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Saving Capital Taxes in Commercial Real Property Transactions

In a commercial real estate transaction, Sellers and Buyers must be aware of tax consequences and how to apply tax law your best advantage. This is particularly true with the sale of a business with commercial real estate in which the Seller must understand the difference between income tax and capital gains tax. Individuals and corporations in the U.S. pay tax on a progressive tax-bracket based on one’s “income” and that rate may vary anywhere from 10% to 35%. The Internal Revenue Code defines “income,” which is sometimes referred to as “gross income,” as “... all income from whatever source derived…” Thus, it is essential that an individual qualify under a lower tax bracket as much as possible by filing for qualified deductions and/or depreciation. Further, it is imperative that one understands the differences between “taxable income” and “capital gains” for tax benefit purposes.

A capital gain is the net profit of the sale of a capital asset, such as a business and its goodwill, corporate assets, commercial real property, or stocks (including mutual funds, ETFs, and taxable IRAs). In a commercial real estate transaction, a capital gain is realized when the sale of the business and property is higher than the basis of the property, taking into consideration the depreciation value of said property. That is, the net profit of the sale of a capital asset, minus the depreciation value of the property is a capital gain and is considered taxable.

Taxes on capital gains are called Capital Gain Tax, which is further divided into a short-term capital gain tax and long-term capital gain tax. While long-term capital gain (capital assets that are held for more than 1 year) is currently taxed at 15%, and will revert back to 20% in 2011, short-term capital gain is taxed as ordinary income based on the 10% - 35% income bracket stated above. Thus, it would be an incentive for a person or corporation to be mindful of these tax incentives and categorization when considering buying or selling a business or a commercial real property.

Law Offices of Steven Tuan Pham does not practice tax law. Nevertheless, our Houston Commercial Transaction and Houston Commercial Real Estate Attorneys understand and are mindful of tax consequences in drafting a purchase and sale agreement, as well as when we design and draft the financing instruments in these transactions. Having the that knowledge enables our clients, working with their tax consultants, design and execute a commercial instrument that helps them maximize their available tax savings.


The information above is NOT intended to replace a personal consultation with our Houston Real Estate Transaction Lawyers and our Spring Houston Real Estate Litigation Attorneys. Readers should not construe the information as a consultation. There may be other legal issues based on the specific fact of each case. Every case is unique and our Houston Real Estate Transaction Attorneys and our North Houston Real Estate Litigation Lawyers need to review the facts and circumstances of each individual case in order to provide a meaningful personal consultation. Please feel free to give us a call at 713-517-6645 or complete our Contact Form.