The Top 6 Investment Strategies If You Sell Your Commercial Property

It’s a great time to own commercial real estate. Vacancy rates are low, property values and rental rates are at all-time highs, and we’ve had over a decade of economic growth. Some owners are happy with their property and can continue to operate their businesses from there or collect rent from a solid tenant.  

Other owners we work with are considering selling to increase their monthly income, diversify their investments, or begin planning for retirement and maximize their quality of life. In today’s market, owners can get record prices for their properties and can alleviate some of the anxieties that come with owning commercial properties.

 The main question we get from all owners is: what would I do with the money if I sell? The following are the top 6 strategies if you sell your commercial property (and how to reduce your tax burden):

1.     Tax Deferred 1031 Exchange

The top strategy from sellers to defer their tax burden is a 1031 exchange. In this transaction, a seller can take the proceeds from a commercial real estate sale and put the amount towards a new property and not have to pay any taxes on the gains. This has been one of the top investing strategies for 100 years and has been a great wealth generator for many property owners. The seller can choose the level of landlord responsibilities required in their newly acquired property. (Write full article about this)

2.     Partial 1031 Exchange

Similarly, if an owner wanted to sell their property and keep a percentage of their proceeds, they can take any amount out after a sale and use the rest of the proceeds in a 1031 exchange. This allows owners to take some of their capital off the table and continue to invest the rest. Capital gains taxes are only paid on the percentage of the gain that is not exchanged.

3.     Installment Sale

For owners who want to sell but don’t know what to do with their proceeds and don’t want to necessarily purchase another property, an installment sale is a great solution. Essentially, the seller becomes the bank and can finance the property to the buyer. Like a bank, the seller would usually take 20-30% down and then structure the balance of the sale price over a 10-25 year loan. Capital gains are incurred as you receive the principal over the life of the loan.

4.     Sale Leaseback

For an owner who operates their business out of the property, a sale leaseback is an option to consider. Your property can be sold to an investor with your company signing a lease as a tenant. This is a benefit to both the seller and the investor, as the owner can use the proceeds as needed while the investor gets a fully leased building. The seller is then free to use the proceeds in any of the other strategies enclosed. 

5.     Delaware Statutory Trust (DST)

Delaware Statutory Trusts (DSTs) allow real estate investors a way to invest passively in commercial real estate. The DST acquires high-quality commercial income properties, finances and manages the properties and makes monthly distributions to all investors. Ownership in the trust is based on a pro-rata share of the equity invested. This is a good strategy for sellers who want passive income and no responsibilities of ownership.

mohamed-ajufaan-dwIHrac2sEA-unsplash.jpg

6.     Cash Out or Straight Sale

Often looked down upon because of the tax consequences, some owners have chosen to sell their property and cash out the proceeds to enjoy their lives with. As property values have increased over the years, some view the appreciation in the last two years as the same as selling two years ago tax free. Your tax bill will be roughly 1/3 of your gains, and we can help you calculate just how much that would be with a quick phone call and a few pieces of information from you.

 

Overall, there are several options to consider when selling your property and deciding what to do with your proceeds. Each owner has their own set of circumstances to consider, but knowing the options available is the first step in making the best decision for you and your family. Our team is available to discuss any of the above options in more detail. Feel free to give us a call at (858)458-3361 or email me at ajize@voitco.com.

Alex Jize