Explaining the Layers of Taxation in an Investment Real Estate Sale

Layers of Taxation

We talk a lot about capital gains taxes and how a 1031 exchange can help you defer these taxes. However, there are actually several layers of taxation involved in an investment real estate transaction. These layers can all add up to some hefty tax liabilities for the seller, which makes a 1031 exchange all the more valuable. In this article, we are going to talk a little bit about the layers of taxation that exist in an investment real estate transaction.

Capital Gains Tax

Most sales of real property will result in some capital gains tax liability for the seller. The specific amount will depend on how the property is held, the seller’s income tax bracket, and more. Figure out your capital gains taxes with our calculator.

Depreciation Recapture Tax

All investment properties have what’s called a “useful life” – meaning the value of the property depreciates over time. Depreciation recapture allows the owner of the property to reduce their tax liability to offset the gradual loss to the property over time. This is then taken into account when calculating the capital gains tax on the sale.

State Income Tax

You also have to pay state income tax when selling real property. The exact amount will depend on the state in which the sale takes place. Some states have a 0% income tax rate, while others have upwards of 13%. When selling real estate, you will typically face state level income tax on the capital gains from the sale, as well as the recaptured depreciation.

Minnesota 1031 Exchange Company

The qualified intermediaries at Commercial Partners Exchange Company have twenty years of experience facilitating real estate exchanges for taxpayers throughout Minnesota and across the country. We can help you through all the details of your exchange by preparing your documents and advising you on the details of your exchange. Reach out to us today at our downtown Minneapolis office to learn more about 1031 exchanges and how to get started!

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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