WHAT TAX DO YOU OWE WHEN SELLING YOUR INVESTMENT PROPERTY WITHOUT A TAX-DEFERRED 1031 EXCHANGE?

by Corbin Thomas

THE FOUR STEPS OF CALCULATING CAPTAIL GAINS TAXES:

I. DEPRECIATION REPATURE IRC 1250

Real estate investors are taxed on all of the depreciation they have taken at a rate of 25%

II. FEDERAL TAX DUE ON CAPITAL GAINS

Capital gains & dividend tax rates have increased from 15% to 20% for singles earning over $400,000 and couples earning over $450,000. Thus, even if your ordinary income is zero as a result of losses and/or depreciation on real estate, if you sell a property with a capital gain in excess of $450,000 (married) you will be subject to this higher Long-Term Capital Gains tax rate of 20%

III. NEW MEDICARE SURTAX IRC 1411

There will also be an additional 3.8% investment income surtax applied to singles earning over $200,000 and couples earning over $250,000. This includes capital gains income.

CA STATE TAX DUE ON CAPITAL GAINS

Like most states, California does not have a preferential treatment on capital gains and therefore taxes them as ordinary income. California's rates recently increased from 9.3% to 10.3% for high-income earners. For those earning over $1 million (including capital gains income if investor does not 1031 exchange), the rate is now 13.3%

CONCLUSION

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Long-term capital gains tax rates have increased substantially. The more capital gains you have, the higher rates you will pay. For real estate investors with long-term capital gains in excess of $1million, total taxes may exceed 42%. Tax-deferred 1031 exchange volume is expected to increase immediately as result of these higher tax rates. Calculating your different financial outcomes (exchanging vs. not exchanging) will help you determine  your best course of action. Contact us if we can be of service in helping you calculate and evaluate this comparison or if you are in need of researching suitable replacement properties for your exchange.

Viking International Real Estate and Investments
4570 Campus Dr.
Newport Beach, CA 92660
phone: (949) 252-2120
fax: (949) 252-2115