Saturday, October 30, 2004
HAPPY HALLOWE'EN!
No "Trick" to Calculating 1031 Tax Matters
Recently one of my clients almost ran into trouble around calculations and her 1031 Like-Kind Exchange. Luckily, she had a solid financial team to advise her. They reminded her that at the time of the exchange, the tax basis from the original property is rolled over into the exchanged property. In order to completely defer all her taxes from the exchange transaction, two (2) rules had to be followed:
1. My client had to acquire property with at least as much equity as the prior equity in the exchanged property.
2. My client had to assume as much debt as the prior debt on the exchanged property.
My client confided that she thought it might be difficult, but it turned out that the tax liability to be deferred was easily calculated! First, she and her team found the sum of the original purchase price plus non-expensed improvements, minus all depreciation taken. That is the adjusted basis. The depreciation had to be recaptured at a federal 25% tax rate plus varying state rates.
The total appreciation of the property is the net sale proceeds minus the original cost and cost of improvements. The appreciation is taxed at the 15% federal capital gain tax rate plus the state capital gain tax rate.
My client learned that the total of these two (2) federal tax liabilities and two (2) state tax liabilities was the tax than she could deferred through her 1031 Exchange.
On Hallowe'en give yourself the treat of a financial team to support you as you work through the 1031 Exchange.
That' way you won't have any "BOOoo!-BOOzzz"
Email for resources: asheville1031@janeAnne.com
More articles: www.janeAnne.com
Recently one of my clients almost ran into trouble around calculations and her 1031 Like-Kind Exchange. Luckily, she had a solid financial team to advise her. They reminded her that at the time of the exchange, the tax basis from the original property is rolled over into the exchanged property. In order to completely defer all her taxes from the exchange transaction, two (2) rules had to be followed:
1. My client had to acquire property with at least as much equity as the prior equity in the exchanged property.
2. My client had to assume as much debt as the prior debt on the exchanged property.
My client confided that she thought it might be difficult, but it turned out that the tax liability to be deferred was easily calculated! First, she and her team found the sum of the original purchase price plus non-expensed improvements, minus all depreciation taken. That is the adjusted basis. The depreciation had to be recaptured at a federal 25% tax rate plus varying state rates.
The total appreciation of the property is the net sale proceeds minus the original cost and cost of improvements. The appreciation is taxed at the 15% federal capital gain tax rate plus the state capital gain tax rate.
My client learned that the total of these two (2) federal tax liabilities and two (2) state tax liabilities was the tax than she could deferred through her 1031 Exchange.
On Hallowe'en give yourself the treat of a financial team to support you as you work through the 1031 Exchange.
That' way you won't have any "BOOoo!-BOOzzz"
Email for resources: asheville1031@janeAnne.com
More articles: www.janeAnne.com
