How to Calculate Capital Gain

The real power of a tax deferred exchange is not just the tax savings — it is the tremendous increase in purchasing power generated by this tax savings! With the advantages of leverage, every dollar saved in taxes allows a real estate investor to purchase two to three times more real estate.

Calculate Capital Gain - Analyze the Benefits of an Exchange Before You Sell

Compare the tax savings and additional purchasing power of an exchange vs. a taxable sale:

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 ____________________
Gross Equity = Net Equity ____________________
Gross Equity x 4 = ____________________

The real power of a tax deferred exchange is not just the tax savings — it is the tremendous
increase in purchasing power generated by this tax savings! With the advantages of leverage, every dollar saved in taxes allows a real estate investor to purchase two to three times more real estate.
Many investors are surprised to discover that capital gain taxes are far higher than 15%.
State taxes, which can be as high as 11% in some states, are added to the federal capital gain taxes owed. In addition, depreciation deducted over the ownership period is taxed at a rate of 25%. The net result is often a large percentage of your profits going directly to pay taxes. Under the 4th calculation, the net equity times four (assuming a 25% down payment) is the value of property you could purchase after paying all capital gain taxes. Under the 5th calculation, involving an exchange, no taxes are paid, leaving the full purchasing power of the entire gross equity to acquire considerably more real estate! In just one transaction, the Exchanger acquires far more investment property than a seller!

Note: This is not being provided as tax and or legal advice. Every taxpayer should review their specific transaction and potential tax consequences with their own tax and/or legal advisors.

Rob Alley, Realtor at RE/MAX Assured Properties
434-220-7133
roballeyrealtor@gmail.com
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