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Q. How much tax will I pay if I do not do an exchange?
A. This is a very important question, which an exchange service may not want
to explore with you if the service is not an attorney or an accountant. Until
you have examined this question, you cannot make an informed decision whether to
perform an exchange or not.
Your tax will depend on a number of factors, such as your tax basis in your
relinquished property, your sales price, your tax bracket, and your overall tax
situation. One important fact to remember is that your tax does not depend on
the debt you have on the property. Your tax can exceed the amount of money
you take out of the transaction after paying off the debt on the property! In
such a situation, an exchange may be an extremely important tool to avoid having
to pay money to sell a property.
Basically, you will pay capital gains tax on the "recognized gain"
on your transaction. If you do not perform an exchange, your recognized gain is
the difference between what you sell the property for and your tax basis. Thus,
if you sell for $50,000.00 and your tax basis is $20,000.00 you will pay tax on
a recognized gain of $30,000.00.
The amount of tax varies depending on your tax bracket, but for most of our
clients, the rule of thumb would be that the capital gains tax (state and
federal) will be about one third of the recognized gain. Thus, if the recognized
gain is $30,000.00, the tax will generally be about $10,000.00. Please note that
this can vary, a lot, from taxpayer to taxpayer, and from state to state, and
this is only an example. Get sound advice from a licensed professional such as
an attorney or an accountant!
If, in the previous example, you have a mortgage of $45,000.00, and only
clear $5,000.00 from the sale, you will still owe the federal and state tax
authorities $10,000.00 in capital gains tax. You would have to pay it, even
though you only cleared $5,000.00. An exchange might be a very valuable tool for
you.
Rice & Stallknecht, P.C. would be honored to
assist you.
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