Capital Gains Tax on Florida Commercial Real Estate — What You Actually Owe
By Michael R. Linton, NCREA, CREIPS, REALTOR® · Florida Real Estate Broker #BK703722
The Four-Layer Tax Stack on a Florida CRE Sale
A taxable sale of Florida commercial real estate held more than one year generates up to four distinct tax obligations: depreciation recapture at a 25% federal maximum, federal long-term capital gains at 0%, 15%, or 20%, the 3.8% Net Investment Income Tax (NIIT) for high-income filers, and any applicable state income tax. Florida has no state income tax, which is one of the structural advantages of holding investment real estate in Florida — investors keep the 5–8% they would otherwise owe in states like California, New York, or New Jersey.
How Adjusted Basis Works (And Why It Matters)
Your adjusted basis is the foundation of every capital gains calculation: Original Purchase Price + Capital Improvements − Accumulated Depreciation. Capital improvements include any expense that materially extends the useful life of the asset or adds value — roof replacements, HVAC system overhauls, structural additions, parking lot reconstructions. Routine maintenance and repairs do not add to basis; they are deducted as operating expenses in the year incurred. Investors who fail to track capital improvements over a long hold often understate their basis and overpay tax at sale.
Depreciation Recapture Under IRC §1250
Commercial real estate is depreciated on a straight-line schedule over 39 years (27.5 years for multifamily). Every dollar of depreciation taken during ownership is a dollar that reduces the adjusted basis — and increases the taxable gain at sale. The portion of the gain attributable to prior depreciation is “recaptured” under IRC §1250 and taxed at a maximum federal rate of 25%, higher than the standard LTCG rate. The calculator above models this automatically: it allocates gain first to depreciation recapture (at 25%) and only then to LTCG (at 0/15/20%).
The 1031 Exchange Defers All Four Layers
A properly structured 1031 exchange under IRC §1031 defers recognition of the entire gain — both depreciation recapture and LTCG — into a like-kind replacement property. The proceeds must flow through a qualified intermediary (never your hands), the replacement property must be identified within 45 days of selling, and closing must occur within 180 days. For a Florida investor sitting on a $2M gain with $600k of depreciation recapture, that is a $385,000 deferred tax liability — capital that can be redeployed into a larger or better-positioned asset.
Linton Global Solutions advises Florida investors on 1031 exchange structuring across multifamily, industrial, retail, hospitality, self storage, and life sciences — including closing cost modeling, qualified intermediary selection, and replacement property sourcing on the I-4 corridor.
NIIT — The Surtax Many Investors Overlook
The Net Investment Income Tax is a 3.8% federal surtax that applies to the lesser of (a) net investment income or (b) MAGI in excess of $200,000 single / $250,000 joint. For most institutional and high-net-worth CRE investors, the full 3.8% applies to the entire gain — effectively raising the top combined federal rate on long-term capital gains from 20% to 23.8%. The calculator includes a toggle for NIIT so you can compare your effective rate with and without the surtax.
Frequently Asked Questions
How are capital gains taxed on the sale of commercial real estate?
A sale of commercial real estate held more than one year generates a long-term capital gain equal to the amount realized (sale price minus selling costs) less the adjusted basis (original purchase price plus capital improvements minus accumulated depreciation). The depreciation portion of the gain is "recaptured" under IRC §1250 and taxed at a maximum 25% federal rate, while the remaining gain is taxed at 0%, 15%, or 20% federal LTCG rates depending on taxable income. The 3.8% Net Investment Income Tax (NIIT) applies above MAGI thresholds.
What is depreciation recapture and how is it calculated?
Depreciation recapture is the portion of your gain attributable to depreciation deductions taken during ownership. Under IRC §1250, this "unrecaptured §1250 gain" is taxed at a maximum federal rate of 25% — higher than the standard LTCG rate. The recapture is calculated as the lesser of (a) accumulated depreciation or (b) total gain. Florida investors who took $600,000 of depreciation on a building and now have a $2M total gain will owe 25% on $600,000 = $150,000 in federal recapture tax, separate from LTCG on the remaining $1.4M.
Does Florida charge state capital gains tax on commercial real estate?
No. Florida has no state income tax and therefore no state capital gains tax on the sale of commercial real estate. This is one of the structural reasons Florida CRE attracts so much out-of-state institutional capital — investors keep the full 5–8% they would otherwise pay in states like California, New York, or New Jersey. Investors residing in other states should still consult their home-state CPA on residency rules.
How does a 1031 exchange defer capital gains tax?
Under IRC §1031, exchanging investment real estate for like-kind investment real estate defers recognition of the entire capital gain — including depreciation recapture — until the replacement property is eventually sold in a taxable transaction. The exchange must be structured through a qualified intermediary, the replacement property identified within 45 days, and closed within 180 days of selling the relinquished property. Linton Global Solutions advises Florida investors on 1031 exchange structuring across multifamily, industrial, retail, hospitality, and self-storage.
What is the 3.8% Net Investment Income Tax (NIIT)?
The NIIT is a 3.8% surtax on net investment income — including capital gains from real estate held for investment — for single filers with Modified AGI above $200,000 and joint filers above $250,000. It is computed on the lesser of net investment income or MAGI in excess of the threshold. For most institutional and high-net-worth CRE investors, the full NIIT applies to the entire capital gain, effectively raising the LTCG rate from 20% to 23.8%.
Can selling costs reduce my taxable capital gain?
Yes. Selling costs — including brokerage commissions, title insurance, documentary stamp tax on the deed, attorneys' fees, and closing costs paid by the seller — reduce the amount realized and therefore directly reduce the taxable gain. On a $5M sale with 6% in combined selling costs ($300,000), the amount realized is $4.7M rather than $5M — a meaningful reduction in tax liability that the calculator above models automatically.
Michael R. Linton holds the NCREA, CREIPS, and REALTOR® designations and Florida Broker License #BK703722. He leads Linton Global Solutions, advising Florida investors on commercial acquisitions, dispositions, and 1031 exchanges across all major CRE asset classes. This calculator is for estimating purposes only — consult a CPA on your specific situation.
