1031 Exchange Decision
1031 Exchange Decision
The Question:
Are you wondering what to do with your rental property? Federal capital gains tax rates currently stand at 15%. In addition, California state capital gains taxes are approximately 7.5%. So, if you sold your investment property you would have to pay approximately 22.5% plus the recapture depreciation tax of up to 25% of the amount depreciated. On the other hand, you could defer paying taxes on your capital gain by using a 1031 exchange. A 1031 exchange enables you to sell your rental property and buy another without having to pay taxes.
Federal Capital Gains Taxes:
When selling a property instead of exchanging, the Federal Government will tax the capital gain at 15%. This is the rate only if the property to be sold is deemed to be a long-term capital asset which, simply stated, is property that is held for more than one year. If the property is held for less than one year, the rate will be based on the taxpayer's ordinary income tax rate, which is typically significantly higher than the15% capital gains tax rate.
Recapture Depreciation Tax:
In addition to the federal rate of 15%, for long-term capital assets, the IRS may impose a "recapture depreciation tax." If the investor depreciated the real estate in previous years , that amount is "recaptured" when the property is sold. Depreciation recapture tax can be as high as 25%. If the investor sells non-real estate, such as an aircraft, which was used in his/her trade or business, the "recaptured depreciation amount" is taxed as ordinary income. Because of the complexity of this topic, all investors should consult with their CPAs to determine the recaptured amount.
State Taxes:
California imposes its own tax of approximately 7.5%.
The Conclusion:
Due to these factors, many investment property owners discover that it is beneficial to defer these taxes by purchasing a new property through a tax deferred exchange. To help determine what is best and engage in a 1031 tax deferred exchange, please call Robert Stuart today at 650-740-5740 or e-mail him at robertstuart1@yahoo.com to discuss the feasibility and possible advantages of engaging in a 1031 tax deferred exchange.
Cities/Areas Served:
Professional Real Estate Brokerage provides services primarily in the following San Mateo County and Santa Clara County cities and areas including: Atherton, Menlo Park, Sharon Heights, Woodside, Portola Valley, Redwood City, Redwood Shores, Emerald Hills, San Carlos, Belmont, San Mateo, Foster City, Hillsborough, Burlingame, Millbrae, San Bruno, South San Francisco, Daly City, Broadmoor, Pacifica, Half Moon Bay, East Palo Alto, Palo Alto, Los Altos, Los Altos Hills, Mountain View, Sunnyvale, Cupertino, Santa Clara, Saratoga, Monte Sereno, Los Gatos, Campbell, San Jose, Willow Glen, Cambrian and Alviso.
Property owners are encouraged and advised to contact the appropriate legal and tax professionals when deciding whether or not to engage in a 1031 tax deferred exchange.
