capitalgainstaxIf you’re thinking about doing a 1031 exchange, it’s probably because you want to decrease your tax liability. The capital gains tax is not the easiest thing to understand, but you can usually calculate it yourself using the 1031trx Excel Calculator.

To understand what a 1031 exchange does for you, you should know the basics of the capital gains tax…

  • The federal capital gains tax applies to a capital gain that is realized from the sale of a capital asset, such as investment property. Most states impose an additional tax on capital gain, which is generally at the same rate as federal ordinary income.
  • You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. When filing your income taxes, you can find out how to report capital gains transactions here.

Capital gains and losses are classified as long-term or short-term and the tax rate varies between them.

  • Short-term capital gains: the sale of an asset held for one year or less is taxed at the same rate as ordinary income.
  • Long-term capital gains: the sale an asset held for more than one year is taxed at long-term capital gains tax rates of 0, 15, and 20 percents (depending on your income bracket).
  • The calculation for a long-term capital gain is the difference between the proceeds you get from the sale (called the amount realized) and the cost of capital asset (known as the cost basis). The cost basis doesn’t just include how much you paid for the asset, but also things such as fees and commissions.

Additional Considerations:

  • Obama-Surcharge: an additional 3.8% tax on net investment income (includes interest, dividends, capital gains, retirement income and income from partnerships), which applies to taxpayers earning net investment income exceeding $200,000 for single filers and $250,000 for married couples filing jointly.
  • Depreciation Recapture Tax: applies to the gain realized by a taxpayer upon the sale of an asset that had previously provided an offset to ordinary income through depreciation deductions.

Of course, you should always consult with your tax advisor about your situation and what taxes will apply. The information contained herein is not meant to be tax advice or legal advice given by 1031trx LLC or its members. To set up a 1031 exchange, contact us here!

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