Taxes associated with 1031 Exchange for Rental Properties

[cshaw]

I’m trying to wrap my head around how the 1031 exchanges work.  I’m planning on selling my first rental property in another state and purchasing another one where I now live.  I don’t expect to make a whole lot more on it as compared to my original purchase price, and my agent says it might be just as easy to just pay the taxes and avoid the 1031 process and exchange fee ($670).
As I read more on it though I’m thinking my tax liability due to depreciation recapture may be quite a bit, thus making it more than worthwhile to do the 1031 exchange.  These are rough numbers and rounded up but can someone tell me if I grasp the concept correctly?  Thanks in advance.

Original Purchase Price – $80K
Depreciated amount – $30K
Selling Price - $90K
Cost basis - $50K
Gain - $40K
Taxes would be:
$30K at 25% for depreciation recapture = $7500
$10K at my tax rate, say 15% = $1500
So about $9K in taxes w/o the 1031 Exchange, with the exchange these taxes are deferred.  Sound about right? 

[Mirwen]

That sounds about right to me.  However, I'm not sure you have the right tax rates for the $10k and $30k and I'm not sure why you split it where you did.  You've got the basic idea though.

1031 exchanges can be very tricky to pull off if you are not experienced.  There are a lot of arcane rules and the all have to be followed exactly or it doesn't work.  It's a big PITA for a realtor and I'm sure s/he doesn't want to get blamed if you get a $9k tax bill.

Because of this it's really best to choose a realtor with lots of experience with 1031 exchanges and make sure you have the closing of the new place lined up and ready to go.  Tax deferment is a powerful tool.  Use it if you can.  Take the time to understand all the rules yourself so you can make sure everything is completed in the very short window.

[Bearded Man]

45 days to identify and get under contract, 180 days to close. I had wondered recently about the depreciation recapture and whether it was deferred in a 10-31 exchange. That's good to know, because as I contemplate moving out of state, I would prefer to 10-31 my existing properties and buy where I end up. I did end up googling real quick just to confirm it.

The PM fees are ridiculously high for what I consider very little actual work and would significantly cut into profits to the point of it just not being worth it. Plus I'd feel better having properties close by where I can check on them.

Apparently you can even buy more than one property with the proceeds, and as long as the property you sold had a deed and the property(s) you are buying have deeds and are for business purposes you can trade a condo for a house or a house for an four-plex, etc.

Is it just me or does the government want you to own real estate. The more I look at the tax laws and all the benefits, the more it looks like they desperately want you to own real estate. It stimulates the economy, think of all those jobs it creates, all the material, the labor, the people involved in the transaction, etc.

[Bearded Man]

cshaw, where about's in Idaho are you thinking of buying? It wouldn't be around Kellogg or Wallace would it?

[cshaw]

cshaw, where about's in Idaho are you thinking of buying? It wouldn't be around Kellogg or Wallace would it?

I'm in the Idaho Falls area.

[cshaw]

That sounds about right to me.  However, I'm not sure you have the right tax rates for the $10k and $30k and I'm not sure why you split it where you did. 

My understanding is that of the $40K gain, $30K would be due to depreciation, and thus subject to the 25% depreciation recapture.  The remaining gain on top of that is subject to 15% capital gains tax.

[Bearded Man]

I think your agent might be biased and trying to make their own job easier rather than having your best interest at heart. Personally I'd find a new agent, I have before. In any case, I think you answered your own question/got the confirmation you were looking for. 10-31 is the way to go on this one.