Equity and gain are both important to a tax deferred 1031 Exchange, but they are never the same number. Watch this quick tutorial to take a cursory look at how you determine both equity and capital gain.
Equity and Gain are both important to an exchange, but they are never the same number.
Let’s take a cursory look at how you determine both equity and capital gain.
First, equity represents the hard-earned value that is yours in any property you own.
So, if you take your gross selling price and subtract your closing expenses or closing costs,
and then further subtract the amount of any debt, that remaining number which is left over will be your equity in the property.
Reverses are typically accomplished in two formats based upon transaction logistics and the financing needs of the Exchanger calculating capital gain.
Well, in order to determine gain we need to know what is called your cost basis.
And your cost basis is going to be informed by when you bought the property.
So, when you bought the property you had a purchase price, correct?
Well, that will be the start of your cost basis, which actually changes over time. For instance,
if you’ve done any improvements to the property, that amount should be added.
And likewise, if you’ve deducted any depreciation while you’ve owned the property, that will be subtracted.
Therefore, let’s determine your cost basis and capital gain this way:
Let’s find our final cost basis or adjusted basis.
That will be our original purchase price, plus any improvements,
and then less any depreciation, that gives us our final adjusted basis.
Now let’s once again take that net selling price from our sale, deduct our final basis, and bingo, that’s our capital gain.
The number with which you would pay gain tax if you do not do an exchange.
One last thing. Here is a very simple rule that works in exchanges if you want to have a totally tax deferred transaction.
And that is, accomplish these three things and your exchange should be fully tax deferred.
Number one, buy equal or greater in value.
Number two, move all your equity from the Relinquished Property into the new Replacement Property.
And three, replace the value of the debt that was on the original Relinquished Property.
If you do those three things, you should have a fully Tax Deferred Exchange.