1031 Exchange mortgage boot capitol gains tax hit calculation
Hello guys,
Just wondering if anyone can help me out here. Just about to close on a property soon and was wondering what my tax hit will be under these circumstances on a sales of a Los Angeles multi family property.
Original Purchase price: 575k
Sales Price: 1,330,000
Settlement cash: 940k
Depreciation: 85k
If I did a 1031 exchange and used only 940k how much taxes will I owe the IRS? If I am not mistaken is it 1,330,000 minus 940k = 390k?
Capitol gains tax on 390K?
What if I got a loan for 250K and total reinvestment value was 1,190,000. Leaving a mortgage boot in the amount of 140k. Is the capitol gains taxed on simply that amount? 140K?
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Kevin C. You got it.
The IRS interprets either boot cash or a reduction purchase price to be a taking of profit. So if you take any of the 940 in cash you will pay tax on whatever you take out until you've taken out $755K in cash which is all your profit.
Similarly, if you only purchase 940 you will pay tax on the difference between your net sale (1,330,000K) and your net purchase (940K). Yep 390K.
Taking out debt in addition to the putting all the cash in does cut down on the tax and reduce it to $140K. In that event you'd just as well balance the mortgage with cash to take 140 or so cash boot to pay the tax you'll incur and have a little something to play with because putting all the cash will still result in a taxable event if you purchase less than what you sell.
Nice problem to have.
And keep in mind the tax on the first $85k will be depreciation recapture at 25%
Thank you for your reply.
So If I were to loan 200K and take a cash boot of around 150K. My capitol gains tax would be:
940K + 200K - 150K = 990K - 1.33M = Capitol Gain: 340K?
Can I assume CA capitol gains tax including state and recapture tax in average of around 30%? If so my total tax hit will be around 102K roughly?
Natalie, the recapture tax is adjusted accordingly to the amount of the capitol gain amount yes?