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Calculating Equity and Capital Gains

Equity and capital gain are both important to a 1031 exchange. Let’s take a cursory look at how you determine both equity and gain.

In order to determine gain, we 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.


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


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


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

Lastly, here is a very simple rule that works in exchanges: If you want a totally tax free transaction, do these two things:

1. Buy a replacement property that is equal to or greater in value than the net selling price of your relinquished, or exchange, property.

2. Move all your equity from your old property into the new one.

If you do these two steps, you will have a tax free transaction.

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 are speculative in nature and involve 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.