The Traditional Sale
The Most Common Exit Strategy…
The traditional sale is where you simply sell the property and pay the capital gains tax on the difference between the sale price and adjusted basis of the property including the depreciation recapture on the portion of the gain from accumulated depreciation.
The adjusted basis of a property is its purchase price + improvements – accumulated depreciation.
For example, you bought a property in 2012 for $200,000 and completed $40,000 worth of improvements. It's now 2019 and you sell the property for $450,000. Your total accumulated depreciation from the last 7 years is $61,091. Your capital gain is as follows:
The total tax obligation is $46,722.75
The obvious downside of a traditional sale is you have to pay the entire tax upfront, and it can potentially put you in a higher tax bracket if the gain is large enough.
But this doesn’t mean a traditional sale doesn’t have its advantages. It’s definitely one of the more conservative options. You get the entire sales proceeds upfront, pay your taxes and keep the rest which is helpful if you need the cash right away for a major life or business purchase.
Rather defer the capital gains tax? Check out these methods: The new Opportunity Zone Fund, the traditional Installment Sale, the Monetized Installment Sale, the Deferred Sales Trust and the Delaware Statutory Trust.