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basis of the office building is $1,760,000, calculated
as shown in the chart “Adjusted Basis of Office
Building.”

Adjusted basis of office building

Purchase price $2,100,000
Acquisition costs 15,000
Improvements 130,000
Depreciation (485,000)
Adjusted basis $1,760,000

A, a high-income taxpayer, intends to sell the
office building for $3,250,000 and replace it with
an apartment complex. The realized gain on her
relinquished property is shown in the chart “Real- Scenario No. 1
ized Gain on Relinquished Property.” A sells her office building outright. She will pay
income taxes as shown in the chart “Total Tax
Realized gain on relinquished Liability From Sale of Relinquished Property”
(using 2020 tax rates and assuming she is a
property high-income earner).
Sales price $3,250,000
Adjusted basis (1,760,000) Total tax liability from sale of
Realized gain $1,490,000 relinquished property
Realized gain on
sale $1,490,000
If A decides to structure the sale of her property Long-term
as a like-kind exchange, she must fully reinvest capital gains 1,005,000 20% $201,000
the proceeds from the sale of the office building.
Depreciation
To preserve her Sec. 1031 status, A cannot receive recapture 485,000 25% 121,250
any of the proceeds from the original sale. Con-
Net investment
sequently, A must determine how much cash will $1,490,000 3.8% 56,620
income tax
be received upon relinquishment of her original
Total tax
property so that she knows how much must be rein- $378,870
liability
vested. If A sells the office building for $3,250,000
and pays off her mortgage of $1,000,000, she will
have $2,250,000 to reinvest. Scenario No. 2
A must purchase a replacement property for an A sells her office building using a Sec. 1031
amount that is equal to or greater than the sales exchange (using current tax rules). Consequently,
price of the relinquished property, and she must she defers all gain recognition and depreciation
obtain a mortgage on the new property that is equal recapture, saving $378,870 of income tax in the
to or greater than the mortgage on her original current year, which can be used for reinvestment
property. In this situation, the purchase price of purposes.
a replacement property should be greater than
$3,250,000, and a mortgage on the replacement Scenario No. 3
property should be greater than $1,000,000. A sells her office building using a Sec. 1031 exchange
A comparison of the tax consequences to A of (using proposed tax rules). Assuming that deprecia-
selling her office building in exchange for an apart- tion recapture rules are unchanged, she will pay
ment building under three scenarios is presented income taxes as shown in the chart “Taxes From
next. Like-Kind Exchange Under Proposed Changes.”

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