NOT doing an exchange...

What if I just don't do an exchange?

A common question we get from prospective clients is how they determine what their tax consequenses would be if they didn't do an exchange. Here is a simple way to calculate it.

Depreciation Tax - First, you will be taxed at a maximum rate of 25% for all of the depreciation you've taken (or could have taken) on the property up to the amount of gains realized.

Federal Capital Gain Taxes - If you've held the property for over a year (long term), your tax rate will be 15% on the amount of gain in excess of the "depreciation tax" discussed above. If you've held it for less than a year (short term), you'll be taxed on the gain at your marginal tax rate. You CAN offset this amount on your tax return with capital losses from other sources.

State Capital Gain Taxes - You'll be taxed on the total gain by the state in which you live. If the property is in a state different from the one you live in, you'll probably owe tax in that state as well.

Example:
Let's say you originally bought the property for $200,000 and sold it for $300,000, leaving a gross capital gain of $100,000. And, let's say you took $60,000 in depreciation. Assuming 6% ($18,000) in broker's commissions and $2,000 in other costs associated with the sale, here's what you'll owe. I've used 5% for the state's tax rate in this example.

Net Cap Gain: $100,000-$18,000-$2,000 = $80,000
To this, add $60,000 for depreciation recapture to give $140,000 in taxable gain

Depreciation Tax$15,000 ($60K x 25%)Federal Long Term Cap Gains Tax$12,000 ($80K x 15%)State Long Term Cap Gains Tax$7,000 ($140K x 5%)Amount you'd owe$34,000

Since every situation is different, you should consult your CPA or tax attorney for the actual tax in your situation.

--The Experts