Capital gains are realized, recognized, and taxes levied, every time you sell real estate. What you may not know is that those commercial property taxes may be deferred indefinitely. Tax deferment for commercial properties means you can delay those payments without getting into trouble with the IRS or stacking up back taxes and penalties. Wondering how? Read on.
How 1031 Tax Deferments Work
The Internal Revenue Code (IRC), Section 1031, lets you trade one piece of real estate for another one without triggering any capital gains tax. All it takes is reinvesting in the same type, or “like kind,” of property.
You can do this any number of times, deferring the taxes as long as you want, as long as you follow the rules for this so-called “1031 exchange.” From the date you sell your property, you have:
- 45 (calendar, not business) days to demonstrate a potential replacement property in writing
- 180 calendar days to buy and close on the new property
- Until your next tax return date, plus any extensions, if it comes earlier than 180 days
Note that these two periods run concurrently, and there are no extensions except for federally declared disasters. It also means the timeline for simultaneous swaps totals 180 calendar days.
There are other, more involved ways to defer commercial property taxes, but many businesses utilizing the 1031 method could theoretically keep these balls in the air for generations.
Pros of Commercial Property Tax Deferment
There are several reasons you might want to defer your tax burden in commercial real estate, most of which have to do with accumulating and holding onto wealth.
You’ll have more liquid cash upfront since you’re not paying those taxes. That means a bigger shot at building up your wealth and your supply of commercial properties.
There could be a more advantageous tax situation on the horizon, due to coming changes like government turnover or new legislation.
Cash is king. Since you have more cash, you can pay your current and short-term creditors on time. When your creditors are paid on time, their goodwill and your credit limit expand, both of which are great for the continued growth of your business.
Cons of Commercial Property Tax Deferment
But deferment isn’t all upsides. Here are the main reasons not to defer your property tax.
Deferrals aren’t permanent. You’ll need to keep an eye on them, and on your finances, in a way you wouldn’t if you paid tax at the typical time.
If anything bad happens, your tax burden could fall to your successors or heirs.
Taxes could even hit you in advanced age when your income and cash flow, and therefore money that’s liquid and available, tend to be lower.
Bankruptcies and sales are both much more complex with that added future tax burden. Those complications mean a greater chance of errors, scrutiny from the IRS, and legal or accounting charges for the extra paperwork.
Don’t Wait to Call Commercial Property Tax Consultant
Every situation is different. In some cases, deferring your tax is the smart move. For the best answers to your questions, please reach out to Hegwood Group Property Tax Consultants for a free consultation. We can walk you through your options, help with appealing any tax decision you disagree with, and address any other commercial property tax services you may need.