Combined Income and Capital Gain Tax Rates generally refers to the total amount of tax a taxpayer would have to pay if they were to sell an asset, combining both the income tax due on any gain realized, as well as the capital gains tax.
A 1031 exchange, also known as a like-kind exchange, is a mechanism in the U.S. tax code that allows investors to defer paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.
When you sell property that has appreciated in value, you typically have to pay two types of taxes:
- Capital Gain Tax: This is a tax on the profit you made from selling the property. This can be short-term (for assets held for one year or less) taxed as ordinary income, or long-term (for assets held for more than one year) which has a lower rate.
- Depreciation Recapture Tax: This is an income tax that you have to pay if you claimed depreciation on the property while you owned it. This is generally taxed as ordinary income.
The Combined Income and Capital Gain Tax Rates would thus be the sum of the capital gains tax and the depreciation recapture tax that you would owe if you did not make use of a 1031 exchange. This rate can vary widely depending on your income level, the type of property, how long you have held the property, your state of residence, and other factors.
Therefore, using a 1031 exchange can be very beneficial, as it allows investors to defer these taxes and instead reinvest the money into a new property, allowing for continued growth and investment.