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It Doesn’t End at 15%
One
of the reasons real estate investors do
a 1031 exchange is to defer the capital gains taxes
on the sale of their ‘old’ real estate.
Many people think that the capital gains tax on
selling their real estate is just 15%. Not so!
It’s actually much greater in most cases.
Here’s why:
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Tracey
Wilson is Dir. of commercial 1031 exchanges
for 1031 Exchange Experts, LLC.
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Too many people think that profit,
or gain, is simply what you sold your
old property for minus what you bought it for. Most
of the time that’s not accurate. Gain is actually
calculated by taking your net sales price and subtracting
your adjusted basis.
But it doesn’t stop there. Not
only are you going to be taxed on the appreciation
or gain of your real estate, but also on the ‘recapture
of depreciation,’ more accurately called ‘Section
1250 Gain.’
Don’t make the mistake of thinking
that since you didn’t depreciate your old property
you won’t be taxed on that depreciation. Quite
the opposite: unless it’s bare land, the IRS
will make you pay the tax at 25% on the depreciation,
regardless of whether you took it or not!
And that’s just
the Feds! There’s also the State capital gains
tax, which could be as high as 9.9%.
So, if you sell real
estate, and you think your tax will only be 15% federal
long-term capital gains, think again. There may actually
be THREE tax bites: 25% on depreciation recapture,
the normal 15% federal capital gains tax, and finally
the State capital gains tax on the entire gain.
Your blended effective
tax rate will probably be higher than just 15%. Depending
on the state you live in and the amount of depreciation,
the blended rate could be as high as 35%. That’s
over a third of the blood, sweat, toil and tears you
expended when you went into real estate investing in
the first place.
Are you ready for the
salt in the wound? There’s even the possibility
you might have to pay yet another tax (Yes, a ‘fourth’ type
of tax). It’s called the ‘AMT,’ or
the ‘Alternative Minimum Tax.’
This example above is
anecdotal, of course. Your actual capital gains tax
might be lower. Or it might be higher. Your tax advisor
or one of us here at The Experts can help you calculate
your actual cap gain tax on your specific situation.
The Bottom Line:
Regardless of what your actual capital gains tax might
be, YOU WILL DEFER ALL OF THESE TAX HITS IF YOU DO
A 1031 EXCHANGE. You worked hard to earn it, but
you won’t need to work hard to keep it. That’s
our job! You did the hard part already, now it’s
our turn. Why not let The Exchange Experts work hard
to help you keep your hard-earned real estate investment?
But enough about us.
What can we do for you?
Nationwide, toll-free: 866-694-0204
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