CALCULATING CAPITAL GAINS
“ANALYZE THE BENEFITS OF AN EXCHANGE BEFORE YOU SELL”
COMPARE THE TAX SAVINGS AND ADDITIONAL PURCHASING POWER OF AN EXCHANGE VS. A TAXABLE SALE
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1. CALCULATE NET ADJUSTED BASIS
Original Purchase Price
+ Improvements
Depreciation
= NET ADJUSTED BASIS
2. CALCULATE CAPITAL GAIN
Sales Price
Net Adjusted Basis
Cost of Sale
= CAPITAL GAIN
3. CALCULATE CAPITAL GAIN TAX DUE
Recaptured Depreciation (25%)
+ Federal Capital Gain (15%)
+ State Tax (when applicable)
= TOTAL TAX DUE
4. ANALYZE PURCHASE
WITHOUT AN EXCHANGE
Sales Price
Cost of Sale
Loan Balances
= GROSS EQUITY
Capital Gain Taxes Due
= NET EQUITY
Net Equity X 4 =
5. ANALYZE PURCHASE
WITH AN EXCHANGE
Capital Gain Taxes Due
Gross Equity = Net Equity
Gross Equity x 4 =
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The real power of a tax-deferred exchange is not just the tax savings – it is the tremendous increase in purchasing power generated by this tax savings! With the advantages of leverage, every dollar saved in taxes allows a real estate investor to purchase two to three times more real estate.
Many investors are surprised to discover that capital gain taxes are far higher than 15%. State taxes, which can be as high as 11% in some states, are added to the federal capital gain taxes owed. In addition, depreciation deducted over the ownership period is taxed at a rate of 25%. The net result is often a large percentage of your profits going directly to pay taxes. Under the 4th calculation, the net equity times four (assuming a 25% down payment) is the value of property you could purchase after paying all capital gain taxes.
Under the 5th calculation, involving an exchange, no taxes are paid, leaving the full purchasing power of the ENTIRE GROSS EQUITY to acquire considerably more real estate! In just one transaction, the Exchanger acquires far more investment property than a seller!
TM 1031 Exchange and Asset Preservation, Inc. do not give tax or legal
advice. The information contained herein should not be relied upon as a
substitute for tax or legal advice obtained from a competent tax and/or
legal advisor.
(c) Copyright 2005 Stewart Title Guaranty Company
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