1031 is a section of the Internal Revenue Code of 1986. A 1031 Tax Deferred Exchange offers investors a great way to build wealth and save taxes.
Think of this like Monopoly. When you own four houses the next step is to trade them in for a hotel. 1031 Exchanges allow this to happen without paying capital gains taxes on the sale of your four houses. This allows your money to grow tax deferred much like a retirement account.
For an exchange to be 100% tax deferred, the exchanger must acquire replacement property that is of equal or greater value and spend all of the net proceeds from the relinquished property.
Federal and State combined can be up to 40%.
By deferring taxes you will increase your leverage.
Time Value of Money
A dollar today is worth more than a dollar tomorrow. Instead of paying $10,000 in taxes today, pay it in the future after using the $10,000 to accumulate more wealth.
Exchange land for income & rental property. Trade from a high appreciation property, such as a house for a high cash flow property, such as a multi-unit apartment complex. This can be used to create cash flow for retirement.
Exchange commercial property for single-family rentals that appreciate faster.
Exchange property from one geographic location to another.
Exchange one large property into multiple properties.
What is a 1031 Exchange?
Sale vs. Exchange
Property was purchased 2 years ago for $200,000
Sales price is $300,000
Mortgage on property is $150,000
Capital Gain: $300,000-$200,000=$100,000
Capital Gains Tax: $100,000x15%=$15,000
Cash to Invest:
Potential Combined Purchase Price with 15% Down
Property Values ten years later with appreciation rate of 5%.
In the above example you can see that by investing the $15,000 saved through an exchange you were able to leverage your money and create $164,000 in additional net worth.