Property sale tax planning should begin before a contract is signed, not after the closing statement arrives and the cash is deposited. Don't wait!
For a practice owner or other business owner, selling real estate or business property can affect taxable income, cash flow, estimated taxes, and other year-end decisions.
The goal is not simply to estimate a tax bill. It is to plan ahead and find ways to proactively reduce taxes or fund future goals.
The first step is gathering information about the property tax basis that is essential to calculating an accurate tax estimate on the sale.
We believe that it is also important to create a personal tax projection in addition to a property sale tax projection. The property sale will likely impact your personal situation, and we want to identify planning opportunities in advance.
Let's start by looking at how the gain on the sale is calculated and then we will look at personal tax planning.
A property gain is generally the amount realized above the property’s adjusted basis. A loss is generally the amount by which the adjusted basis exceeds the amount realized. We are focusing on gains for this article.
Let's define some key terms:
Adjusted basis is the tax investment remaining in the property after applicable adjustments like depreciation or Section 179. The correct calculation depends on the property’s records and history, which is why it's so important to keep good records and have a qualified tax preparer.
Amount realized generally reflects what the owner receives in the transaction after expenses.
Total gain is the difference between the amount realized and the adjusted basis.
Now that we know the gain, we can start to work on calculating the tax.
Depreciation recapture exists because the owner has already claimed tax deductions for renting the property over time. When the property is sold, part of that prior tax benefit may be taxed back at higher rates than long-term capital gains.
This is why depreciation recapture matters. It can materially increase the total tax owed on the sale, so it should be modeled carefully as part of the overall tax projection.
Because these calculations depend on the property’s basis, depreciation history, and other transaction details, it is important to work with a qualified tax professional to ensure the numbers are calculated correctly.
Now that we have calculated the gain and understand the basis, we can apply the tax rates to the gain of $447,500. You can see that the tax rates vary by the "type" of gain (Sec 179 recapture, Unrecaptured 1250 gain, Long Term Capital Gain). These tax rates are estimates.
You can see that the total tax owed on the property sale is $132,466 after all the different rates were applied.
The next question clients ask is how they can NOT pay that tax. In general, there are a few strategies to defer the tax on the sale of the property.
First, you can evaluate whether an installment sale is a good fit for your situation. An installment sale can help spread the capital gain across multiple years for tax planning purposes. Unfortunately, the tax associated with the depreciation recapture hits in year one no matter what, so you need to fully model this option out.
Second, you could consider a 1031 like-kind exchange. A 1031 exchange lets you sell investment or business real estate and roll the proceeds into another "like-kind" property without paying capital gains tax at the time of sale. It's important to know the tax is deferred, not erased. A 1031 exchange may be difficult to execute given the time requirements to reinvest.
Please talk to a qualified professional about the above two strategies before proceeding.
Okay, let's tie it all together. Here is the calculation from the top to the bottom to show after taxes. This example client would have about $800k remaining on a $1M sale.
After the taxes and fees, the seller still has almost $800k remaining. Hooray! Now you need to think through where to put the proceeds.
Ideally, you are planning your estimated payment strategy before you sell a property or shortly thereafter.
For calendar-year individuals, the 2026 estimated tax payment dates are April 15, June 15, September 15, 2026, and January 15, 2027.
We covered estimated payments and safe harbors in a previous blog on tax planning.
It is critical to connect a property sale with the rest of your personal financial situation. This is why we have CPAs, CFPs, and other professionals on one team to give comprehensive advice.
Here is a sample output of the tool we use to tax plan for our clients. We've added in their personal tax information and gain on the sale.
Next, we can see how an increase in capital gains income (x axis) impacts the tax rate (y axis) for the client. In the sample below, you can see another $150k of income bumps the tax rates by 5%.
Actions we may consider for a large income year:
The trade-off is that early planning takes time and may require coordination with legal, real estate, and tax professionals. It's worth the effort to know where you stand!
Our team gets involved early to calculate the gain for our clients and plan ahead for taxes, savings, or investment.
If you are considering selling property, please do not hesitate to reach out before the transaction is finalized.
We are happy to help you get organized, better understand the tax impact, and coordinate the next steps with your other business and personal planning decisions.
Disclosure
The content and information presented herein are for educational purposes only and should not be construed as a solicitation or offer to buy or sell any investment services. Nothing contained in this material should be considered an offer to provide any product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. The information contained herein has been obtained from sources believed to be reliable; however, the Firm does not guarantee accuracy or completeness of the information. Such information is subject to change at any time without notice. Before taking any action, you should consult with a qualified tax, legal, or financial professional.