Calculating Your Capital Gain on Sale of Property

You've probably heard a lot of talk about 1031's but do not quite understand them and since a 1031 exchange is a fabulous boon to investors of real estate or owners of rental property, if they are done right- I will attempt to provide you with a simplistic overvview of what's involved.

Quite simply, a 1031 exchange lets you defer your capital gains on the sale of your investment or rental property or business. The Wall Street Journal (6/18/07) has an interesting article that reports that capital gains taxes are likely to rise no matter who wins the presidential election. Today's rates are probably the lowest we'll see so it may behoove you to know how to calculate your capital gains taxes in now in order to decide whether or not to see some investment property you own.

Simply stated, you can sell a rent house or condo and replace it with undeveloped land or sell a business and replace it with a ranch or any other investment type property. It's all real investment property even though it does not appear to look alike.

If you own a condo, vacation home, commercial property, raw land, a rental property or even a ranch and you sell it  - and you stand to have a  substantial capital gains that will be taxed, you can  probably defer those taxes by using a 1031 exchange. There is no limit to the number of times you can do a 1031 exchange in your lifetime.

Properties can be exchanged anywhere in the United States.

The real value or benefit of an exchange is not the actual savings but the purchasing power you have that's been provided by the tax savings -  The challenge is to find good replacement property.

All net proceeds from the  sale of your investment  property must be reinvested in one or more properties. If some proceeds are left over or you choose not reinvest the entire amount, you will be taxed on the difference.

There are very strict rules about the time you have to effect a 1031 when you sell property. - During the first 45 days after the closing of your property you must identify in writing which property or properties will be acquired. You have 180 days from the closing to purchase and close on the new property. No extensions! It is best to start this entire exchange  process before you actually sell your property and/or identify the property you want to acquire. Your intention to utilize a 1031 should be indentified in your sales contract.

Calculating Capital Gains Taxes:

Original purchase price (of property you want to sell.)
Plus non-expensed improvements
Minus depreciation taken=
            Equals Adjusted Basis

Sale Price (of what you want to sell)
Minus adjusted Basis
Minus transaction costs (Commissions, fees etc.)
            Equals Total Gain on Sale

Gain from Appreciation
Multiply by federal capital gains tax rate (A)
Gain from Depeciation Recapture
Multiply by federal tax rate (B

Total of Taxes shown on A and B equals the Capital Gain Tax exposure
that is Deferred Through a 1031 Exchange.