Sample Transaction Page

In 1980 John bought an apartment building for $320,000.00 and over the course of fifteen years spent $40,000.00 on improvements. In 1995 he sold the property for $950,000.00. He paid $52,500.00 in selling costs and depreciation over 15 years came to $160,000. His capital gain was $697,500.00 Capital gains are calculated as follows: Selling Price less Purchase Price less Depreciation less improvements.

With a state tax rate of 6%, a federal tax rate of 15%, and a depreciation recapture rate of 25%, John will have to pay approximately $33,000.00 state tax and $147,500.00 federal tax for a total of $180,500.00. If John executed a deferred exchange, he could reinvest his net profit, as well as the $180,500.00 he would have paid in taxes.

To qualify for an IRC 1031 deferred exchange, John would have had to purchase a like kind property, or a property of similar use. He would also have to contract with a qualified intermediary to hold the original property while he searches for a like kind property to replace it.

For a list of common terms and their definitions, please visit our Glossary page