Example Exchange

Marsha, a calendar year taxpayer, owns an office building and land. Due to $500,000 of depreciation claimed over the years, her basis in the building is zero. Her basis in the land is $100,000. Martha sells the land and building on July 1, 1997 for $2,100,000. She has no other gains or losses in 1997. Of the $2,000,000 gain ($2,100,000 – $100,000), $500,000 is taxed at a maximum rate of 25%; the balance of the gain ($1,500,000) is taxed at a maximum rate of 20%.

EXAMPLE : SALE VS. EXCHANGE OF RENTAL
 

SAMPLE FACTS

Original Purchase Price
Mortgage
Sale Price
Depreciation
$70,000
$40,000
$80,000
$30,000

FIRST, FIND YOUR ADJUSTED BASIS

Original Purchase Price
Less Depreciation
Adjusted Basis
$70,000
$30,000
$40,000

SECOND, SUBTRACT YOUR ADJUSTED BASIS TO FIGURE YOUR CAPITAL GAINS TAX

Sale Price
Less Adjusted Basis
Equals Amount Subject to Capital Gains Tax
$80,000
$40,000
$40,000


20% Capital Gains Tax on Appreciated Property: $10,000 x 20% = $2,000

25% Capital Gains Tax on Depreciated Property: $30,000 x 25% = $7,500
TOTAL CAPITAL GAINS TAX OWED: $9,500
 

NEXT, COMPARE A SALE VS. AN EXCHANGE OF YOUR RENTAL

SALE

SALE PRICE
MORTGAGE
EQUITY
LESS CAPITAL GAINS TAX
NET EQUITY TO REINVEST
$80,000
$(40,000)
$40,000
$ 9,500
$30,500

EXCHANGE

SALE PRICE
MORTGAGE
EQUITY
LESS -0- CAP. GAINS TAX
NET EQUITY TO REINVEST
$80,000
$(40,000)
$40,000
$00,000
$40,000