How to Defer Capital Gains Tax

If you own investment real estate, when the time comes to cash in on your hard earned equity, you may be surprised to find that the capital gains tax may dramatically cut into your net profit.  Currently the Federal Capital Gains tax rate sits at 15%.  If you live in the great state of California, go ahead and tack on another 9.3% for a combined rate of approximately 25%.  And don’t forget about the depreciation recapture tax on top of your capital gains tax.  This one’s a real sleeper.  Federal Depreciation Recapture Tax is at 25% and in the state of California, you can go ahead and tack on another 10%; combined Depreciation Recapture Tax of 35%.  So what exactly does all this mean?  Let’s look at an example:

Let’s say you bought your California Condo in 1987 for $150,000.  In 2007, your property is now worth $650,000.  You now have accumulated about $500,000 in equity.  Awesome! The time has come to sell the property and cash in and the golden egg.  The tax consequences might look something like this: