How to Calculate Tax on Sale of Commercial Property

Understanding how to calculate tax on the sale of commercial property can help investors estimate taxable gain, plan for depreciation recapture, and evaluate tax-deferral options such as a 1031 exchange. Commercial property sales often involve adjusted basis, depreciation recapture, state taxes, and reporting requirements, so investors should review the transaction with a CPA or tax advisor before closing.

Universal Pacific 1031 Exchange is a reputable firm with over 32 years of experience guiding investors through the complexities of real estate transactions. We serve as qualified intermediary for 1031 exchanges, holding exchange proceeds, tracking deadlines, and supporting the documentation needed to keep the transaction aligned with IRS Section 1031 requirements. Contact us today to start an exchange

This article explains the meaning of capital gains taxes and how to calculate them when selling a commercial property.

What Is Capital Gains Tax on a Commercial Property Sale?

Capital gains tax is the tax charged on the profit made when you sell a commercial property for more than it cost you to buy and improve it. In commercial real estate, this profit is called a capital gain, and it counts as investment income in the eyes of the Internal Revenue Service. This tax applies to all commercial real estate investments, including office buildings, warehouses, and retail spaces

The simple formula for calculating capital gains is: Capital Gains = Net Selling Price − Adjusted Basis. Here “net selling price” means the sale price of the property minus any selling expenses, while the “adjusted basis” is the original purchase price plus the costs of improvements, minus the depreciation deductions claimed over the years. 

Subtracting this adjusted basis from the net selling price gives you the gain on the sale, and it is on this amount that capital gains tax is calculated. Part of the gain may be subject to depreciation recapture taxes, which can increase the tax liability for commercial real estate investors. 

The capital gains tax rate on commercial property depends on the taxpayer’s or investor’s income level and filing status. Additional taxes, such as the net investment income tax (NIIT) and state and local taxes (SALT) may also apply, adding to the overall tax burden. Knowing how capital gains taxes work helps real estate investors understand their tax burden and plan for the capital gains tax bill that may come with a sale.

Short-Term vs. Long-Term Capital Gains on Commercial Property

In general, property held for one year or less produces short-term gain, while property held for more than one year may qualify for long-term capital gains treatment. The exact holding-period calculation depends on the dates of acquisition and disposition, so investors should confirm the holding period with a CPA or tax advisor before reporting the sale.

This holding period applies to many types of assets, including commercial real estate investments, stocks, and other property. Knowing whether your gain is short-term or long-term is important because it affects how the capital gains tax is calculated and what tax rate applies. 

Short-term capital gains are generally taxed at your ordinary income tax rate, which is significantly higher than the long-term capital gains tax. The appropriate tax rate for long-term gains is 0%, 15%, or 20%, depending on your taxable income and filing status. High earners may also pay the net investment income tax of 3.8% on top of their capital gains tax bill.

Calculating your holding period starts the day after you acquire the property and ends on the day you sell it. For example, if you purchased an investment property on November 5, 2024, and sold it on the same date in 2025, you held the property for exactly one year, classifying the gain as short-term. If you sold it on August 3, 2026, that would be over a year and would classify as a long-term gain.

What Taxes Apply to a Commercial Property Sale?

When selling a commercial property, several types of taxes can apply. The most common of them is the capital gains tax, which is charged on the profit you make from the sale of the property. Another tax you might owe is the depreciation recapture tax on the depreciation claimed over the years.

Depending on the property’s location, you might also face state and local taxes, which can add to your tax burden and affect your final net proceeds. However, it is important to note that commercial and residential properties can be taxed differently when sold.

While both are subject to capital gains taxes and depreciation recapture, commercial properties often involve higher depreciation amounts, which can increase the tax liability at sale. Residential properties, especially a primary residence, may qualify for special exclusions.

Under the Internal Revenue Code, homeowners are allowed to exclude part or all of the gain from the sale of their main home from capital gains taxes. If you are married filing jointly, you can exclude up to $500,000 of capital gains from your taxable income, as long as both spouses meet the ownership and use tests set by the IRS. 

For those who are single or married filing separately, the maximum exclusion is $250,000. If your profit exceeds these limits, it will be subject to capital gains tax. Given the different taxes involved and the potential size of the capital gains tax burden, consulting an experienced tax professional or financial advisor before completing a sale is wise.

How to Calculate Tax on a Commercial Property Sale

Properly calculating your tax after a commercial property sale can be challenging for most real estate investors. The process extends beyond just knowing your sale price; it requires determining your adjusted basis, accounting for depreciation, and understanding how different taxes apply.

How to Calculate Adjusted Basis

Calculating the adjusted basis of a commercial property starts with the original purchase price, which is the amount you paid to acquire it, including certain closing costs. This figure is then increased by the cost of improvements or renovations that add value, extend the building’s life, or adapt it to a different use. 

Examples include structural upgrades, new roofs, expanded floor space, or major system replacements. Routine repairs, like fixing a leak or repainting, do not increase the basis because they are considered maintenance, not improvements. From this total, you subtract the depreciation deductions you have claimed over the years. 

Depreciation reflects how the IRS accounts for wear and tear, and while it can lower your taxable income each year, it also reduces your basis, which increases your taxable gain when you sell. In summary, the adjusted basis formula is: Adjusted Basis = Purchase Price + Improvements – Depreciation. 

For example, if you bought a warehouse for $700,000, invested $200,000 in innovations, and claimed $40,000 in depreciation, your adjusted capital gains tax basis would be $860,000. If you later sold it for $1,200,000, your gain would be $340,000. This is the figure the IRS uses to calculate both the capital gains tax and any depreciation recapture owed.

How to Calculate Capital Gain on a Commercial Property Sale

As given above, the formula for calculating capital gains is net selling price – adjusted cost basis. So, to calculate the net selling price of a commercial property, start with the sale price and subtract your selling expenses. These expenses include broker commissions, legal fees, title charges, and other costs directly tied to closing the sale. 

The result is your net proceeds, which is the actual amount you receive from the transaction. Next, subtract the property’s adjusted basis from the net proceeds. The adjusted basis is the original purchase price plus the cost of qualifying improvements, minus the depreciation deductions you have claimed over the years. The difference between your net proceeds and your adjusted basis is your taxable capital gain:

Example:

Sale price = $1,400,000

Selling expenses = $60,000

Net proceeds = $1,340,000

Adjusted basis = $950,000

Capital gain = $1,340,000 – $950,000 = $390,000

In this example, the $390,000 gain is subject to federal capital gains tax, possible net investment income tax, and any applicable state or local taxes. A portion of this amount may also be taxed separately for depreciation recapture. 

What Is Depreciation Recapture and How Does It Affect Taxes?

Depreciation recapture is the IRS’s way of taxing the portion of your profit that comes from claiming depreciation on a property over the years you owned it. When you own commercial real estate, you can deduct a set amount each year to account for wear and tear, which lowers your taxable income during ownership. 

However, when you sell the property for more than its depreciated value, the IRS wants to recapture some of those tax benefits, treating them as part of your taxable gain. This affects your taxes because the amount you’ve claimed as depreciation is not taxed at the long-term capital gains tax rate. 

Instead, it’s taxed as ordinary income but capped at a maximum rate of 25%. For example, if you took $80,000 in depreciation deductions over the years, that $80,000 will be taxed separately from your regular capital gains on the sale, even if your overall profit is much higher.

Are There Other Taxes on Commercial Property Sales?

Apart from federal capital gains taxes, there are also State and Local Taxes (SALT), which state and local governments often impose on the sale of commercial property. Depending on the region, these taxes can take the form of transfer taxes, recording fees, or local surtaxes on high-value commercial real estate investments. 

If you are a high earner, the Alternative Minimum Tax (AMT) also affects how your capital gains tax is calculated for commercial property sales. The AMT is a separate tax calculation meant to ensure high-income individuals and certain corporations pay at least a minimum level of tax.

While it’s less common now due to changes in tax law, certain large gains or deductions connected to the sale of commercial property can still push a seller into AMT territory, which might increase the total tax owed. 

Another potential factor is the Net Investment Income Tax, as mentioned earlier. This tax imposes a 3.8% rate on the net investment income for individuals, estates, and trusts with a Net Investment Income (NII) and Modified Adjusted Gross Income (MAGI) above certain thresholds. If your income, including the gain from the sale of a property, exceeds those limits, this tax can apply on top of regular capital gains and recapture. 

One way to defer these federal taxes is through a 1031 exchange, which allows you to reinvest the proceeds of a property sale into another qualifying property and postpone paying taxes until a future sale, as long as strict IRS rules are followed.

What Expenses Can Reduce Taxable Gain?

Certain deductions can significantly lower your capital gains tax bill when selling a commercial property. One of these deductions is the subtraction of common selling expenses such as real estate agent commissions, title insurance, legal fees, Qualified Intermediary fees, and marketing costs from the sale price when calculating your net proceeds.

These deductions reduce the profit amount that the IRS uses to determine your capital gains liability. Another is the SALT deduction, which was previously capped at $10,000 under the 2017 Tax Cuts and Jobs Act. However, as of July 4, 2025, under the One Big Beautiful Bill Act signed into law by President Donald Trump, this deduction rises to $40,000

It allows a $20,000 deduction if married filing separately, with gradual annual increases of 1% until 2029 before dropping back to $10,000 in 2030. However, for taxpayers in the $500,000 – $600,000 range, the deduction is reduced by 30%

Another notable deduction is the primary residence exclusion of up to $500,000, depending on your filing status. You can also get deductions for improvement expenses made specifically to prepare the property for sale, as well as depreciation deductions taken during ownership.

While depreciation recapture taxes can increase an investor’s tax burden, the original depreciation deductions help reduce taxable income during the years the property is held. In addition, if the property qualifies for certain tax credits or incentives under the Internal Revenue Code, these benefits can offset some of the capital gains tax calculated at the time of sale.

Claiming these deductions requires accurate reporting when filing your tax return. Hence, it is important to keep detailed records of every deductible expense tied to your commercial real estate investments. The deductions are generally reflected when you calculate capital gains tax using IRS forms specific to the sale of a capital asset, factoring in your adjusted cost basis. 

Tax Strategies for Selling Commercial Property

Selling commercial property often comes with a sizable tax bill, but certain approaches can help reduce or delay those taxes while keeping more of your profit working for you. Here are some of the most effective tax strategies:

• 1031 Exchange (Like-Kind Exchange): This tax strategy allows you to postpone capital gains tax by reinvesting your sale proceeds into another qualifying property, keeping more capital available for future investments.
• Installment Sale: This is done by spreading your taxable gain over several years by receiving the sale price in installments, easing the yearly tax burden and improving cash flow.
• Opportunity Zones: Qualified Opportunity Funds (QOFs) may allow eligible gains to be deferred until an inclusion event or December 31, 2026, whichever comes first. The rules are complex and should be reviewed with a tax advisor before relying on this strategy. If you hold your investment in the QOF for at least ten years (if the program extends for that long by an act of legislature), you may permanently exclude any gain from appreciation when you sell by stepping up your basis to the fair market value at that time. 
• Maximize Deductions: You can also reduce your taxable gain by claiming allowable selling expenses such as broker commissions, legal fees, title costs, and qualified improvements before the sale.

How a 1031 Exchange Can Help Defer Capital Gains Tax

A 1031 exchange allows taxpayers to defer or postpone paying immediate capital gains when they sell a property. This is done by reinvesting the proceeds of a relinquished property into the purchase of a like-kind property. This approach keeps more money working for you, allowing your real estate portfolio to grow without the setback of an immediate tax bill. 

However, the process is bound by strict IRS timelines. The IRS rules require you to identify a replacement property within of selling your old property and finalize the purchase within . The property you buy must also meet the “like-kind” requirement, meaning it serves as an investment or commercial asset, not personal property

Because the 1031 exchange rules are detailed and deadlines unforgiving, many investors rely on experienced QI or qualified tax professionals to manage the process. Experienced qualified intermediaries and tax professionals can help coordinate exchange documents, timelines, and fund handling, which may reduce the risk of mistakes that could jeopardize tax deferral. Careful planning and CPA review give a 1031 exchange the best chance of preserving the deferred capital while the funds remain invested in like-kind real estate.

How to Report a Commercial Property Sale on Your Tax Return

When you sell investment or business property, the transaction must be reported on your tax return using various forms. For most real estate sales, capital gains and losses are reported on Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets).

If the property was used in a trade or business, you may also need Form 4797 (Sales of Business Property) to calculate gains subject to depreciation recapture. If you completed a 1031 exchange, you’ll also file Form 8824 (Like-Kind Exchanges) to detail the transaction and show that taxes were deferred rather than paid immediately. 

The IRS requires these forms to be filed with your annual tax return, generally due by April 15 (or the next business day if it falls on a weekend or holiday), unless you request an extension. It is essential to keep thorough records involved in the transactions for at least three to seven years.

Some of these documents include settlement statements, proof of improvements, depreciation schedules, and exchange agreements. Accurate reporting not only ensures compliance but also helps you avoid penalties, interest, or the IRS disallowing your tax deferral.

Want to Defer Tax on a Commercial Property Sale?

Deferring tax on a commercial property sale starts with knowing how the gain is calculated. A miscalculation can affect the reported tax and the deferral amount, which is why investors should work with a CPA or tax advisor on the figures and reporting. The basic formula is your net selling price minus your adjusted basis.

This gain is then subject to federal government capital gains tax, depreciation recapture, and possible state and local taxes. The good thing is that these taxes can be deferred using a powerful tax-deferral strategy like a 1031 exchange. However, the rules are strict and the paperwork detailed; hence, the need for professional guidance.

Universal Pacific 1031 has over 35 years of experience as qualified intermediary on 1031 exchanges. From coordinating the exchange documents to tracking the 45-day identification and 180-day exchange deadlines, we hold exchange proceeds in a segregated trust account and coordinate with your CPA, attorney, lender, escrow officer, and title company. Contact Universal Pacific 1031 before closing to discuss whether a delayed 1031 exchange may fit your commercial property sale. To get started, visit one of our offices or contact us directly.

FAQs

These are questions people are frequently asking about how to calculate tax on the sale of a commercial property, and their provided answers.

How do you calculate capital gains tax on commercial property?

Start with the net selling price (sale price minus selling expenses such as broker commissions and legal fees), then subtract the adjusted basis (purchase price plus capital improvements, less accumulated depreciation). The result is the taxable gain, which may be subject to federal capital gains tax, depreciation recapture on prior depreciation, the Net Investment Income Tax, and applicable state and local taxes. Review the calculation with your CPA or tax advisor before filing.

What taxes apply when selling commercial property?

A commercial property sale can involve several layers of tax. Long-term capital gains are generally taxed at preferential federal rates (often 0%, 15%, or 20% depending on taxable income), and prior depreciation may create unrecaptured Section 1250 gain taxed at a federal rate of up to 25%. The Net Investment Income Tax and state or local taxes may also apply. Confirm the rates and the totals with your CPA or tax advisor.

How does depreciation recapture affect a commercial property sale?

For depreciable real property, prior depreciation may create unrecaptured Section 1250 gain that can be taxed at a federal rate of up to 25%. The exact treatment depends on the property, the depreciation history, and how the sale is reported on IRS Form 4797. Investors should confirm the calculation with a CPA or tax advisor.

What expenses reduce taxable gain on a commercial property sale?

Selling expenses such as broker commissions, legal fees, title charges, and marketing costs may reduce the amount realized from the sale. Capital improvements made during ownership may increase basis. Both can reduce taxable gain, but they are reported differently on the return. Discuss the specifics with your CPA or tax advisor.

Can a 1031 exchange defer tax on a commercial property sale?

Yes, a properly structured 1031 exchange may allow capital gains tax to be deferred when the sale proceeds are reinvested into like-kind replacement property within the IRS deadlines (45-day identification, 180-day completion). A qualified intermediary holds the exchange proceeds, prepares the documents, and coordinates the closing. Contact Universal Pacific 1031 before the relinquished property closes so the exchange can be started on time, and review the tax treatment with your CPA or tax advisor.