September 7, 2022
Perhaps you are ready to sell your commercial storage property but are worried about what the tax consequences might be after the sale. You are not sure if you will do a 1031 or can even pull it off in order to avoid these consequences.
We thought it might be helpful to give a brief and simple overview of how to calculate your tax that would be due on the sale of your property. Please understand this is a simplified example and we do not cover every nuance. Please consult your professional financial advisor for a more in-depth discussion regarding your personal situation.
To begin, let’s say you purchased your storage property for $1,000,000 (original cost basis does not include land) and held it for 10 years. You depreciated $25,641 (straight-line depreciation schedule 39 years, rounded) each year. So, your accumulated depreciation for the 10 years is $256,410. Thus, your adjusted basis becomes $743,590 ($1,000,000 – $256,410).
You find a buyer willing to pay you $1,250,000. Assuming $1,250,000 is your net proceed after closing costs, we then subtract the adjusted basis of $743,590 which gives us a taxable gain on sale of $506,410. Using 20% capital gain tax rate, the capital gain tax due would be $101,282 resulting in a net sale cash flow of $405,128.
We went ahead and put the formulas below so it might be easier to understand for those visual learners.
Taxes Due On Sale Calc.
Net Sales Proceed
– Adjusted Basis
= Taxable Gain on Sale
X Capital Gain Tax Rate
= Taxes Due on Sale
Adjusted Basis Calc.
Original Basis (Total Initial Cost)
+ Capital Improvement Expenditures
– Accumulated Depreciation
= Adjusted Basis