Some investors received an unpleasant surprise over the course of the last few years when their losses turned into gains. So how does a complete loss, like a foreclosure, result in a gain?
Understanding that gain is the outcome of a calculation and has nothing to do with profit or net equity is crucial. Here’s a quick rundown:
What Is Gain?
The adjusted sales price less the basis equals gain.
What Is Basis?
The purchase price plus any capital upgrades minus any depreciation constitutes the basis.
The “buy price” of a property may differ from the actual amount paid for it if it was obtained through a 1031 Exchange, a gift, an inheritance, or another tax-deferred method. Depreciation taken will lower the basis while improvements made to the capitalized property will raise it.
A 1031 Exchange can be set up to defer any gain you could be subject to.
We frequently have Exchangers who decide to complete an Exchange by paying the down payment on a replacement property using the funds that would have been the taxes payable. You may not be able or willing to fully satisfy the Exchange value requirements in the current economic context, but you may be able to partially satisfy them by delaying some of your gains.
Simply said, anything spent beyond the basis constitutes a tax deferral; for example, if the basis is $150k and you spend $200k, you would have postponed taxes on a gain of $50k. Therefore, buy the property that works for you—it’s not an all-or-nothing choice.
Want more information?
Check out our ONLINE webinar replay:
Basis, Gain & the 1031
During the past several years some investors have been hit with a rude surprise; their losses have become gains. So how does a total loss such as a foreclosure trigger a gain? This class was taught by Tina Colson of Equity Advantage for 1 OR credit hour on Wednesday, November 16th at 10:00am PST.
Watch the Replay on our YouTube Channel
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