ESTIMATING THE CAPITAL GAIN TAX
ON THE SALE OF INVESTMENT PROPERTY |
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An Exchanger/taxpayer should always consult with competent independent legal and/or tax advisors to determine the applicability of any IRC §1031 tax deferred exchange benefits. The gain, not the profit or equity, from the transfer of investment property is subject to the combination of federal and state capital gain taxes and federal taxes on the gain due to the depreciation taken on the property. Remember, it is possible to have little or no equity in the investment property being transferred and still owe taxes! |
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This formula is a guide to estimate the potential capital gain tax owed on the transfer of property: |
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| 1. First, calculate the Adjusted Basis: |
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Original Purchase Price |
|
$_________________ |
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Plus |
Non-expensed Improvements |
+ |
$_________________ |
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Equals |
|
= |
$_________________ |
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Minus |
Depreciation Taken |
– |
$_________________ |
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Equals |
Adjusted Basis |
= |
$_________________ |
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| 2. Second, use the Adjusted Basis to determine the Capital Gain Tax: |
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|
Sales Price |
|
$_________________ |
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Minus |
Depreciation Taken |
– |
$_________________ |
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Equals |
|
= |
$_________________ |
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Minus |
Transaction Costs |
- |
$_________________ |
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Equals |
Total Gain on Sale |
= |
$_________________ |
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Times |
State Capital Gain Tax Rate |
x |
$_________________ |
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Equals |
State Capital Gain Tax |
= |
$_________________ (A) |
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Times |
Federal Capital Gain Tax on
Gain Due to Appreciation |
x |
$_________________ |
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Equals |
Tax on Appreciation |
= |
$_________________ (B) |
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Times |
Federal 25% Tax Rate on
Gain Due to Depreciation |
x |
$_________________ |
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Equals |
Tax on Depreciation Taken |
= |
$_________________ (C) |
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Total of Taxes A + B + C Equals The
Capital Gain Tax Exposure |
= |
$_________________ (*) |
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* This is the approximate amount of tax that is deferred by doing an IRC §1031 tax deferred exchange.
NOTE: The federal deduction for state taxes is not included in this calculation. |
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