Capital Gains 101: How They’re Calculated and How 1031 Exchanges Can Help

As a real estate investor, understanding capital gains is crucial. But let’s face it – tax talk can be about as exciting as watching paint dry. Don’t worry, we’ve got you covered with this simple breakdown of capital gains and how a 1031 exchange can keep more money in your pocket.

What Are Capital Gains?

Simply put, capital gains are the profit you make when you sell an asset for more than you paid for it. In real estate, it’s the difference between your property’s sale price and its adjusted basis. Fully understanding capital gains can help you better plan your investments. It’s essential for grasping the details of your investments.

Calculating Your Capital Gain

Here’s the basic formula:

Capital Gain = Sale Price – Adjusted Basis

Your adjusted basis includes:

• Original purchase price
• + Improvements (that add value)
• + Closing costs when you bought the property
• – Depreciation you’ve claimed

If you want to do a quick calculation for your property, check out our capital gains tax calculator for better understanding of your potential gains.

Example:

You bought a rental property for $200,000.

You’ve made $50,000 in improvements.

You’ve claimed $30,000 in depreciation.

You sell for $300,000.

Your adjusted basis: $200,000 + $50,000 – $30,000 = $220,000

Your capital gain: $300,000 – $220,000 = $80,000. Remember, understanding the details of capital gains is essential for accurate calculations and investing.

Tax Rates on Capital Gains

For investment properties held over a year:

• 0% for incomes up to $80,000 (married filing jointly)
• 15% for incomes up to $496,600
• 20% for incomes above $496,600

Plus, don’t forget the potential 3.8% Net Investment Income Tax for high earners! These tax rates significantly impact your understanding of capital gains and their implications.

Enter the 1031 Exchange

Here’s where things get interesting. A 1031 exchange allows you to defer paying these capital gains taxes by reinvesting the proceeds into a like-kind property.

In our example above, instead of paying up to $16,000 (20% of $80,000) in capital gains tax, you could use that money to invest in a more valuable property, potentially supercharging your real estate portfolio’s growth. That’s one major strategy for better understanding capital gains and their impact.

The 1031 Exchange Magic

• Defer taxes: Keep more money working for you
• Trade up: Invest in higher-value properties
• Diversify: Shift property types or locations
• Compound growth: Your deferred taxes keep earning returns

The Bottom Line

Understanding capital gains is step one. Knowing how to legally defer them with a 1031 exchange? That’s where you level up your real estate investing game.

Ready to explore how a 1031 exchange can help you keep more of your hard-earned profits? We’re here to guide you through every step. Give WealthBuilder1031 a call at 888-508-1901, and let’s crunch some numbers together.

Remember, in real estate investing, it’s not just about what you earn – it’s about what you keep. Let’s make those capital gains work harder for you and deepening your understanding of capital gains strategies!