Analyze the Benefits of an Exchange Before You Sell
Compare the tax savings and additional purchasing power of an exchange vs. a taxable sale.
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 = __________
The real power of a tax-deferred exchange is not just the tax savings—it is the tremendous increase in purchasing power generated by these tax savings! With the advantages of leverage, every dollar saved in tax 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 general 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 fourth calculation, the net equity times four (assuming a 25% down payment) is the value of the property you could purchase after paying all capital gains taxes.
Under the fifth 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!
Note: 1031 Exchange Place cannot give tax and/or legal advice. Every taxpayer should review their specific transactions and potential tax consequences with their own tax and/or legal advisor.