Capital Gains And Depreciation On Investment Property Sale And A 1031 Exchange

Q: I’ve found your website very helpful, but I’d like to ask a specific question: – I’m 65 years old and I’ve owned an 11-unit apartment building in Tennessee since 1994. I wanted to sell it, but it seems I’ll have to pay taxes on my earnings, plus all the depreciation I’ve taken on the building. I’ll also have to pay the real estate commission and other costs of sale. Is that right?

Is there any other way to sell this without such a cost?

A: You are correct. If you have a large profit on the building, you will have to pay capital gains taxes on that profit. So if you purchased the building for $100,000 and now sell it for $300,000, you have a gain on the sale of about $200,000.

At current capital gains tax rates of 15 percent, you’ll have to pay about $30,000 in capital gains taxes. These numbers are simplified and yours may vary depending on other costs of purchase and costs of sale that you will have when you actually sell the property.

You’re also right about the depreciation. If you depreciated the building over 27.5 years or other schedule that your building falls into, you will have taken depreciation on that building for the last 17 years.

If the value of the building was $80,000 and the value of the land was $20,000, you might have taken depreciation on the building of about $50,000 plus any other items you depreciated.

On that $50,000, you’ll have to repay the IRS that amount at 25 percent or about $12,500. So, your total approximate tax bill to the IRS could be about $42,500 on that $200,000 gain.

For some people, they would rather pay the tax now than wait for capital gains tax rates to go up. Others may decide to defer the payment of these taxes until some other day in the future.

If you use a 1031 tax deferred exchange, you’d sell your property, and buy a replacement property equal to or more expensive than the one you’re selling. You have to abide by the strict rules of the 1031 exchange (also called a like kind exchange or Starker Trust).

I have plenty of information on my site about 1031s and I have written an eBook detailing many of the rules that must be followed with 1031 exchanges (including how to find a quality 1031 company) that is available in the ThinkGlink Store. .