For many business owners, the building, land, or other real estate connected to the business represents a significant part of their overall wealth.
Often, that property is owned separately from the operating company. Over the years, the owner may have paid down debt, built equity, claimed depreciation, and relied on rental income from the business.
Then it comes time to consider selling the company.
That can create a second major decision: Should you sell the commercial property along with the business, or keep it as a source of income during retirement?
There isn’t one answer that fits every business owner. The better choice depends on the property, the structure of the business sale, your tax situation, and what you want your finances to look like after you leave the business.
Here are some of the factors worth considering.
Selling the Property Along With the Business
Selling both the business and commercial property can create a cleaner transition. Rather than remaining financially connected to the property after you leave the company, you may be able to convert both assets into liquidity.
That could give you more flexibility as you enter retirement. Sale proceeds might become part of your larger investment strategy, support retirement spending, fund other goals, or reduce how much of your net worth is tied to a single asset.
But the price you receive for the building doesn’t necessarily equal the amount you’ll have available afterward.
Before deciding to sell, consider questions such as:
- What is your adjusted tax basis in the property?
- How much depreciation have you taken?
- How much debt remains?
- What expenses could be associated with the transaction?
- How could the sale affect your tax situation?
- How would the net proceeds fit into your retirement and investment plans?
This is where looking at the property within a broader financial planning strategy can become important. The goal isn’t simply to determine how much the property is worth today. It’s to understand what selling it could mean for the years ahead.
Keeping the Property for Retirement Income
Keeping the commercial property can create an entirely different opportunity.
For example, depending on the terms of the business transaction, the buyer may continue operating from the property and lease it from you. Instead of selling the building, you would transition from business owner to landlord and potentially continue receiving rental income.
For some owners, that may complement other retirement income sources.
However, keeping the property also means keeping the risks and responsibilities that come with it.
Consider:
- Who will lease the building after the business is sold?
- How long is the lease?
- How dependent is the property’s value on one tenant?
- Who is responsible for maintenance, repairs, taxes, and insurance?
- Is there debt associated with the property?
- How much of your overall wealth would remain tied to this one asset?
- Would you want to continue managing commercial real estate during retirement?
A property that worked well while you owned the operating business may play a very different role once the business changes hands.
Think About Income and Liquidity Separately
One of the biggest trade-offs between keeping and selling commercial property is the difference between ongoing income and immediate liquidity.
Keeping the building may provide rental income, but the value of the property itself remains relatively illiquid. If a significant expense or investment opportunity arises, accessing that equity may require borrowing against the property or selling it.
Selling creates liquidity, but it also means giving up the potential rental income and future appreciation associated with continued ownership.
A useful question is:
What do you need this asset to do for you in retirement?
If predictable cash flow is a priority, continued rental income may deserve consideration. If flexibility, diversification, or access to capital is more important, selling may deserve a closer look.
Neither consideration exists in isolation. They should be weighed alongside your other retirement income sources, investments, expenses, and long-term goals.
Don’t Overlook Depreciation and Taxes
Taxes can be one of the more complicated parts of the decision.
Commercial property owners may have taken depreciation deductions throughout the years they owned the building. When the property is sold, previous depreciation and appreciation can affect the tax consequences of the transaction.
That’s why looking only at the property’s purchase price and expected sale price doesn’t necessarily provide the entire picture.
Before completing a sale, you may want your CPA and financial professionals to evaluate factors such as your adjusted basis, depreciation history, ownership structure, debt, potential gain, and how the transaction fits into your overall financial plan.
What matters isn’t simply the sale price. It’s what you’re able to do with the proceeds after the transaction.
Could a 1031 Exchange Be Part of the Discussion?
If you’re interested in selling the current property but don’t necessarily want to leave real estate altogether, a Section 1031 like-kind exchange may be worth discussing with your tax and financial professionals.
Depending on the circumstances, a properly structured 1031 exchange can allow an owner to exchange qualifying investment or business real property for other qualifying real property while deferring certain tax consequences.
That could potentially appeal to a business owner who wants to sell a property associated with the operating company but continue owning real estate in retirement.
However, tax treatment shouldn’t be the only consideration. A replacement property also needs to fit your investment objectives, income needs, risk tolerance, and broader investment planning strategy.
The goal isn’t simply to defer taxes. It’s to make sure the next asset makes sense for what you’re trying to accomplish.
Consider How Much of Your Wealth Is Tied to Real Estate
Business owners can sometimes accumulate significant concentrations of wealth without realizing it.
For example, much of an owner’s net worth may be represented by:
- The operating business
- The property occupied by the business
- Additional real estate
- Retirement accounts
- Personal investments
Selling the operating company can substantially change that picture.
If you keep the commercial building, you may still have a meaningful portion of your wealth concentrated in one property, one geographic market, or even one tenant.
That isn’t necessarily a reason to sell. But it is a reason to consider the property as part of your complete investment portfolio instead of looking at it independently.
Ask:
If I weren’t already the owner of this building, would owning this property still fit the financial plan I want for retirement?
That can provide a helpful new perspective.
Your Estate Plan May Affect the Decision, Too
For some business owners, the property isn’t simply an investment. It may also be part of a larger legacy.
Perhaps family members are involved in the business. Maybe the real estate has been owned for decades. Or you may expect the property or proceeds from its eventual sale to become part of what you leave to family or charity.
Keeping versus selling the real estate can therefore have implications beyond your own retirement.
That makes estate planning another important piece of the conversation, particularly when significant business and real estate assets are involved.
Your financial advisor, CPA, and estate attorney can each bring a different perspective to these decisions.
So, Should You Sell or Keep the Property?
Rather than beginning with “Is it better to sell or keep my building?” consider asking a broader question:
“What role should this property play in my financial life after I sell the business?”
If you’re considering selling, look beyond the headline sale price to factors such as taxes, liquidity, your investment strategy, and your future income needs.
If you’re considering keeping the property, evaluate the potential income alongside tenant risk, expenses, management responsibilities, diversification, and your eventual plans for the property.
For many business owners, neither decision should be made independently of the business sale itself.
Your business, real estate, investments, retirement plan, taxes, and estate plan are interconnected. A decision in one area can affect several others.
Bringing those pieces together can help you better understand the trade-offs before making a decision.
Frequently Asked Questions About Selling or Keeping Commercial Property
Should I sell my commercial property when I sell my business?
Not necessarily. Selling the business and selling the real estate are two separate decisions, even when they happen at the same time.
A thoughtful approach may include comparing the liquidity you could receive from selling the property with the potential income and responsibilities associated with keeping it. Taxes, debt, retirement income needs, investment diversification, and estate objectives may also affect the decision.
The goal isn’t simply to determine whether selling or keeping is better. It’s to understand what role the property should play in your financial life after the business is sold.
Can commercial property provide income in retirement?
Commercial real estate can potentially provide rental income after a business owner steps away from the operating company. For example, depending on the transaction, a buyer may continue operating from the building under a lease.
But rental income is only one consideration. Property expenses, debt, tenant risk, maintenance responsibilities, liquidity, and the amount of your overall wealth concentrated in the property should also be evaluated.
Looking at the property alongside your broader retirement and investment strategy can provide a clearer picture of how it might fit.
What tax considerations should I think about before selling commercial real estate?
The tax implications depend on your individual circumstances and how the property is owned and structured.
Potential considerations can include the property’s adjusted tax basis, depreciation history, debt, ownership structure, and gain associated with the transaction. Because a business sale and real estate transaction may involve several interconnected decisions, involving your tax, legal, and financial professionals before the transaction is structured can be important.
Could a 1031 exchange apply when selling commercial real estate?
Depending on the circumstances, a Section 1031 like-kind exchange may be something to discuss with your tax and financial professionals if you’re selling qualifying real property and considering another real estate investment.
A 1031 exchange should not be viewed solely as a tax decision, however. The replacement property also needs to make sense within your investment objectives, income needs, risk considerations, and long-term financial plans.
What should I consider before keeping commercial property after selling my business?
One of the most important considerations is how the property fits into your finances without the operating business attached to it.
A thoughtful review might consider:
- Potential rental income
- Lease terms and tenant considerations
- Property expenses and debt
- Ongoing management responsibilities
- Liquidity needs
- Investment concentration
- Retirement income needs
- Estate and legacy objectives
A broader financial plan can help put those considerations into context.
Who should be involved when deciding whether to sell or keep business real estate?
Depending on the complexity of the transaction, the conversation may involve your CPA, financial advisor, attorney, and other professionals involved in the business sale or real estate transaction.
Each decision can affect another. The tax treatment of a transaction may influence available proceeds, while the decision to retain the property may affect retirement income, liquidity, investments, and estate planning.
Bringing those perspectives together can help you evaluate the decision as part of your complete financial picture rather than treating the real estate as an isolated asset.
Planning for What Comes After the Business
Selling a business you’ve spent years building can be one of the biggest financial transitions you’ll make. When commercial real estate is part of the equation, there may be even more to consider.
At Landmark Financial, we help business owners look at the tax and investment sides of significant financial decisions and consider how those decisions fit into their broader goals. Our team can work alongside your tax and other professional advisors to help you evaluate the bigger picture as you prepare for the next chapter.
Contact Landmark Financial to start the conversation.