Sale vs. Exchange: The Tax Impact
Rhythmic Exchange ServicesTo determine if a 1031 Exchange makes sense, let's walk through a real example using a property with an original purchase price of $200,000.
1. Calculate Net Adjusted Basis
| Original Purchase Price (Basis) | $200,000 |
| Plus Capital Improvements | + $20,000 |
| Minus Depreciation | - $50,000 |
| Equals Net Adjusted Basis | = $170,000 |
2. Calculate Capital Gains
| Today's Gross Sales Price | $500,000 |
| Minus Cost of Sale (commissions, fees, etc.) | - $30,000 |
| Minus Net Adjusted Basis | - $170,000 |
| Equals Capital Gains | = $300,000 |
3. Calculate Taxes Due
| Recapture of Depreciation ($50K × 25%) | $12,500 |
| Federal & State Capital Gain Rate (~27%) | $81,000 |
| Net Investment Income Tax (3.8%) | $11,400 |
| Total Tax Due | = $104,900 |
Sale vs. Exchange Comparison
Traditional Sale
Gross Proceeds
$470,000
Taxes Owed
-$104,900
Net After Tax
$365,100
1031 Exchange
Gross Proceeds
$470,000
Taxes Deferred
$0
Available for Reinvestment
$470,000
That's $104,900 more working for you through a 1031 Exchange.
Valid Closing Expenses
Certain expenses paid from 1031 exchange proceeds can create a taxable event. Understanding the difference is critical.
✓ Allowable Expenses
- • Broker commissions, finder fees
- • Owner's title insurance premiums
- • Closing agent fees (title, escrow, attorney)
- • Attorney/tax advisor fees for the sale
- • Recording, filing, transfer tax fees
✗ Taxable Expenses
- • Pro-rated rents & security deposits
- • Utility & insurance payments
- • Property taxes & association dues
- • Repairs & maintenance costs
- • Loan acquisition fees & points
See what a 1031 exchange could save you
Contact Joshua Oliver at (919) 371-8497
Contact Us1031 exchange services are provided by a qualified intermediary that is a wholly owned subsidiary of Accruit LLC, an Inspira Financial solution. The provider of these materials is not an agent or employee of, nor otherwise affiliated with, the qualified intermediary.