How Do I Calculate Capital Gains Tax On My 1031 Exchange?

Many savvy investors seek to take advantage of the tax-deferral benefits of a 1031 exchange property when replacing their investment property. However, since no 1031 exchange is guaranteed, every investor still needs to know how to calculate potential tax liabilities on the sale of the relinquished property.

There are three steps to determine the total taxes owed:

• Calculate your net adjusted basis – Start with your original purchase price, add in any capital improvements and subtract any depreciation taken. The resulting amount is your net adjusted basis.
• Calculate your actual capital gain – Take the sale price and subtract both your net adjusted basis and the cost of the sale. The resulting amount is your actual capital gain.
• Calculate your taxes owed – Recaptured depreciation is taxed at 25% and any remaining gain is taxed at the maximum federal capital gain rate of 15% or 20%, depending upon taxable income. If you live in a state that also imposes its own capital gains tax, you must also apply that percentage to your gain. The total of these three amounts is your total capital gain tax due on the transaction.

Understanding your potential tax liability is an important part of the overall 1031 exchange. You can also use our handy Capital Gains Tax Calculator.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.