| These calculations show the approximate capital gain taxes deferred by performing an IRC Section 1031 exchange with Asset Preservation, Inc. Please enter your figures in the fields provided (enter your numbers with no commas or dollar signs, for example: 300000) and click on the “Calculate” button in each area to perform the calculations. |
*The Federal capital gain tax rate is generally 15% or 20% depending upon taxable income. Single taxpayers with over $425,000 in taxable income and taxpayers filing as married filing jointly with over $479,000 in taxable income pay the higher 20% capital gain tax rate.
**The 3.8% NIIT surtax only applies to “net investment income” as defined in IRC §1411.
| Single Taxpayer | Married Filing Jointly | Capital Gain Tax Rate | Section 1411 NIIT Surtax | Combined Tax Rate |
|---|---|---|---|---|
| $0 – $44,625 | $0 – $89,250 | 0% | 0% | 0% |
| $44,626 – $200,000 | $89,251 – $250,000 | 15% | 0% | 15% |
| $200,001 – $492,300 | $250,001 – $553,850 | 15% | 3.8% | 18.8% |
| $492,301+ | $553,851+ | 20% | 3.8% | 23.8% |
The capital gain tax formula provided is to help you determine an approximate gain and amounts that may be deferred under Internal Revenue Code §1031. Asset Preservation, Inc. (API), its officers or employees are not authorized or permitted under applicable laws to provide tax or legal advice to any client or prospective client of API. The tax-related information contained herein or in any other communication that you may have with a representative of API should not be construed as tax or legal advice specific to your situation and should not be relied upon in making any business, legal or tax-related decision. A proper evaluation of the benefits and risks associated with a particular transaction or tax return position often requires advice from a competent tax and/or legal advisor familiar with your specific transaction, objectives and the relevant facts. We strongly urge you to involve your tax and/or legal advisor (or to seek such advice) in any significant real estate or business-related transaction.
Related Articles:
How to Determine Capital Gain Taxation
Capital Gain Tax Rates and 1031 Exchange Benefits
Calculating Capital Gain
The real power of a 1031 exchange is not just the tax savings — it is the tremendous increase in purchasing power generated by this tax savings. With the advantages of leverage, every dollar saved in taxes allows a taxpayer to generally purchase multiple times more real estate when taking advantage of debt financing. Many taxpayers are surprised to discover that capital gain taxes are far higher than 15% or 20% federal tax rates. State taxes, which can be as high as 13.3% in some states, are added to the federal capital gain tax owed. In addition, depreciation deducted over the ownership period is recaptured and taxed at a rate of 25%. Finally, when applicable, some taxpayers may also have to pay an additional 3.8% net investment income tax on certain income over threshold amounts of $200,000 for single filers and $250,000 for married couples filing jointly. The net result is often a large percentage of a taxpayer’s profits could be going directly to pay the four potential levels of taxation. Under the 4th calculation below, the net equity times four (assuming a 25% down payment and a 75% loan-to-value ratio) is the value of a replacement property a taxpayer could purchase after paying all capital gain taxes.
Under the 5th calculation involving a 1031 exchange, no taxes are recognized in the current tax year, leaving the full purchasing power of the entire gross equity to acquire more real property held for investment. In just one transaction, the taxpayer who chooses to exchange versus sell and pay capital gain and other taxes has the potential to acquire more investment property than a taxpayer who sells and will ultimately only retain the net proceeds after-taxes are paid.
Analyze the Benefits of an Exchange Before You Sell
| 1. CALCULATE NET ADJUSTED BASIS | ||
| Original Purchase Price | __________ | |
| + Improvements | __________ | |
| – Depreciation | __________ | |
| = NET ADJUSTED BASIS | __________ | |
| 2. CALCULATE CAPITAL GAIN | ||
| Sales Price | __________ | |
| – Net Adjusted Basis | __________ | |
| – Cost of Sale | __________ | |
| = CAPITAL GAIN | __________ | |
| 3. CALCULATE CAPITAL GAIN TAX DUE | ||
| Recaptured Depreciation (25% ) | __________ | |
| + Federal Capital Gain (15% or 20%) | __________ | |
| + Medicare Surtax (when applicable 3.8%) | ||
| + State Tax (when applicable) | __________ | |
| + Net Investment Income Tax (when applicable 3.8%) | __________ | |
| = TOTAL TAX DUE | __________ | |
| 4. ANALYZE PURCHASE-NO EXCHANGE | ||
| Sales Price | __________ | |
| – Cost of Sale | __________ | |
| – Loan Balances | __________ | |
| = GROSS EQUITY | __________ | |
| – Capital Gain Taxes Due | __________ | |
| = NET EQUITY | __________ | |
| Net Equity X 4 = | __________ | |
| 5. ANALYZE PURCHASE-EXCHANGE | ||
| Capital Gain Taxes Due | __________ | |
| Gross Equity = Net Equity | __________ | |
| Gross Equity x 4 = | __________ | |