1031 EXCHANGE EXAMPLE
The following is an example of how a 1031 Exchange would be carried out. The chart at the bottom will help compare when an investor does just a typical sale and when an investor conducts a 1031 Exchange.
Bill has decided to sell the condominium (relinquished property) he has owned for 6 years. The property’s current fair market value is $1,500,000, however, at the time he purchased the condo, the property was $500,000. After Bill put out $50,000 of capital improvements and the property depreciated $80,000, his adjusted basis is $470,000. Bill has been advised by his tax consultant to engage in a tax deferred exchange. Bill’s real estate broker discovers an apartment building (replacement property) for $2,750,000. Bill purchases the property using the net proceeds from his condo within the 180 day period and successfully completes the 1031 Exchange. Were Bill to have sold his condo without using his exchange, he would have paid $144,500 in federal taxes.
Through the use of a 1031 Exchange, Bill deferred his capital gains and depreciation recapture taxes, and had $144,500 more to invest into a replacement property.
| Original Purchase Price (relinquished property) |
$500,000 |
| Capital Improvements |
$50,000 |
| Depreciation |
$80,000 |
| Adjusted Basis |
$470,000 |
| |
|
| Sale Price (assuming property sells at F.M.V |
$1,500,000 |
| Sale Expenses |
$120,000 |
| Net Sale Price |
$1,380,000 |
| Realized Gain ( Net Sale – Adjusted Basis) |
$910,000 |
| |
|
| Depreciation Recapture ( $80,000 x 25%) |
$20,000 |
| Capital Gains Tax ( $830,000 x 15%) |
$124,500 |
| Total Federal Taxes Amount |
$144,500 |
| |
Typical Sale
|
1031 Exchange
|
|
Net Profit (Realized Gain)
|
$910,000
|
$910,000
|
| Total Federal Taxes Due |
$144,500
|
$0
|
|
Equity to reinvest
|
$765,500
|
$910,000
|
|
|
