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Calculating Capital Gains
The following formula should be used to calculate capital gains:
1. Calculate Net Adjusted Basis
Original Purchase Price __________
+ Improvements __________
- Depreciation ____________
= NET ADJUSTED BASIS __________
2. Calculate Capital Gain
Sales Price __________
- Net Adjusted Basis __________
- Cost of Sale _________
= CAPITAL GAIN __________
3. Calculate Capital Gain Tax Due
Recaptured Depreciation (25%) __________
+ Federal Capital Gain (15%) __________
+ State Tax (when applicable) __________
= TOTAL TAX DUE __________
4. Analyze Purchase Without An Exchange
Sales Price __________
- Cost of Sale __________
- Loan Balances __________
= GROSS EQUITY __________
- Capital Gain Taxes Due __________
= NET EQUITY __________
Net Equity X 4 = __________
5. Analyze Purchase With An Exchange
Capital Gain Taxes Due _____0____
Gross Equity = Net Equity __________
Gross Equity x 4 = __________
The real power of a 1031 tax exchange is not just the tax savings, but also the increased purchasing power that results from the tax savings. Every dollar saved in taxed allows the investor to purchase two to three times more real estate.
Capital gain taxes are much higher than 15% state taxes, which can be as high as 11% in some states. In addition, depreciation deducted over the ownership period is taxed at a rate of 25%. This results in a large percentage of profit being lost to taxes. Under the fourth calculation listed above, the net equity times four is the value of the property you could purchase after paying all capital gains taxes.
Under the fifth calculation, involving an exchange, no taxes are paid, leaving the full purchasing power of the entire gross equity to acquire more real estate.
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What is the Boot Test?