Investors can finally breathe a sigh of relief now that the new budget has been approved and there have not been any significant changes to the last remaining tax shelter for investment real estate, Internal Revenue Code Section 1031.

Only 1031 exchanges involving personal property predominantly used outside the United States will be affected.

A 1031 exchange can help investors accomplish many investment goals such as diversification, consolidation, greater income potential, less maintenance, less management intense and relocation or expansion of a business or investment. You can sell one property and acquire three or vice versa. Essentially, you can effect exchange after exchange and perhaps, if planned properly, completely avoid the gain altogether.

For those who are not sure whether to pay the tax or defer, they should use the enclosed easy to use 1031 Exchange Worksheet to get a better idea of how an exchange would work in their particular situation. Following is a brief overview of the NEW Capital Gain tax rates.

The individual capital gains rates and holding periods have significantly changed. Assets held for under one year will continue to be taxed at ordinary income tax rates (39.6%). Assets held for over one year but less than 18 months are taxed at a maximum of 28%. For assets held over 18 months, the new tax rate is 20%, with depreciation recapture at 25%. For those currently in the 15% bracket, the new capital gain rate will be 10%. Beginning in the year 2001, assets purchased after 2000 and held at least five years will be taxed at a maximum 18% (8% for 15% bracket). The lower capital gains are all well and good if you no longer wish to own business use or investment property.

However, if you wish to continue investing in real estate, why not complete a 1031 exchange, defer the gain and REINVEST WITH PRE-TAX DOLLARS!

To determine what you would have to pay if you didn't do an exchange, use the following rules:

  1. Subtract the sale price of the property from the original purchase price (plus capital improvements made) and times it by 0.20 (20%).
  2. Calculate all depreciation taken on the property and times it by 0.25 (25%).
  3. Add both of the these figures and this is the capital gains tax that would be due on the sale of your property.


You purchased a property twenty years ago for $50,000. Over the years, you have taken $30,000 in depreciation. The property is now selling for $250,000. The capital gains taxes due would be calculated as follows:

  1. $250,000 (selling price) - $50,000 (original purchase price) X 0.20 = $40,000
  2. 2. $30,000 (total depreciation taken) X 0.25 = $7,500
  3. 3. $40,000 + $7,500 = $47,500 is the capital gains tax that would be due Before you decide an exchange isn't right with you, look at the above example and ask yourself if you would rather pay $47, 500 in capital gains tax or use that money to reinvest in a new, more profitable investment.

Other Tidbits For Your Information

For individuals, the exemption amount for the unified credit for estates and gifts increased from $600,00 to $625,000 in 1998, and continue to gradually increase to $1 million over the next ten years.

Capital Gains Calculator available in our Resource Center

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