| A
1031 Tax Deferred Exchange transaction permits the taxpayer
to legally defer the payment of taxes on capital gains when
an investment property is sold. In any 1031 Exchange, there
are specific time limits and the taxpayer must utilize a "Qualified
Intermediary" to conduct the exchange.
In a non-tax
deferred transaction, the proceeds of an investment property
sale are comprised of five parts:
|
 |
|
A.
Adjusted Cost Basis: The initial purchase price of the
property, plus non-expensed improvements, minus depreciation
taken.
B.
Capital Gain: The profit from the increased value of the
property:
Sales price minus transaction costs less the adjusted cost
basis.
C.
State Capital Gain Tax: The South Carolina capital gain
tax rate is currently 7 %. However, South Carolina provides
tax relief to investment property sellers by discounting the
capital gain by 44 % - i.e. taxing on only 56 % of the capital
gain.
(See example below)
D.
Federal Tax on 'Gain Due To Appreciation': Uncle Sam's
current tax rate on 'Gain Due To Appreciation' is 15 %.
E.
Federal Tax on 'Gain From Depreciation Recapture': Uncle
Sam also recovers a portion of the capital gain saved by the
taxpayer through depreciation of the property. The current
federal tax rate on 'Gain From Depreciation Recapture' is
a flat 25 %.
|
In a 1031 Tax
Deferred Exchange, these federal and state taxes are deferred until
a later date
(not avoided), thus allowing the taxpayer to use this federal and
state money to purchase new
investment property.
See the example
below for a 1031 Tax Deferred Exchange transaction in South Carolina.
Disclaimer:
I am not an accountant or a 1031 Tax Deferred Exchange expert.
The information herein is offered as a guide to explain the tax
consequences of a 1031 Tax Deferred Exchange. Anyone considering
an exchange should consult with their tax or legal advisors prior
to entering into an exchange.
The link below
will take you to IPX1031's web site (Investment Property Exchange
Services, Inc.),
a Qualified Intermediary with excellent reputation and financial
strength. Here you can review the expert explanation and advice
regarding the issues and requirements of 1031 Tax Deferred Exchanges.
|
Example
Capital
Gain Tax Estimate on the Sale of Investment Property
| Example
Assumptions: |
Purchase
Price: |
$
400,000 |
| |
Sale
Price: |
$
550,000 |
| |
Non-Expensed
Improvements: |
$
10,000 |
| |
Depreciation
Taken: |
$
280,000 |
| |
Sale
Transaction Costs: |
$
40,000 |
| |
|
|
| Adjusted
Cost Basis: |
Purchase
Price |
$
400,000 |
| |
Plus |
$
10,000 |
| |
Minus |
$
280,000 |
| |
Equals |
$
130,000 |
| |
|
|
| Capital
Gain: |
Sale
Price |
$
550,000 |
| |
Minus |
$
130,000 |
| |
Minus |
$
40,000 |
| |
Equals |
$
380,000 |
| |
|
|
| |
A.
Amount Due to Appreciation |
$
100,000 |
| |
B.
Amount Due to Depreciation |
$
280,000 |
| |
Total:
|
$
380,000 |
| |
|
|
| Capital
Gain Taxes: |
|
|
|
Federal:
|
15
% X A. ($ 100,000) =
|
$
15,000 |
| |
25
% X B. ($ 280,000) =
|
$
70,000 |
| |
Total:
|
$85,000 |
| |
|
|
|
State:
|
56%
X $ 380,000 =
|
$
213,000 |
| |
7%
X $ 213,000 =
|
$15,000 |
| |
|
|
Total
capital gain TAXES SAVED & available
for use in purchasing other investment property
involved in the 1031 Tax Deferred Exchange: |
$100,000 |
|
|
