Understanding the Tax Impact of Selling Highly Appreciated Industrial Real Estate
Making the decision to sell a highly appreciated asset can be agonizing. The very thought of writing huge checks to the IRS and the Franchise Tax Board is enough for most property owners to dismiss the idea of cashing out. Some opt for a hold-forever approach instead, while others exchange into other real estate assets to upgrade their portfolios and defer taxable events.
Both options have their place depending on individual circumstances, estate planning strategy, and life circumstances.
However, planning a real estate strategy around an aversion to taxation has potential drawbacks. Values in every asset class run in cycles as numerous economic forces move pricing higher or lower. Individual investors have no control over macro-economic metrics, only their response to them.
Some sell before a perceived market peak to assure themselves of a tidy profit. Others hold on too long in hopes of maximizing profits and find themselves chasing the market in the wrong direction and selling during a correction.
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Current Market Conditions for Industrial Property Owners
The truth is that nearly all straight sales of industrial real estate assets made today have significant tax consequences given the rapid rise in property values that began in 2011, peaking in late 2022 in response to rising mortgage rates. Since then, buyer demand has slowed sharply, leading many to believe that a major price correction would follow.
But fewer owners than expected headed for the exits, and supply actually fell along with demand, which kept prices from correcting. In fact, the average asking sales price increased by 4.5% in 2025. And with economic uncertainty slowly fading out, we start the year with demand on the rise and mortgage interest rates back down into the mid-to-high 5% range.
What Taxes Do Sellers Actually Pay?
So, what does the tax picture really look like? First, the IRS imposes a 25% recapture tax on depreciation taken during the hold period. Then, it taxes the balance of the gain at 20%. For non-owner users, add another 3.8% for the net investment income tax (aka Obamacare Tax).
The California Franchise Tax Board will then take its cut of up to 13.3% of the entire gain. Usually, this nets out to a tax burden of approximately 32% to 36% of the overall gain, depending on how much depreciation was taken and owner-user vs investor status. Thus, it’s easy to see why so many property owners have made the tax-driven decision to hold their assets.
Retirement Planning and Industrial Property Ownership
But, right now there are a lot of Orange County industrial property owners wringing their hands over what to do. The pricing curve has leveled off and many owners are approaching or are beyond retirement age, and their buildings figure heavily into their retirement income matrix.
The vast majority of these owners bought their properties 10 to 30 years ago, which are now worth 3 to as much as 8 times what they paid for them. So, even if they have a big tax bill to pay, what they keep in after-tax proceeds is much more than they ever anticipated when they acquired their properties.
Put another way, they are sitting on gold mines, but the price to access their windfall is to share generously with Uncle Sam and the FTB in Sacramento. So, to assess your own situation it might be helpful to think in terms of how you would benefit from what you keep rather than what you will pay if you sell.
Looking at After-Tax Gains from a Different Perspective
With that in mind, here’s another way to look at the tax issue. For 11 years, industrial property values rose at a double-digit annualized pace. As a result, if you sold your property outright under current market conditions, most or all the federal and state taxes due would probably be covered by just two or three years of appreciation. The rest would be yours to enjoy.
Disposition Alternatives Beyond an Outright Sale
Of course, an outright sale is only one of many options available to you, each with its own tax and risk factors. You can exchange into income producing property or keep your property and lease it out. You can also partially exchange your property and realize a portion of your gain to generate cash proceeds.
Or, you can exchange into multiple properties, including a second home for you and your family to enjoy. You can even carry the mortgage on the building you sell, enjoy the cash flow from monthly payments and spread your tax burden over the life of the loan. In other words, asset disposition is not a one-size-fits-all proposition. Everyone’s situation is unique.
Planning Your Next Move with Professional Guidance
In our next several posts we will be modeling disposition alternatives to help you develop a vision for how you get to the gold that’s under your building, with an emphasis on keeping the most and paying the least. Stay tuned.
Need Help Evaluating Your Property Options?
If you own industrial property and are considering selling, exchanging, or restructuring your real estate holdings, professional guidance can help you maximize after-tax returns while minimizing risk.
👉 Visit Zehner & Hill to explore market insights, investment guidance, and expert brokerage support tailored to industrial property owners:
Talk to our team today and discover how much of your property’s value you can truly keep.