|
The Tax Problem
There are several different tax rates you will be confronted with at the sale of a property.
The federal tax rate on an appreciated Capital Gain realized is currently 15%. In addition, there may be a state tax rate. Across the country the state Capital Gains averages around 3-5%, and in California, for example, all Capital Gains are taxed as ordinary income which can add another 9.3%. It is important to know how your state works! Click here for a complete table of State Income Taxes
Also, if your current mortgage is in excess of your adjusted tax basis, you have what is called mortgage over basis. The difference between your current debt and your adjusted tax basis is not taxed as a capital gain; rather it is taxed as ordinary income at your ordinary tax income rate, (perhaps 34%) which can be a big surprise. This is often the case if you have refinanced your property.
Finally, there is the depreciation recapture which can catch you by surprise or be overlooked. If you depreciate an asset like real estate, the depreciation that has been taken is recaptured at a tax rate of 25%. Let’s look at an example:
Example:27.5 Year Straighline Depreciation taken on $200,000.00 over 7 years
|
| Sale Price of Property |
$500,000.00 |
| Cost Basis of Property |
($100,000.00) |
| Capital Gain |
$400,000.00 |
| Taxes Due*: Federal |
15% |
$30,000.00 |
| Recapture |
25% |
$50,909.00 |
| State |
9.3% |
$37,200.00 |
Total Tax: |
|
$118,109.00 |
* Taxes may vary depending on your state of residency and hold period of asset |
When you add these different tax rates together the tax erosion can easily be 30% or greater. There's the problem.
For many investors using the 1031 exchange tax code is the key to build wealth and preserve it.
Now investors have a choice of using a 1031 exchange and taking advantage of not only putting UNTAXED equity to work but also retire from the daily grind and risks associated with active hands on managment.
National Income Property can help advise you of your options whether you are considering an "Active" plan or "Passive" plan.
| Capital Gains Tax Information |
 |
Under normal circumstances, when you sell a property you have to pay tax on the gain. Gain is caused by taking depreciation deductions for tax purposes or by the property appreciating in value during its ownership.
Section 1031 tax deferred exchange, named for the Internal Revenue Code Section it refers to (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an exception to the real estate capital gains tax.
When you sell your investment real estate, replace it with a different investment property and complete a 1031 exchange, you can defer payment of the capital gains tax normally required on these sales.
If your plans include using the money from the sale of investment property to buy more of the same, a 1031 real estate exchange provides greater proceeds for your next investment, more than you could gain through the re-investment of after tax proceeds. |
The 1031 Capital Gains rule is not a tax loophole. It is a section of the Internal Revenue Code, written by Congress, to allow anyone who meets all the requirements to sell their property and defer paying taxes on the gain.
Because of the great advantages a 1031 Exchange gives, many successful real estate investors have used this rule to either “trade up” to larger properties or exchange into multiple properties - thus build wealth. |
|
