Commercial Real Estate Capital Gains Tax – All You Need To Know!

Special Rates And Special Cases

August 22, 2004
By Niles Brohey

When you make a profit or gain from selling a capital asset your profit will be subject to capital gains tax. Generally the rate of tax you will be liable for depends on a many of factors but for real estate a special flat rate of tax is charged. Commercial real estate capital gains taxes are very high compared to tax on other capital gains with only one exception – when the property was being rented out to tenants.

Capital gains tax on commercial real estate is higher than the corresponding tax on other assets regardless of the term, it can be 20% higher in some cases. This is because real estate is considered to be a special asset by capital gains law and as such is taxed at a special, inflexible, flat rate. Rental property is not taxed in this way however, it is taxed less heavily.

At 25% the tax rate on real estate is high compared to taxes on assets such as shares which are applied at between 5% and 15%. When trading in standard capital assets the rate of tax drops with the length of time you have owned the asset being traded, this is not true of real estate - although it can have an effect if the real estate is being rented or let to tenants.

So although the length of time an asset has been held makes a difference when considering your tax situation when you are selling standard assets, it makes very little difference when selling real estate since real estate is subject to 25% tax regardless of the holding term or income bracket of the holding business.

Gains from selling real estate which you have been renting to tenants are taxed in a different way to standard real estate. A part of the gain made (determined by how much the property has depreciated in value while you owned it) is taxed at the same rate as your income tax, the rest of the gain is taxed at the standard capital gains tax rate of between 5% and 15%.