1031 Exchange
What Is A 1031 Exchange?

Calculating Capital Gain

In the state of California, property owners who decide to sell an investment property are subject to the following taxes: Calculating the tax bill upon the sale of a property isn’t as hard as one might think, but it does require that you have a firm understanding of some basic principles. The first thing to understand is how to calculate the Adjusted Basis:

Formula Example
Net Purchase Price $500,000
(Depreciation) ($100,000)
Capital Improvements + $25,000
Adjusted Basis $425,000

Calculating gain is the next step to figuring out your tax bill. Let's assume we sold our property for a net sales price of $1,000,000. With that assumption we calculate gain as follows:

Formula Example
Net Sales Price $1,000,000
(Adjusted Basis) ($425,000)
Gain $575,000

With a computed gain of $575,000, we can now start applying the tax rates mentioned above to compute the total tax liability on the sale of the property:

Tax Formula Tax Owed
15% Federal Capital Gain 15% * (Gain - Depreciation) $71,250
9.3% State Tax 9.3% * Gain $53,475
25% Depreciation 25% * Depreciation $25,000
Total Tax Bill $149,725

Instead of receiving the money after the sale of real estate with a capital gains tax, the sale funds can instead be reinvested in other like-kind property real estate through a 1031 exchange.