Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Taxation in the Event of a Sale

The basic rule is that when real property is sold, the profit or loss must be reported in the year of sale and the applicable tax paid, unless an exemption applies or the profit or loss is excluded from reporting. When the owner cashes out, when he sells his property, a gain or loss occurs.

Gain or loss on the sale of real estate is measured by taking the sale price less the property's basis.

Profit or Loss = Sales Price Less Basis

The concept of Sales Price should be clarified. The Sales Price should be refined to derive the Adjusted Sales Price or Net Sales Price. In other words, the Sales Price should be reduced by the cost of selling the property. These costs include real estate commissions, legal expenses, title charges, and the like.

Additionally, Basis must be defined. Basis equals the original purchase price plus any acquisition costs less depreciation taken plus any capital improvements.

Following our hypothetical scenario, two years after his acquisition, Diamond Jack sold the center to Steven Stable for $14,500,000. When Diamond Jack acquired the MOB, his closing costs were $100,000. Closing costs are added to the property's basis. Let us assume that during the two-year holding period, Jack spent $200,000 improving the property and based on the 75/25 building-to-land allocation took $196,154 in depreciation each year.

The following chart illustrates how the taxable gain or loss would be calculated: