Example Exchange

Marsha, a calendar year taxpayer, owns an office building and land. Due to $500,000 of depreciation claimed over the years, her basis in the building is zero. Her basis in the land is $100,000. Martha sells the land and building on July 1, 1997 for $2,100,000. She has no other gains or losses in 1997. Of the $2,000,000 gain ($2,100,000 - $100,000), $500,000 is taxed at a maximum rate of 25%; the balance of the gain ($1,500,000) is taxed at a maximum rate of 20%.

EXAMPLE : SALE VS. EXCHANGE OF RENTAL

SAMPLE FACTS

Original Purchase Price Mortgage Sale Price Depreciation

$70,000 $40,000 $80,000 $30,000

FIRST, FIND YOUR ADJUSTED BASIS

Original Purchase Price Less Depreciation Adjusted Basis

$70,000 $30,000 $40,000

SECOND, SUBTRACT YOUR ADJUSTED BASIS TO FIGURE YOUR CAPITAL GAINS TAX $80,000
$40,000
$40,000

Sale Price Less Adjusted Basis Equals Amount Subject to Capital Gains Tax

20% Capital Gains Tax on Appreciated Property: $10,000 x 20% = $2,000
25% Capital Gains Tax on Depreciated Property: $30,000 x 25% = $7,500
TOTAL CAPITAL GAINS TAX OWED: $9,500

NEXT, COMPARE A SALE VS. AN EXCHANGE OF YOUR RENTAL

SALE

SALE PRICE MORTGAGE EQUITY LESS CAPITAL GAINS TAX NET EQUITY TO REINVEST

$80,000 $(40,000) $40,000 $ 9,500 $30,500

EXCHANGE

SALE PRICE MORTGAGE EQUITY LESS -0- CAP. GAINS TAX NET EQUITY TO REINVEST

$80,000 $(40,000) $40,000 $00,000 $40,000