Realty Exchange Corporation has created this simple Capital Gain Analysis Form and Calculator to determine the tax impact if a property is sold and not exchanged, and to determine the reinvestment requirements for a tax-free exchange. See below for an example and explanation.
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Example and Explanation of the Like-Kind Exchange Analysis
The Like-Kind Exchange Analysis is used to determine the tax impact if a property is sold and not exchanged.
A rental property has a selling price of $500,000, and it is estimated the total selling costs will be $40,000. The property cost $150,000 when purchased ten years ago. No depreciable improvements have been made. The estimated depreciation taken is $45,000.
|A||Taxable Gain if Property is Sold|
|2||Less: Selling Costs (see Note 1)||-$40,000|
|3||Equals: Adjusted Selling Price||$460,000|
|4||Original Cost Basis||$150,000|
|6||Equals: Adjusted Cost Basis||$150,000|
|7||Less: All Depreciation Taken (see Note 2)||-$45,000|
|8||Equals: Tax Basis||-$105,000|
|9||Total: Taxable Gain or Loss if property sold||$355,000|
|B||Taxable Gain if Property is Sold|
|10A||Recapture of all Section 1250 depreciation allowed
(see Note 4)
|$45,000 x 25%||$11,250|
|10B||Capital Gain on Profit (SEE NOTE #5)
(Adj Selling Price less Adj Cost Basis)
|$310,000 x 15%||+$46,500|
|11||Total: Federal Tax if property sold||$57,750|
|C||Before and After Tax Proceeds|
|12||Selling Price (line 1)||$500,000|
|13||Less: Balance Due on all Loans||-$100,000|
|15||Less: Selling Costs (Line 2)||-$40,000|
|16||Proceeds Before Tax (cash to Escrow in an Exchange)||$360,000|
|17||Less: Total Tax Due (line 11)||-$57,750|
|18||Net Sale Proceeds After Tax if property sold||$302,250|
D. Exchange Reinvestment Requirements
For deferral of all gains the replacement property(ies) must cost at least $460,000 (line 3) and the amount of cash reinvested must be at least $360,000.00 (line 16).
The balance of funds needed to purchase the new property(ies) may be borrowed and/or be new cash.
If the new property(ies) cost less than line 3 or the cash reinvested is less than line 16, then the capital gain will be recognized and be taxed on whichever amount of difference is greater(The recaptured Section 1250 depreciation will be taxed first.)
- To estimate selling costs use 8 to 10% considering points paid or allowances given by seller.
- To estimate residential depreciation taken multiply original purchase price by 3%, times the number of years the property has been owned.
- Total taxable gain is the profit plus all the depreciation taken.
- Section 1250 property is basically all real estate rental property.
- CAUTION: Sale may push income above tax thresholds. A potion of the capital gain may be taxed at 20% if taxable income is above $400,000 single / $450,000 married and you may have to pay 3.8% Medicare Tax.
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