global Tax Selling Your Real Estate? Here’s What You Need to Know April 05, 2021 It’s crucial to consider various factors when deciding to sell real estate. Understanding the cash flow from the sale of real estate is critical. The time has come – you built a profitable company and you are planning an exit strategy, and your most valuable asset is the real estate. It is important to consider various factors when deciding to sell your company and most importantly whether to continue to hold the real estate and lease to the buyer of your business, or sell the real estate. One important step that should not be missed in this decision is to evaluate the cash flows of the operations. Read on. What information is needed? You may have acquired the existing real estate via a section 1031 exchange, or you have previously completed a cost segregation study, or perhaps you are interested in deferring taxes and exchanging your existing real estate for replacement property under a new section 1031 exchange. All of these factors impact the gain on sale calculation and ultimate net proceeds from the transaction. Using the following preliminary information, your advisor can provide a thorough Gain on Sale Analysis: Estimated sales price – typically, a Gain on Sale Analysis considers multiple possible sales valuesCost of the real estate plus cost of improvements through the estimated date of saleAccumulated depreciation – For both the cost and accumulated depreciation your advisor can obtain the information from your tax preparerEstimated closing costs – your advisor can provide you with expected closing costs based on the nature of the real estate transactionOutstanding debt balance at time of salePreparing the Gain on Sale Analysis Utilizing the above information, your advisor can prepare a detailed gain on sale and cash flow analysis. In order to make sure you are making the best decision, your advisor will work with you and prepare a detailed analysis to provide you, the seller, with the following information and finally Net Cash after Income Taxes: Estimated gain or loss from the sale of the real estate using the following hypothetical example:Sales Price - $20,000,000Less outstanding debt - $5,000,000Less closing costs - $1,000,000Net Cash after debt and closing costs - $14,000,000 ACost Basis of the Real Estate - $6,000,000Less accumulated depreciation - $3,500,000 (assuming all subject to recapture)Net Book Value - $2,500,000 BGain on Sale - $16,500,000 Sales Price – closing costs – B = CTax implications, including the character of the tax –Gain subject to 1250 recapture at 25% - $3,500,000 DGain subject to capital gain tax at 20% - $13,000,000 C – D = EFederal taxes @ 25% - $875,000 D * 25%Federal taxes @ 20% - $2,600,000 E * 20%Medicare tax at 3.8% - $627,000 C * 3.8%State tax- use 5% - $825,000 C * 5%Total Taxes - $4,927,000 FProjected cash flow after closing costs, pay-off of debt, and taxesNet Cash After Taxes - $9,073,000 A - FHaving this information allows you the seller to consider various options and scenarios and ultimately decide whether selling the real estate makes sense. Need assistance? Contact us.