1031 Xchg: What if we cannot execute? (Depreciation Recapture)

[Cary P.]

Hey guys, as we all know, this is a crazy real estate market right now. My husband and I are selling a multi-unit and we are trying to figure out what happens if we cannot execute on an exchange.. Is my math right? Worse case, I'd go into an Inland or NNN portfolio if we are in dire straights. If my math is right, I'm not sure we would want to cash out...

Purchase + Cap Improvements: $2.1MM

Depreciation: $380K

Sales Price: $4.82MM

Cap Gains after fees / expenses: $2.48MM

These are the top bracket taxes I came up with:

Paid on the $2.4MM:

- 20.00% cap gains

- 03.80% Medicare surcharge

- 04.63% Colorado state tax

Paid on the $380K:

- 35% Depreciation Recapture

Does the $380K get added into the $2.4MM for a computed MAGI of $2.8MM, so we are paying taxes multiple times on that money, or not?  Am I missing something that would greatly impact the taxes either in my favor or not? Does the 20% pass-through apply here? :D :D

Thanks!

[Michael Plaks]

@Cary P.

Both $2.4 mil and $380k are you capital gain. Both are included in your income: AGI, MAGI and taxable income. Both are subject to the Medicare surcharge and Colorado taxation.

The only difference between them is the rate for the IRS taxation. $2.4 mil is taxed at 20%, and $380k is taxed at 25%.

I'm not sure what you believe causes you to pay taxes "multiple times." There is one-time taxation on both parts, just different rates apply.

The first part is capital gain from appreciation - something that has never been taxed before. The second part is depreciation. You previously took a tax deduction on depreciation for both IRS and CO taxes, and now you have to return those temporary tax breaks. Never double taxation.