Start with the price you paid for your property, add any capital improvements, and subtract any depreciation, . This figure is your adjusted basis. Subtract the adjusted basis and the new costs of sale from the new sales price and the remaining figure is your gain.
Do not confuse capital gain with equity. The two terms cannot be compared with each other. Equity is the amount of money you have left over after you have sold the property and paid off all related liabilities and mortgages.
As an example lets say you bought a property for $200,000 five years ago, it has a mortgage of $130,000 and has a basis of $166,667. If you sold that property today for $400,000, and paid out $30,000 in closing costs and commissions, you have equity of $240,000 (the amount of cash you would get out of the closing). However your capital gain on this property would be the difference between your basis: $166,667 and your adjusted sales price of $370,000 (Price: 400k – Costs: 30k = 370k), in this case $203,333. If this sale is not turned into 1031 Exchange, there will be capital gains tax owed on the entire gain. At the base federal rate of 15%, that’s $30,499.95 due in federal taxes alone. Be careful here if you have refinanced since your original purchase, it is in this area you want to be very cautious not to trap yourself. In a situation like this you are almost obligated to exchange unless you have the additional funds to pay the taxes. For example, a taxpayer buys property for $100,000 with a mortgage of $70,000. Later its value increases to $210,000 and the taxpayer refinances with a new mortgage of $140,000.If the taxpayer sells this property for $210,000 and does not use a 1031 Exchange, the gain of $110,000 will require the payment of $16,500 in federal taxes alone. (Sale price: 210,000 - Basis: 100,000 = Gain: 110,000 x Federal Cap Gains tax: 15% = Taxes due 16,500) The larger the transactions and the more money and leveraging involved the greater tax burden of cashing out. The advice of your tax advisor is priceless in this instance.
to open an exchange in order to avoid capital gain taxes under section 1031 exchange.