Commercial buildings come in all shapes and sizes. From the towering downtown offices to the abandoned fast-food restaurant, commercial buildings can take up the majority of any town’s business center.
In most cases, commercial buildings are leased to paying tenants. However, when things go awry (or a global pandemic hits), many building owners find themself tired of finding renters and start looking to sell their property.
Today, buildings can be sold at a tremendous value, which usually means considerable taxes will be paid on the sale. Thankfully, some or all of the capital gains taxes can be deferred by using a 1031 exchange.
In this article, we will outline the steps it takes to 1031 exchange buildings. After exploring potential reinvestment options we will make the case for mineral rights and royalties, which can bring tremendous value to an investment portfolio.
How to Sell A Commercial Building
In order to 1031 exchange building, you must first obviously sell it. Think back to how you purchased your property, chances are that things haven’t changed in the way this step of the process is done. Commercial building sales have been commonplace for over a century, so there are many systems in place to help you.
Although many real estate websites have specifically designated commercial building sections for independent buyers to pursue and purchase, more often than not, most of today’s buyers and sellers will use a commercial real estate agent. Having someone who knows the market, has connections, and understands your property can make the process of selling a building easy and painless.
Determining the Value of A Building
Whether you are going out on your own or just checking to see the validity of your broker’s claim, you must first determine the value of your building before putting it on the open market. Commercial buildings have a ton of factors that determine their value, and therefore have a wide range of price points across the country.
All in all, the value of a building is largely determined by:
- Building Size (Sq footage, number of floors, etc)
- Building Condition (need for repairs)
- Special Features (energy efficiency, gardens, etc.)
- Current Tenant Status (single, multi, none, etc.)
- Property Size
- District and property taxes
- And more
In most cases, it is fairly easy to source the publicly available records of your commercial building in order to double-check the value you purchased it before, as well as its history. To get an idea of market trends, it is also commonplace for building owners to check the value of similar-sized buildings in the area. Although they are similar markets, the value of commercial real estate may not be impacted by local residential rates.
Taxes Paid on the Selling Buildings
Once a building is sold, a considerable amount of taxes are paid to local and federal governments. The total amount of taxes applied to a building sale is largely dependent on the dollar amount and property location and zoning. Around the country, the following are generally paid on building sales:
- Capital Gains Taxes
- Depreciation Recapture Taxes
- Federal Income Taxes
- Sales Taxes
- Local Taxes
- And More
As the numbers add up, most investors try to find ways in order to limit the amount of tax paid and maximize the return on the sale. As we mentioned above, a 1031 exchange is one of the best ways to do so, as it can be used to narrowly avoid hefty capital gains taxes.
1031 Exchange Buildings
Whenever you sell your building, the clock begins ticking on your eligibility for a 1031 exchange. As it is called an “exchange,” IRS tax code 1031 tells us that capital gains taxes can be deferred if the property is replaced with another, similar property.
In order to do so, paperwork must be filed and deadlines must be met. As IRS processes can be laborious and painstaking, it is strongly recommended that investors work with a 1031 exchange intermediary to make sure everything goes as planned.
Buildings Like-Kind Properties
As commercial buildings are one of the most common types of property in the United States, they can be sold and exchanged for a large variety of new purchases. The following can be purchased with a 1031 exchange after selling a building:
- Single and Multi-Family Homes
- Trailer Parks
- Malls and Strip-Malls
- Farms & Land
- Water and Ditch Rights
- Mineral Rights and Royalties
- And Many More
1031 Exchange Buildings – Timeline
To successfully complete a 1031 building exchange, new like-kind properties must be purchased within 180s of the sale of a building. Don’t wait until it is too late, however, because at least one reasonable property must be identified within 45 days. Commercial buildings can spend a lot of time on the market, so research can be done on reinvestments even before it is officially sold.
For additional requirements, please see our 1031 Exchange Rules and Requirements Page.
What to 1031 Exchange Buildings For
Mineral rights and royalties are quite different from buildings, however, investors in the United States have been profiting off of subsurface rights for over a century. Mineral rights can be leased to oil and gas companies, just as commercial buildings can be leased to tenants. The key difference here is that every month an oil and gas company successfully extracts and sells natural resources, you are entitled to a fixed percentage of the profits as the mineral rights owner. With this in mind, a passive income stream is born that rarely requires your upkeep.
Ultimately, commercial buildings are a sound investment as society will always have the need for office space, dining capacity, and so much more. As portfolios diversify and buildings are sold for tremendous amounts of money, mineral rights and royalties are among the best possible reinvestments in today’s market.