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AN EXAMPLE
An investment property owner sells a rental property for $400,000. The owner originally purchased the property for $200,000. There is $200,000 of debt and the property has been fully depreciated. The capital gain is approximately $350,000 (assuming 75% of the property is depreciable). If the investor does not do an exchange, federal capital gain taxes would be:
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$150,000 (depreciation recapture) x 25% = $37,500
$200,000 (capital gain balance) x 15% = $30,000
$350,000 Capital Gain Taxes Owed $67,500 |
The state taxes owed (where applicable) would need to be added to the federal taxes due. Assuming the property owner sold in California, the following additional taxes would need to be paid:
| State level (CA) 9.3%, $350,000 x 9.3% = $32,550
Total Capital Gain Taxes (Fed. & State) $99,050 |
The next comparison analyzes the value of the new property that could be acquired in a sale versus an exchange. The comparison assumes an investor makes a 25% down payment and finances 75% of the property (75% loan-to-value ratio). |