You sell commercial real estate in eight steps: plan the sale, price the building, choose how to sell it, assemble the records, market it, pick an offer, sign a purchase and sale agreement and close. The early steps cost time and fees. The later ones bind you to deliver the building on the buyer's terms.
| Step | What you prepare or sign | Does it bind you? |
|---|---|---|
| 1. Plan | a target net amount and a tax estimate from your accountant | No |
| 2. Price | a broker opinion of value or an appraisal | No |
| 3. Route | a listing agreement with a broker, or none | Yes, on the commission and the listing term |
| 4. Records | the rent roll, the leases, 12 months of operating statements, the title and the survey | No, but buyers rely on them |
| 5. Marketing | the offering memorandum and the buyers' confidentiality agreements | No |
| 6. Offer | a letter of intent | Mostly no |
| 7. Contract | the purchase and sale agreement | Yes |
| 8. Closing | the deed, the loan payoff and the statement of adjustments | Yes |
Step 2 prices the building on its income. Buyers pay for the net operating income, the rent left after operating expenses and before loan payments. They divide it by the cap rate they accept for that kind of building. Our guide on how to value commercial real estate shows the income, sales comparison and cost approaches.
Step 4 decides what the buyer's due diligence finds. The buyer checks the rent roll against each lease and asks every tenant to sign an estoppel certificate that confirms the rent, the deposit and any default. A record that disagrees with a lease gives the buyer a reason to cut the price.
Step 5 puts the building in front of buyers. The offering memorandum presents the property, its leases and its income. Serious buyers sign a confidentiality agreement before they see the rent roll.
Steps 6 and 7 hand control to the buyer for a while. The purchase and sale agreement sets the price, the deposit, the buyer's due diligence period, the closing date and your representations about the building. Our explainer lists what a purchase and sale agreement includes. During the due diligence period, the buyer can usually walk away and recover the deposit.
Yes. An owner can market and sell its own building, and a lawyer drafts or reviews the contract. Owners choose among three routes:
- A broker's listing. The broker prices the building, writes the offering memorandum, calls owners of similar buildings and runs the negotiation. Our page on who pays the commission explains how the seller's broker is paid.
- A sale by owner. You keep the commission and take on the pricing, the marketing and the screening of buyers.
- An auction. Bidders compete on a set date, and the highest bid at or above your reserve price wins.
A US seller pays federal tax on the gain at up to 25% on the part that comes from depreciation and up to 20% on the rest (IRS Topic 409). The gain is the price minus your adjusted basis: what you paid, minus the depreciation you deducted while you owned the building.
Depreciation spreads a building's cost over its recovery period as a yearly deduction. For a commercial building, the period is 39 years under the straight-line method, and the cost of the land is left out (IRS Publication 946). When you sell, the depreciation you took returns as unrecaptured section 1250 gain.
Take a building bought for $3,000,000, of which $2,400,000 is the building and $600,000 the land. The owner sells it for $4,000,000 after 10 years:
| Line | Amount | How it is figured |
|---|---|---|
| Depreciation taken | $615,385 | $2,400,000 ÷ 39 × 10 |
| Adjusted basis | $2,384,615 | $3,000,000 − $615,385 |
| Gain | $1,615,385 | $4,000,000 − $2,384,615 |
| Tax on unrecaptured section 1250 gain at 25% | $153,846 | $615,385 × 25% |
| Tax on the remaining $1,000,000 at 20% | $200,000 | $1,000,000 × 20% |
| Federal capital gains tax | $353,846 | the two lines added |
The example leaves out selling costs, which reduce the gain, and the IRS's mid-month convention, which trims the first and last years. Hold the $1,000,000 rise in price fixed and change only the years held. Each extra year of depreciation adds to the part of the gain taxed at 25%.
Source: Sphera Credit calculation on the example above: straight-line depreciation of the building over 39 years, then the gain taxed at the 25% maximum rate on unrecaptured section 1250 gain and the 20% top rate on the rest (IRS Publication 946 and Topic 409). Excludes the 3.8% net investment income tax, state tax and selling costs.
A further 3.8% net investment income tax applies to individuals whose modified adjusted gross income exceeds $200,000, or $250,000 for a married couple filing jointly (IRS Topic 559). Your state may tax the gain as well.
Canada splits the result in two. The capital cost allowance you claimed comes back as recapture when the building sells above its undepreciated cost, and the CRA treats that recapture as income (CRA, Income Tax Folio S3-F3-C1). Half of the capital gain above the original cost is taxable (CRA, calculating capital gains).
Yes, in most cases: a seller of commercial real property in Canada collects the GST/HST from the buyer, unless the buyer is registered for it or the seller is a non-resident (CRA, GST/HST Memorandum 19.1). A registered buyer accounts for the tax itself on its own return. Confirm the buyer's registration with your accountant before closing, and write the tax treatment into the purchase and sale agreement.
Yes: a US seller who exchanges the building for other real property held for business or investment can defer the gain under section 1031. The rule covers "real property held for use in a trade or business or for investment, other than real property held primarily for sale" (IRS, Form 8824 instructions).
Two deadlines run from the day you transfer your building:
- 45 days to identify the replacement property in writing.
- 180 days to receive it, or the due date of your tax return with extensions if that comes first.
In the IRS's words, "The replacement property for the exchange must be identified within 45 days after the property being given up is transferred" (IRS, timing rules for exchanges). Most sellers use a qualified intermediary, who holds the sale proceeds and buys the replacement property for them. Plan the exchange before you sign the purchase and sale agreement, because the clock starts at closing.
Canada's nearest rule defers the gain and the recapture when you replace a property used mainly to earn business income. Its definition of that property "excludes rental property" (CRA, replacement property rules). An owner that runs its business from the building can qualify, and a landlord generally cannot. The investing hub compares whether Canada has a 1031 exchange with the US rule.
The purchase and sale agreement decides who pays each closing cost, and the seller's side usually carries the broker's commission, the loan payoff and its own legal fees. Budget each one before you accept an offer.
| Cost | What it pays for | What decides who pays |
|---|---|---|
| Broker's commission | the listing broker's work | the listing agreement |
| Loan payoff | the loan balance and any charge for early repayment | your loan documents |
| Transfer tax | the government's charge on the deed | the statute, then the contract |
| Title and survey updates | proof that you can deliver clear title | the contract and local custom |
| Legal and accounting fees | the contract, the closing and the tax return | your engagement letters |
| Adjustments | rent collected, deposits held and taxes paid in advance | the statement of adjustments |
Read the prepayment clause of your loan before you set a closing date, since many commercial loans charge for early repayment. The transfer tax falls on the seller in some places and on the buyer in others, and the contract can move it. The buying guide compares who pays the transfer tax in three jurisdictions.
Sellers often count the price as cash in hand, expect a longer hold to lower the tax, and treat a signed letter of intent as a sale. Each mistake shows up at closing.
You keep the price minus the loan payoff, the closing costs and the tax. In the example above, a $4,000,000 sale after 10 years owes $353,846 of federal capital gains tax, before any state tax and before the loan is repaid. Ask your accountant for an estimate of the tax before you set the asking price.
Holding more than one year moves a US gain to the long-term rates: "if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term" (IRS, long-term holding rule). After that, each year of depreciation adds to the part of the gain taxed at up to 25%, as the chart shows. The deductions lowered your tax in the years you took them, and the sale gives part of that saving back.
A letter of intent records the price and terms both sides expect to sign. Most of its terms bind neither party, and our explainer on whether a letter of intent is binding shows the clauses that do. Keep other buyers warm until the purchase and sale agreement is signed, or grant exclusivity only for a short, fixed period.