How Much Capital Gains Taxed will I Owe if I don’t do a 1031 Exchange?

capital gains and levels of taxation

Many people want to know how much they are going to have to pay in capital gains taxes if they don't do a 1031 exchange? We take a look at capital gains taxes and 1031 exchanges in this article.

Layers of Taxation

There are different layers of taxes you have to look at. The first is how much of the property that you're selling has appreciated in value. The portion of the gain that is from appreciation or natural increase in value over time, is taxed at a maximum rate of 20%. Congress also has an investment income tax of 3.8%, which may be applicable to some or all of that appreciation so you could rough it in or say rule of thumb is a 23.8% appreciation.

Recaptured Depreciation

Then there's a portion of the game that relates to depreciation. That's the deductions you have been taking over time for the theoretical wear and tear on the property. So incremental, over time you're lowering your basis every year due to these depreciation deductions. That's called depreciation recapture. The maximum federal right now is 25% on the recapture of depreciation.

So on the appreciation, the upward climb, we’ll say 23.8%. On depreciation, we’ll say a maximum rate of 25%. However, some of the gain may be taxed at a maximum rate of 39.6%, which is the Federal Ordinary Income rate for §1245 Personal property (either tangible or intangible).  A gain on the disposition of section 1245 property may be treated as ordinary income to the extent of depreciation allowed or allowable on the property. On top of all of that, if you're in a state that taxes such as Minnesota or California, these states have their own layer of taxation around 10%.  So if you’re going to rough it in, you’re going to be giving away 45%-50% of your gains in federal taxes.

Rather than taking that tax hit, a 1031 exchange can help you roll that gain over into a new property and avoid the tax hit.

  • 1031 Hotline: If you have questions about the capital gains taxes you owe, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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