Equity and Gain are both important to an exchange, but they are never the same number. Let’s take a cursory look at how you determine both equity and gain?
First equity represents the hard earned value that is yours in any property you own. So, if you take your gross selling price and subtract your closing expenses or closing costs, and then further subtract the amount of any debt, that remaining number which is left over will be your equity.
Now how about capital gain? Well in order to determine gain we need to know what is called your costs basis. And your cost basis is going to be informed by when you bought the property. So when you bought the property you had a purchase price correct? Well that will be the start of your cost basis, which actually changes over time. For instance, if you’ve done any improvements to the property that amount should be added. And likewise, if you’ve deducted any depreciation while you’ve owned the property that will be subtracted. Therefore, lets determine your cost basis and gain this way: Let’s find our final cost basis or adjusted basis. That will be our original purchase price, plus any improvement, and then less any depreciation, that gives us our final adjusted basis. Now let’s once again take that net selling price from our sale, deduct our final adjusted basis, and bingo, that’s our capital gain.
One last thing. Here is a very simple rule that works in exchanges if you want to have a totally tax free transaction. And that is …….. do these two things and your exchange should be tax free. Number 1, buy a replacement property that is equal or greater in value than your net selling price, and 2) move all your equity from the old property into the new one. If you do those two things, plus replace your debt, you’ll be in excellent shape.