Partial 1031 Exchange: How to calculate Cap Gains/Depr Recapture?

Question

Assuming there is no mortgage, let's say I bought Property A 6 years ago for $200K and I decide to sell it for $350K with $20K in commission. Let's also assume there are no improvements to make the numbers easy.

-Total Proceeds of Property A minus Commission: 330K-Original Purchase Price of Property A: 200K-Purchase price of Property B: 200K (60% of Proceeds used for 1031 Exchange)

-Remaining proceeds: 130K (40% not used for 1031 Exchange)-Accumulated Depreciation: 50K (25% Depreciation Recapture tax =$12,500)

Would the Depreciation Recapture tax in this scenario be $5000 (40% of $12,500)? If so, does the same 40% get applied to the Capital Gains taxable amount? Or is it just the unused proceeds of130K multiplied by either 15% or 20% depending on your tax rate and the 40% has nothing to do with it? I'll definitely get with a CPA on this before I do anything - just trying to get a ballpark idea of how it would go hypothetically. Thanks in advance!

Dave Foster · Answer

@Mark Andrews Only your CPA will be able to give you an accurate estimate for how much your tax bill will be. Depreciation recapture is usually 25% and depending on your financial situation capital gains tax is usually around 15%. If you do a 1031 both the capital gains and depreciation recapture can be deferred indefinitely. I'll send you a link to our online capital gains calculator vie direct message.

Wayne Brooks · Answer

@Mark Andrews To summarize….

Your cap gain is $130k

Your depreciation recapture taxable amount is $50k

Your boot: $130 k

I’ve heard varying opinions on which category, cap gains or depreciation, gets taxed first, or you “pro rate” it like you did. I’d also be curious what the CPA’s here say.

@Dave Foster may know.

David M. · Answer

@Dave Fostercan you chime in?

@Mark Andrews

First, I forget how the commission is included. I think its actually included in your cost basis along with the other closing costs (not prepaids and escrows).

I didn't think this tax treatment was pro rated. So, anything "above the line" is capital gains, and "below the line" is the depreciation unrecapture. So, the boot that you receive comes "off the top" and so capital gains tax is realized first.

Partial 1031 Exchange: How to calculate Cap Gains/Depr Recapture?

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