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What if I just don't do an exchange?
A common question we get from
prospective clients is how they
determine what their tax consequenses
would be if they didn't do an
exchange. Here is a simple way
to calculate it.
Depreciation
Tax - First, you will
be taxed at a maximum rate of
25% for all of the depreciation
you've taken (or could have taken)
on the property up to the amount
of gains realized.
Federal
Capital Gain Taxes -
If you've held the property
for over a year (long term), your
tax rate will be 15% on the amount
of gain in excess of the "depreciation
tax" discussed above. If
you've held it for less
than a year (short term), you'll
be taxed on the gain at your marginal
tax rate. You CAN offset this
amount on your tax return with
capital losses from other sources.
State Capital Gain Taxes
- You'll be taxed
on the total gain by the state
in which you live. If the property
is in a state different from the
one you live in, you'll
probably owe tax in that state
as well.
Example:
Let's say you originally
bought the property for $200,000
and sold it for $300,000, leaving
a gross capital gain of $100,000.
And, let's say you took
$60,000 in depreciation. Assuming
6% ($18,000) in broker's
commissions and $2,000 in other
costs associated with the sale,
here's what you'll
owe. I've used 5% for the
state's tax rate in this
example.
Net
Cap Gain: $100,000-$18,000-$2,000
= $80,000
To this, add $60,000 for depreciation
recapture to give $140,000
in taxable gain
| |
Depreciation
Tax |
$15,000
($60K x 25%) |
|
| |
Federal
Long Term Cap Gains Tax |
$12,000
($80K x 15%) |
|
| |
State
Long Term Cap Gains Tax |
$
7,000 ($140K x 5%) |
|
| |
Amount
you'd owe |
$34,000 |
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Since
every situation is different,
you should consult your CPA or
tax attorney for the actual tax
in your situation.
--The
Experts
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TEE-Shots
are Tips
from the Exchange
Experts
that are designed to make you
think about, and ask questions about, the 1031 exchange process. |
