total depreciation. That’s recapture tax at 25%. -
Run the Math on Tax Impact: Example: $1.5M sale, $800K basis, $700K profit. Long-term cap gains tax (20% federal) = $140K. Recapture (25% on $400K depreciation) = $100K. Total tax = $240K. You net $1.26M, not $1.5M. -
Understand NC vs. SC Impact: NC’s 4.99% state tax on capital gains is significant. If you’re in SC, there’s no state tax component. This can swing 5-6% of profit. -
Consult Your CPA: Tax law is complex. Get ahead of it with your CPA before you accept an offer. Understand your exact tax liability.
The federal piece
When you sell a commercial property for more than your adjusted basis (what you paid plus improvements minus depreciation), you owe capital gains tax on the profit. If you’ve held the property for more than a year, it’s long-term capital gains. The federal rate is 0%, 15%, or 20% depending on your income. Most sellers I work with fall into the 15-20% bracket.
Estimating your total tax burden
Use this framework to estimate what you’ll actually net after federal, state, and recapture taxes.
- What is your adjusted cost basis (purchase price plus improvements minus depreciation)?
- What is your projected sale price?
- How much total depreciation have you claimed (estimate: 3-4% per year)?
- Are you in NC (4.99% capital gains tax) or SC (no state capital gains tax)?
- Will you be in the 15% or 20% federal capital gains bracket?
But that’s not the whole story. There’s also depreciation recapture. If you’ve been depreciating the building (and you should be, your accountant should have been doing this), the IRS wants some of that back when you sell. Depreciation recapture is taxed at 25%. On a building you’ve held for 20 years, the recapture amount can be significant.
And then there’s the 3.8% net investment income tax if your income is above certain thresholds. So your total federal tax bill on a sale could be in the 20-28% range when you stack everything up.
North Carolina and South Carolina
North Carolina taxes capital gains as regular income. The state income tax rate is currently around 4.5%. So add that on top of federal.
South Carolina also taxes capital gains as income, but there’s a deduction. SC allows you to exclude up to 44% of net long-term capital gains. The top state rate is around 6.5% but after the exclusion the effective rate is lower. Your CPA will know the exact numbers for your situation.
Related: Self-Storage in Charleston
Related: Self-Storage in Fayetteville
What this means in practice
Let’s say you bought an industrial building in Greensboro for $600K fifteen years ago. It’s worth $1.5M today. Your depreciation over 15 years has reduced your basis to maybe $300K. So your gain is roughly $1.2M. Between federal capital gains, depreciation recapture, NIIT, and state taxes, you could be looking at $250K-350K in taxes.
That’s a real number. And it’s why a lot of sellers seriously consider a 1031 exchange. Defer the tax, roll into something else, keep the full amount working for you.
What you should actually do
Talk to your CPA before you sell. Get an estimate of your tax liability so there are no surprises. Think about whether a 1031 makes sense. Think about the timing. Selling in Q4 versus Q1 can sometimes shift when the tax bill comes due.
And if you’re in Columbia or anywhere in the Carolinas, consider selling to me direct. I can work with your timeline, accommodate 1031 requirements, and close on a schedule that works for your tax planning.
Seller takeaway
Before you accept an offer on your commercial property, understand your tax liability. Call Roth Capital at 704-600-3839 to discuss your sale scenario and get your CPA involved early. Tax planning in advance can save you thousands.
Call me. 704-600-3839. I’ll give you a straight take on what your property is worth and you can loop in your CPA from there.
Ready to explore your options?
Tell us about your property. We will follow up within one business day.
Recent Comments