Partial Capital Gain Tax Deferral Benefit

If you are a taxpayer in an exchange and cannot purchase enough replacement value to hit the Target Replacement Value (“TRV”) for the exchange and maximize the tax deferral, there might be a partial tax deferral benefit to doing an exchange. The tax deferral benefit begins when the value of the replacement property you purchased exceeds the adjusted basis in the relinquished property you sold. As you buy greater replacement value above that adjusted basis amount, you will receive greater tax deferral benefit on the gain. Because of this, it is important for you to consult with your accountant to determine the adjusted basis in the property you are selling in order to understand fully the benefit of doing an exchange.  The TRV is equivalent to the net sale price of the relinquished property, it is the minimum replacement property value a taxpayer must purchase in order to maximize the tax deferral under 1031.

The rule of thumb for calculating adjusted basis is:

COST BASIS + CAPITAL IMPROVEMENTS minus DEPRECIATION = ADJUSTED BASIS.   
 

The rule of thumb for calculating taxable gain is:

SALE PRICE minus ADJUSTED BASIS = TAXABLE GAIN.

Strategic 1031 Exchange Advisors, LLC, a Georgia limited liability company, is a qualified intermediary for 1031 exchanges only. It is not an accounting firm, law firm or registered investment professional and therefore is not qualified to give accounting, tax, legal or investment advice, and, further, cannot act in an agency capacity on behalf of its clients. This website is for informational purposes only and does not and is not intended to constitute accounting, tax, legal or investment advice. We advise you to consult with your accountant, attorney and investment professional on all matters related to your exchange.