Hello, my husband and I purchased 7 duplexes during about 8 years ago. We had unexpected offer for these duplexes and are now selling them on April 30th. We did not have them listed and had no plans to sell prior to this offer. However, we are now trying to figure out capital gains and a 1031 exchange. Our CPA is unable to meet with us because of her schedule, and it is not easy to connect with my 1031 exchange company, and I am not sure they tell us our capital gain side of it anyway. All of our duplexes were purchased for close to the same price. I would like to give an example of one property and ask if I am thinking about this right.
We purchased one of the properties for $155,345 and over the years have added in improvements that total $14333. Then over the years we have depreciated $44,843.
We are selling this property for $253,000.
So here is the question:
Is my cost basis $155,345 plus the improvements? And I am just taxed 25% on the depreciation amount of $44,843 plus the capital gains?
Or is my cost basis $155,345 minus the depreciation and has nothing to do with the improvements?
Or is my cost basis $155,345, nothing to do with the depreciation or improvements? And I am taxed the 25% on the depreciation amount and then whatever rate I will be taxed on the capital gains?
I am trying to determine if I want to do a partial 1031 exchange and which properties I should exchange.
Thank You in advance for any help in understanding this!!!
Hi @Rhonda Louis ,
Your cost basis is the original purchase price of the property plus any capital improvements made to/on the property less any depreciation taken. This will compute your adjusted cost basis for tax purposes.
Your taxable gain is the sale price, less certain closing costs less your adjusted cost basis.
The taxable portion (if you do not 1031 Exchange) is first applied toward the depreciation recapture at 25% and then once you have recognized all of your depreciation recapture you would be taxed on the capital gain of 15% to 20%.
You also need to look at the Medicare Surcharge (Obamacare Tax) to see if that would be triggered based on your adjusted gross income.
@Rhonda Louis , You're right. You would pay the 25% on the depreciation recapture and capital gains fed and state for the rest of the gain. Make sure you also check to see if there's a local tax as well. Several states have a tax that can be waived if you do a 1031. And PA if you're properties are there will not let you out of state tax at all. So to get really accurate numbers you're going to need your CPA. But they're not available. So lean on your title company closing escrow as much as you can.
In accountant speak the number you subtract from your net sale is the "adjusted cost basis". which is the purchase price plus capitalized improvements then minus depreciation. You subtract this from your net sale price (contract price minus closing costs) and you have your total amount of gain which is divided into two parts - capital gain and depreciation recapture.
Youve already broken out the depreciation recap so you know which will be 25%. And the convention is that depreciation recapture is taken first when doing a 1031 exchange. So figure that any amount you purchase less than you sell or any cash. you take out will first be taxed at 25% until your depreciation recapture is exhausted. The rest then will be capital gain.