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%.
| Original Purchase Price Mortgage Sale Price Depreciation |
$70,000 $40,000 $80,000 $30,000 |
| Original Purchase Price Less Depreciation Adjusted Basis |
$70,000 $30,000 $40,000 |
| 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
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 |
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