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 values
• Cost of the real estate plus cost of improvements through the estimated date of sale
• Accumulated depreciation – For both the cost and accumulated depreciation your advisor can obtain the information from your tax preparer
• Estimated closing costs – your advisor can provide you with expected closing costs based on the nature of the real estate transaction
• Outstanding debt balance at time of sale

Preparing 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 - $20,000,000
  Less outstanding debt - $5,000,000
  Less closing costs - $1,000,000
  
  Net Cash after debt and closing costs - $14,000,000 A
  
  Cost Basis of the Real Estate - $6,000,000
  Less accumulated depreciation - $3,500,000 (assuming all subject to recapture)
  Net Book Value - $2,500,000 B
  
  Gain on Sale - $16,500,000 Sales Price – closing costs – B = C
• Tax implications, including the character of the tax –
  Gain subject to 1250 recapture at 25% - $3,500,000 D
  Gain subject to capital gain tax at 20% - $13,000,000 C – D = E
  
  Federal 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 F

• Projected cash flow after closing costs, pay-off of debt, and taxes
  Net Cash After Taxes - $9,073,000 A - F

Having this information allows you the seller to consider various options and scenarios and ultimately decide whether selling the real estate makes sense.

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