Is 1031 Exchange Works The Same As Tax Defer?
Hi,
Let's say I buy a house price at 200,000. I make a 20,000 down payment. This is a rental property; and next year I sold this house for 300,000. I then have a 80,000 gain (100,000 gain - 20,000 down). I then use the 1031 exchange and use the 80,000 gain to down payment a 400,000 house and rent it out. Two years later, the house worth 600,000 and I sell this house. Then I decide to pay tax on the gain. How do I calculate the gain?
600,000 - 400,000 = 200,000 (appraise value)
1. gain is 200,000 - 80,000 = 120,000
or
2. gain is 200,000 - 20,000= 180,000
which of the above is correct? 1 or 2?
thanks for your help.
your gain is calculated by a few different things. 1) what you state on your taxes as fmv on the date you place the property in service. (your cost ) this amount will determine your depreciation number which in turn lowers your cost www.basis.e.g. you pay 200k, you sell for 300k,
your depreciation is 3k the first year
your cost basis is 197k your realized gain is 103k. the next property you buy for
400k and sell for 600 k and have 6k depreciation, your realized gain would be
103k from the first and 206k from the 2nd for a total of 309k taxable gain
this is how i understand it if i am not correct ,some one please advise.
kevin
For general benefit of all, the 1031 co's, such as Starker Svs, etc., are all elated and delighted to answer, free, any questions on a potential 1031 deal...and since those guys deal with them all the time, and specialize in them, they've got the answers at their fingertips.
Ignore your down payment, this has nothing to do with your capital gain calculation. If you paid $200,000 for the first property and sold it for $300,000 then your capital gain is $100,000 less closing/settlement costs PLUS you must take into consideration your deprecation recapture. If you do a 1031 exchange, the capital gain and the depreciation recapture are generally all tax deferred into the new property.
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You might also want to keep in mind that recapture of depreciation is taxed at the rate of your income, not at capital gains rates. Not a real big deal in most situations, but in my business I depreciate some high priced equipment very quickly. The recapture of that stuff costs dearly at the time of sale..
Depreciation recapture is taxed at 25% for Federal purposes when real estate is involved. The depreciation recapture on other assets can vary, but for rental property purposes it is 25% and not your ordinary income rate.
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