Benefits of a 1031 Exchange
A 1031 Exchange allows your clients to sell his or her investment property and defer the capital gains tax into a new investment property of equal or greater value.
The true power of exchanging is found in being able to meet investment objectives without losing equity to taxes. This allows clients to leverage their purchases to build greater wealth many times the amount of their initial investment.
Maybe the best ways to illustrate this is to give a real life example. Investor Jack Smith owns a building that he purchased 10 years ago for $500,000. His basis, the amount he paid for the building, was $100,000. This is what his transaction looks like with no 1031 exchange:
| Sales Price of Property |
$500,000 |
| Cost Basis |
($100,000) |
| Capital Gains |
$400,000 |
| Taxes Due |
|
| Federal 15% |
$60,000 |
| State |
$20,000 |
| Equals |
$80,000 |
| Proceeds |
$420,000 |
Here’s the same sale using a 1031 exchange. This is a highly simplified example, it doesn’t even consider the considerable savings of depreciation recapture and avoiding the Alternative Minimum Tax (Click here to read more about these).
| Sales Price of Property |
$500,000 |
| Cost Basis |
($100,000) |
| Capital Gains |
$400,000 |
| Taxes Due |
|
| Federal 15% |
0 |
| State |
0 |
| Equals |
0 |
| Proceeds |
$500,000 |
| NO 1031 |
|
| Assuming a return of |
6% |
| Able to re-invest |
$420,000 |
| Cash Flow (6%x$420,000) |
$25,200 |
| With 1031 |
|
| Assuming Return of |
6% |
| Able to re-invest |
$500,000 |
| Cash Flow (6%x$500,000) |
$30,000 |
$30,000 - $25,200 = $4,800 or 19%
By utilizing a 1031 exchange, under this example, you could increase your buying power by 24% from the sale of your existing property and receive and additional $4,800 annually.
Anyone looking for an interest free loan from the government to buy real estate?
Download the 1031 Fact Sheet PDF
|
