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Exchange Facts
Estimating Capital Gains Tax
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The following example illustrates estimated capital gains tax savings to a non-corporate taxpayer,
as a result of effectuating an exchange under IRC Section 1031.
| Calculating Adjusted Cost Basis in Relinquished Property: | |
| Original Purchase Price | $500,000 |
| + Capital Improvements | $50,000 |
| - Depreciation Allowed | ($165,000) |
| = Adjusted Cost Basis | $385,000 |
| Calculating Realized Gain on the Sale of Relinquished Property: | |
| FMV of Relinquished Property | $1,000,000 |
| - Adjusted Cost Basis | ($385,000) |
| = Realized Gain | $615,000 |
| Gain from Appreciation v. Gain from Depreciation: | |
| Appreciation: FMV today = $1,000,000 less (original purchase price = $500,000 +
$50,000 capital improvements) = $450,000 gain from appreciation |
| Un-recaptured Section 1250 Gain (Depreciation): | |
| $615,000 realized gain less $450,000 gain from appreciation = $165,000 |
| Calculating Capital Gains Tax Liability: | |
| Realized Gain from Appreciation: 15% for capital assets owned for more than one year and sold
or exchanged on or after May 25, 2003
= $450,000 x 15% = $67,500 |
| plus Un-recaptured Section 1250 Gain (Depreciation) tax rate: 25%
= $165,000 x 25% = $41,250 |
| Total Tax Liability = $67,500 + $41,250
= $108,750 |
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