Capital Gains Tax on Commercial Property: What Agents Should Tell Sellers

Commercial sellers usually have advisors, but the agent is often the first to ask what they’ll do after closing. Knowing how the gain breaks down helps you set up the right conversation early, especially when the buyer wants to allocate the price or the seller is weighing a 1031 against getting out. This guide covers the essentials.

It’s part of our series for agents. The hub is OZ talking points for your next listing appointment.

How the gain breaks down

A commercial building used in a business or rented out is generally §1231 property (IRC §1231). On a sale:

Commercial buildings are generally depreciated over 39 years (IRC §168(c)), so the recapture builds more slowly than on a residential rental, but cost segregation studies can move part of the basis into faster-depreciating personal property, and that part comes back as ordinary income. The depreciation recapture calculator splits a sale into these parts; a worked example is in depreciation recapture for selling landlords.

Price allocation matters

The contract price is often split among land, building, equipment, and sometimes intangibles like an assumed lease. Each piece is taxed differently: land has no recapture, equipment is mostly ordinary income, and the building carries §1250 gain. Buyers and sellers want different allocations, so it’s worth flagging early for both sides’ advisors. If an operating business is part of the deal, see selling a business with real estate.

Deferral options

• 1031 exchange. Commercial sellers often exchange into other commercial property, including triple-net leased buildings or DST interests. The whole gain, including recapture, can be deferred if all the proceeds are reinvested (IRC §1031). Deadlines are in the 1031 exchange 45-day rule.
• Opportunity Zone fund. The seller invests an amount equal to the eligible gain in a qualified opportunity fund within 180 days (IRC §1400Z-2). The §1250 and §1231 parts can be deferred; §1245 recapture can’t (Treas. Reg. §1.1400Z2(a)-1(b)(11)(iii)). For investments on or after January 1, 2027, the deferred gain is included after five years, less a 10% basis step-up (30% for a qualified rural fund). See the Opportunity Zone tax benefits guide and the 180-day deadline calculator.
• Installment sale, with ordinary recapture taxed in the year of sale (IRC §453(i)).

Run the options on the seller’s numbers with the 1031 vs DST vs Opportunity Zone calculator.

If the buyer is an opportunity fund

Commercial buildings in a zone can draw fund buyers, but the fund generally has to substantially improve the building by adding more than its basis within 30 months. Land-heavy sites and buildings due for major renovation fit best. See the substantial improvement rule for buyers and check the tract on the Opportunity Zone map.

Questions to ask a commercial seller

• Has a cost segregation study been done? When?
• How is the property owned: individually, in an LLC, or a partnership with other owners?
• Are there existing leases, and will any equipment or business assets convey?
• Is the plan to exchange, to get out, or to carry a note?

Related reading

• Capital gains tax on investment property
• Opportunity Zone real estate investing
• OZ talking points for agents (series hub)

Sources: IRC §1231; IRC §1; IRC §1245; IRC §1250; IRC §168; IRC §1411; IRC §1031; IRC §453; IRC §1400Z-2; Treas. Reg. §1.1400Z2(a)-1; IRS Publication 544.

Not tax advice.