welcome to 10:31 University I'm Paul
Holloway today we are going to go over a
basic example of how the numbers play
out if you sell an investment property
and if your goal is to just simply cash
out on that investment how much of a tax
you would be expecting to pay to the
federal and/or state governments and it
can be surprising how much taxes there
are out there
but then we'll tie it into a 1031 that
instead of just cashing out and paying
the federal government and or state
governments you would be able to defer
all those taxes forward into one or
multiple investment properties so let's
just go ahead and say that I purchased a
rental property just to start the game
and let's say that I bought that
investment property for $200,000 now a
common term that your CPA is probably
going to use and talking to you about
this investment is that this is your
basis that being your starting point of
this investment so you bought it for two
that's your basis that your starting
point the fact that it is a rental
property one of the great benefits of
owning investment real estate is the
fact that if it's a building like a
rental you would be able to depreciate
that investment on your yearly tax
returns and get attached right off which
actually helps on a yearly basis when
you file your taxes so let's assume on
this example that we took throughout the
years $40,000 of depreciation we will
get back to this number but we're just
going to have it up there and then
discuss it in a bit but we're going to
say that this investment that we bought
for 200,000 a few years later we are now
selling that investment and let's say
that we're selling it at $600,000 so we
did pretty well on this investment we
bought it for 2 we're selling it for 6
we made $400,000 on the sell and so
let's take that 400,000 down here if we
just simply cash out on this investment
what sort of tax hit are we going to
have so if this is me for example in the
middle like most tax payers if I just
simply cash out on this investment I'm
going to pay to the federal government
under current tax law assuming that this
is a long term capital gain that being a
game that is an investment that's held
over one year in one day so federally I
would be paying 15% to the federal
government state in Colorado where I am
I would be paying roughly five percent I
think it's actually four point eight
five but we'll just round it to five so
if I just simply cash out on this
investment between federal and state I
am looking at a twenty percent tax hit
so of the four hundred thousand of gain
I am going to lose eighty thousand
dollars of that money out of my pocket
into the federal and state government so
that money is no longer mine another
item that a lot of people forget about
is right back up to this blue figure the
what about that forty thousand of
depreciation that we took throughout the
years so let's go ahead and bring that
down to the equation so what the IRS
says is yeah you can have the write offs
on a yearly basis but if you just simply
cash out
we the IRS get to recapture that
depreciation at a twenty five percent
rate I like to refer to this as phantom
gain because it really isn't the fact
that the property went up in value by
this forty thousand it's that you took
those write offs and this is the piece
that a lot of people forget about so
above and beyond this eighty thousand
that you would lose out on the forty
thousand that is taxed at twenty five
percent that is an additional ten
thousand dollars that you would lose out
on and it would go to the federal
government a couple more tax rates that
I did not even touch on that may or may
not affect you but you should be aware
of if you are considered to be a high
income earner you may have to actually
pay higher than fifteen percent
many high-income earners are actually
paying as high as 20% federally so 20
plus 5 would be 25% in a much higher
figure than that $80,000 other high
income earners may have to pay what is
referred to as a Medicare surcharge tax
and that is an additional 3.8 percent
tax that could be hid what you want to
do is go over these numbers and figure
out which tax bracket you're in with
your CPA or tax attorney but you may be
subject to that 3.8 percent tax as well
and depending on what state you're in
you may have to pay local taxes a few
places here in the mountains in Colorado
you may have a 1 or 2 percent transfer
tax at a local taxing level so there is
potential for an additional 2 percent
tax for example in certain states so
definitely be aware of the locale that
you are in and verify as to whether or
not those taxes may be able to be
deferred as well but this is what you
would have to pay if you actually just
simply sold but if your goal is to
actually keep the dollars tied up in
real estate by one or multiple
properties at $600,000 total or more and
reinvest all of your equity all that
this tax over here that we're discussing
will be deferred forward into the new
property and no tax will come due so
that is the great benefit of doing the
exchange and I think is your clients sit
down with their CPA and crunch these
numbers and find out which tax bracket
they're in many times it will make sense
as to why they're going to want to
explore doing a 1031 exchange
so hopefully this gave you a little bit
of clarity on how the numbers play out
this has been 1031 University and for
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