Every Dollar Saved in Taxes Will Allow an Investor to Purchase 4 to 5 times as Much Real Estate
Tax deferment increases leverage. Consider that 10% appreciation is converted to a 50% profit with a 20% down payment. Let me illustrate:
An investor sells a fully depreciated property and the capital gain is $200,000. This amount is subject to taxation. Assuming a 35% tax bracket, the Tax would be
$200,000 x 35% = $70,000
If the investor sold the property outright rather than exchanging it, they'd have $130,000 to re-invest. If the investor exchanged the property pays no capital gains and has $200,000 to re-invest.
| |
SALE |
EXCHANGE |
| Proceeds |
$200,000 |
$200,000 |
| Tax Paid |
($70,000) |
None |
| Re-invest |
$130,000 |
$200,000 |
Both investors purchase a new property using 20% down payment. The sale investor can purchase a building worth $650,000 while the exchange investor can purchase a building worth $1,000,000. That amounts to a $350,000 loan from Uncle Sam to invest in real estate! This is one transaction. If 1031 exchanges are utilized again on the new property, the leverage will again be increased.
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