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 you sell a commercial property for more than its original cost basis, the profit or capital gain, is subject to taxation. Knowing how to calculate these gains 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 applies to the profit from the sale of a capital asset, such as commercial property. The amount of tax you owe depends on the length of time the asset was held before it was sold.

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 you hold for one year or less.

These gains are taxed at the individual’s ordinary income tax rate, which can be as high as 37%. This creates a significant tax burden if you hold the property for only a short period.

On the other hand, long-term capital gains apply to assets held for more than one year. These gains generally receive preferential tax treatment, with tax rates typically lower than ordinary income tax rates.

The rate you pay depends on your filing status and taxable income.

2026 Long-Term Capital Gains Tax Rates ¹

Keep in mind that these thresholds are based on taxable income, not gross income or adjusted gross income (AGI).

Additionally, high-income taxpayers may owe the 3.8% Net Investment Income Tax (NIIT) in addition to the applicable capital gains rate.

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 allows property owners to defer capital gains tax by reinvesting the sale proceeds from 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 all gains earned by the fund from their taxable income.

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, potentially reducing 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 minimize or even eliminate the taxable gain. This serves to effectively lower your 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 property’s appreciated value. This strategy is most effective for those with philanthropic goals.

Beware of Depreciation Recapture

When you invest in 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. This means 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%. 

How Depreciation Recapture and Capital Gains Work Together at Sale

Selling a commercial property can trigger two different types of tax on the same transaction. Part of your profit may be subject to depreciation recapture, while the remainder may qualify for long-term capital gains treatment.

Suppose you buy a commercial building for $500,000 and claim $100,000 in depreciation deductions over the years. Those deductions reduce your adjusted basis to $400,000. If you later sell the property for $700,000, your total gain is $300,000.

The IRS does not tax that entire $300,000 at a single rate. Instead, the gain is divided into separate components:

• The first $100,000 reflects the depreciation deductions you previously claimed. That portion is generally subject to depreciation recapture rules and may be taxed at rates of up to 25%.
• The remaining $200,000 represents appreciation above your adjusted basis. Because the property was held for more than one year, that portion is generally treated as a long-term capital gain and taxed at the applicable capital gains rate.

Using a 25% recapture rate and a 15% long-term capital gains rate, the tax on the depreciation portion would be $25,000, and the tax on the remaining gain would be $30,000. This produces a combined federal tax liability of $55,000. For higher-income taxpayers, additional federal taxes may apply.

As a result, the amount ultimately owed can be higher than a simple capital gains calculation would suggest. This distinction is important because many investors focus on the property’s appreciation while overlooking the impact of years of depreciation deductions.

Understanding how these two tax calculations work together can provide a clearer picture of the after-tax proceeds from a sale and help inform decisions about tax strategies such as a 1031 exchange or an installment sale.

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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