SALE v. EXCHANGE
In the example below we bring the previous two posts together to demonstrate the power of a 1031 exchange and how it permits the taxpayer to defer the payment of capital gain tax, so that he/she can use the amount they would have paid the IRS as additional equity in their new replacement property. It permits the taxpayer to purchaser more property than if he/she were to have done a straight sale, paid the capital gain tax and bought another investment property.
1. Calculate Net Adjusted Basis: | ||
Original Purchase Price | $ | 500,000 |
plus Improvements | + $ | 50,000 |
minus Depreciation | - $ | 150,000 |
Minus Deferred Capital Gain (if purchased in an exchange) | - $ | 0 |
= NET ADJUSTED BASIS | = $ | 400,000 |
| ||
2. Calculate Capital Gain Sales Price of Property: | ||
Sales Price | $ | 1,200,000 |
minus Net Adjusted Basis | - $ | 400,000 |
minus Costs of Sale (commissions, fees, etc.) | - $ | 80,000 |
= CAPITAL GAIN | = $ | 720,000 |
| ||
3. Calculate Capital Gain Tax Due: | ||
Recaptured Depreciation (25%) | $ | 37,500 |
plus Federal Capital Gain Rate (15%) | + $ | 85,500 |
plus State Capital Gain Rate |
| Tax % 9.3 |
+ $ | 66,960 | |
= TOTAL TAXES DUE | = $ | 189,960 |
| ||
4. Calculate After-Tax Equity: | ||
Sales Price | $ | 1,200,000 |
minus costs of sale | - $ | 80,000 |
minus loan balances | - $ | 300,000 |
= GROSS EQUITY | = $ | 820,000 |
minus Capital Gain Taxes Due | - $ | 189,960 |
= AFTER-TAX EQUITY | = $ | 630,040 |
| ||
5. Analyze Reinvestment - Sale: | ||
AFTER-TAX EQUITY x 4 | = $ | 2,520,160 |
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6. Analyze Reinvestment - Exchange: | ||
Capital Gain Taxes Due | $ | 0 |
Gross Equity = Net Equity | $ | 820,000 |
GROSS EQUITY x 4 | = $ | 3,280,000 |
*Note: 25% x $150,000 = $37,500 15% x $570,000 = $85,500 9.3% x 720,000 = $66,960
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Lisa Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com
Asset Preservation, Inc. 800.282.1031 info@apiexchange.com or http://www.apiexchange.com/
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