What to Do with Commercial Property You Inherited
Inheriting commercial property can be a mixed blessing. Whether it’s a family-owned business property or a commercial real estate portfolio, you’re now faced with decisions that could shape your financial future. From managing tax liabilities to deciding whether to keep or sell the property, there are several factors to consider. However, with careful planning and informed decision-making, you can turn your inherited property into a valuable asset rather than a burden.
Key Steps to Take When You Inherit Commercial Real Estate
Managing inherited commercial property can seem overwhelming, especially if you're not familiar with real estate management or if there are multiple heirs. The following steps are crucial in minimizing costs and making well-informed decisions:
1. Understand Estate Taxes
Inherited commercial real estate may be subject to estate taxes, depending on the property’s value and the total value of the estate. For estates exceeding the federal estate tax exemption limit (in 2024, $13.61 million per person), federal estate tax rates range from 18% to 40% on the amount exceeding the exemption.
For example, in New York, the estate tax exemption is $6.94 million in 2024. If the estate value exceeds 105% of this exemption, the entire estate will be taxed.
2. Assess Outstanding Debts and Liens
Inherited commercial properties often come with financial obligations such as unpaid mortgages or liens. Inheritors assume responsibility for continuing mortgage payments, and must address any tax liens or judgments that might be attached to the property.
Failure to address these financial responsibilities could result in foreclosure or difficulty transferring ownership.
3. Get a Property Valuation
Accurately determining the property’s fair market value is critical for making informed decisions about selling or holding onto the property. The IRS provides a "step-up in basis" for inherited properties, meaning the market value at inheritance becomes the new cost basis. This can reduce capital gains taxes when the property is sold.
For example, if the inherited property’s market value is $2 million and it was originally purchased for $500,000, your “stepped-up basis” is $2 million. Selling at $2.5 million means you’ll only be taxed on the $500,000 gain.
4. Consult a Tax Professional
Estate tax rules and the potential for financial obligations can be complex. Consulting a tax expert ensures you make informed decisions, whether it’s about utilizing trusts to minimize tax liabilities or understanding state-specific estate tax regulations.
Should You Keep or Sell Your Inherited Commercial Property?
After inheriting a commercial property, deciding whether to sell the commercial property or retain it is often one of the most difficult choices. Both options have pros and cons, depending on your financial goals.
Pros of Selling the Property:
Immediate Cash Flow: Selling provides immediate cash, which is useful if you don’t want to manage the property or deal with taxes.
No Ongoing Costs: Selling avoids the burden of maintenance, property taxes, and property management responsibilities.
No Landlord Hassle: If you’re not prepared for managing tenants and repairs, selling may be a simpler option.
Cons of Selling the Property:
Possible Lower Sale Price: Market fluctuations may result in a sale price lower than expected.
Capital Gains Tax: If the property has appreciated in value, selling may trigger capital gains taxes, affecting your overall profit.
Pros of Keeping the Property:
Steady Rental Income: Renting out the property provides regular passive income.
Long-Term Appreciation: Over time, the property may increase in value, offering future financial benefits.
Cons of Keeping the Property:
Ongoing Costs: You’ll still need to cover maintenance, property taxes, and utilities, which can add up.
Property Management: Even with a property manager, you’ll have to stay involved in decision-making.
Financial Challenges of Keeping the Property
Owning commercial property comes with several financial responsibilities. While rental income may seem appealing, be prepared for significant ongoing expenses.
Maintenance and Capital Improvements:
Routine Maintenance: Costs for upkeep (landscaping, cleaning, minor repairs) can run between $2 and $3 per square foot annually.
Major Improvements: Significant upgrades, such as a new roof or HVAC system, can range from $40,000 to $75,000 for a 5,000-square-foot property.
Property Taxes:
Commercial property tax rates can range from 1% to 3% of the property’s assessed value. For example, a property valued at $1 million could incur $20,000 in annual taxes.
Utility Bills and Insurance:
Utility costs for a commercial space (especially with heating and cooling) can reach $12,000 to $15,000 annually. Additionally, commercial property insurance may cost $1,000 to $3,000 per year per $1 million in value.
Legal Compliance:
Regulatory compliance costs, including inspection fees and necessary upgrades, can add to the expenses. Fines for non-compliance can range from $500 to $5,000.
Determining the Value of Your Inherited Commercial Property
Before making decisions about your inherited property, it’s important to know its value. Common methods for valuing commercial real estate include:
Comparable Sales (Comps): Comparing your property to similar recently sold properties.
Income Approach: Using rental income and cap rates to estimate value.
Cost Approach: Estimating the value based on the cost to rebuild.
Market Trends: Keeping an eye on local real estate trends to understand property demand.
Tax Appraisal: Reviewing the tax assessor’s value for the property, though this should be cross-referenced with current market conditions.
How We Simplify the Selling Process
Selling inherited commercial property doesn’t have to be a stressful, long process. We make it easy by providing:
No Repairs Required: Sell the property as-is without investing in repairs.
Fast and Transparent Offers: We make competitive offers without the need for prolonged negotiations.
No Hidden Selling Costs: Avoid typical selling costs like agent commissions and marketing fees.
Expert Assistance: Our team handles the entire process, ensuring you meet all legal and regulatory requirements.
Quick Closings: Sell your property quickly, with many deals closing in just a few weeks.
Ready to Sell Your Inherited Commercial Property?
If you’ve inherited commercial property and are struggling with decisions about whether to sell or keep it, we offer a simple and efficient solution. We make selling fast, easy, and stress-free, allowing you to unlock the value of your inheritance without the hassle of repairs or managing the property.
