Selling Commercial Property - Opportunity Zone Make Sense?

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ze233
Posts: 64
Joined: Fri Jul 03, 2015 4:41 pm

Selling Commercial Property - Opportunity Zone Make Sense?

Post by ze233 » Thu May 21, 2020 5:49 pm

Hello Bogleheads,

I'm looking for anyone with expertise in commercial property as I have no experience in this area.
My parents are selling a commercial property they've held on to for the past 30 years. During that time they've depreciated every year and can no longer depreciate the property as the cost basis is now 0.

They are in the process of selling the property, and would be looking into a large tax bill due to depreciation recapture, in additional to the taxes they would owe due to capital gains.

Here are the numbers
Bought for 650,000 30 yrs ago.
Selling for 800,000 now.
Over 30 years, they have depreciated their cost basis down to 0.

Am I right that their capital gains is the entire 800,000 due to depreciation?
Also, since they have depreciated the property down, their depreciation recapture would also be on the entire 650,000, so they would owe 650,000 *.25 = 162,500 as ordinary income?

Due to the large tax bill, they are looking into converting into Opportunity Zone funds, as they were told by their realtor that doing so can eliminate depreciation recapture, in a similar vein to an 1031 exchange, and also reduce their capital gains if they invest in the fund for 10 years.

Does anyone have any insight on whether this is correct or have experience selling commercial real estate or investing in Opportunity Zone funds?

annu
Posts: 579
Joined: Mon Nov 04, 2019 7:55 pm

Re: Selling Commercial Property - Opportunity Zone Make Sense?

Post by annu » Thu May 21, 2020 11:14 pm

Biggerpockets might have better answers

Topic Author
ze233
Posts: 64
Joined: Fri Jul 03, 2015 4:41 pm

Re: Selling Commercial Property - Opportunity Zone Make Sense?

Post by ze233 » Fri May 22, 2020 8:50 am

Thanks, I didn't know about that forum. I will repost my question there.

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unclescrooge
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Joined: Thu Jun 07, 2012 7:00 pm

Re: Selling Commercial Property - Opportunity Zone Make Sense?

Post by unclescrooge » Fri May 22, 2020 9:18 am

I am not a CPA, but here is my opinion.

Capital gains is due on the profit, or sale price less costs minus original purchase price.
Additionally, depreciation recapture is taxed at 25%.

For commercial buildings, depreciation is taken over 39 years. If they have only owned it for 30 years, how did they depreciate the whole thing? 🤔

An opportunity zone investment will offset taxes from any capital gains. But there are caveats. The biggest one in my opinion, is that the prices for properties are marked up, often to the level where one is better off paying taxes.

Bigger pockets may be a real estate forum, but I'm not certain it is a better forum.

GibsonL6s
Posts: 353
Joined: Tue Aug 29, 2017 12:17 pm

Re: Selling Commercial Property - Opportunity Zone Make Sense?

Post by GibsonL6s » Fri May 22, 2020 10:24 am

Opportunity zones allow non real estate capital gains to be reduced if you are in the new property 10 years. So if you have gains from an appreciated stock you can defer and forgive some by buying OZ real estate. In your instance you can also 1031 to another property to defer gains. So you have 2 options to consider. I would make sure you are comfortable with the Oz route due to the lengthy hold if you go that way.

Good luck

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