Equity and capital gain are both important in 1031 exchange calculations. While these terms are relevant to many types of transactions, they are important to understand in real estate. Investors must know their equity to make strategic investment decisions. In order to determine gain, you need to know your cost basis. Your cost basis is going to be informed by calculations starting with the purchase price you paid when you bought the property. Though capital gains are ordinarily taxed, these taxes can be deferred with a 1031 exchange.
Let’s take a cursory look at how you determine both equity and gain.
Equity
Equity is the difference between the value of your assets and the value of your liabilities. Equity in property and real estate is the difference between the property’s market value and debt. This calculation determines how much of the property you own versus the amount with registered debt.
Equity is important in real estate investing because it can determine your ability to invest in other properties. Home equity loans use equity as collateral to finance other investment properties. If you have a high equity in your properties, you can use it to purchase other properties.
A cost of equity calculator requires the following figures:
- Assets: Assets are your property’s market value. Appreciation and depreciation can affect the value.
- Liabilities: Liabilities are the debts registered to the property, such as the mortgage.
Capital Gains
Capital gain or loss is the difference between the amount you invested into an asset and the amount it sold for. If you have capital gains, the selling price is higher than the purchase price, resulting in a profit on your capital asset. Capital loss occurs if the selling price is lower than the purchase price.
In real estate capital gains, the asset is your investment property. Your property must meet certain classifications to be treated as a capital asset. Your property’s classification will also affect how you report the transaction and calculate capital gains taxes.
1. How to Calculate Adjusted Basis
Your purchase price is the starting amount of your cost basis, which actually changed over time. For instance, if you made any improvements to the property, that amount should be added. Likewise, if you deducted any depreciation while you owned that property, that should be subtracted. Therefore, to find your final cost basis, or what we call the adjusted basis, take the original purchase price plus any improvements and less any depreciation.
Original Purchase Price + Improvements – Depreciation = Net Adjusted Basis
2. How to Calculate Equity
Equity represents the hard-earned value that is in any property you own. To determine your equity, take your gross selling price and subtract your closing expenses, or closing costs, and then further subtract the amount of any remaining debt. The remaining number leftover will be your equity in that property.
Selling Price – Cost of Sale – Debt = Equity
3. How to Calculate Capital Gains
Now, to find your capital gain amount, take the net selling price from your sale and deduct the final adjusted basis.
Sales Price – Adjusted Basis – Cost of Sale = Capital Gain
Reinvest Your Capital Gains for a Tax-Free Transaction With 1031 Crowdfunding
When you reinvest your capital gains into a replacement property that is equal to or greater in value than the net selling price of your relinquished property, you can defer taxes on those capital gains and move all your equity from your old property into the new one.
1031 Crowdfunding can help you manage your 1031 exchange and defer your capital gains taxes. A 1031 exchange requires following several regulations from the Internal Revenue Service (IRS) to qualify the exchange. We have assisted thousands of investors with their 1031 exchanges and other investment vehicles, allowing the process to be personalized and efficient.
Register with 1031 Crowdfunding today to see all of our investment properties. We have an online marketplace of vetted 1031 exchange properties from various real estate sectors. Learn more about how 1031 exchanges work by reading our blog.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.
