1031 Tax Exchange

 



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.

Why Exchange?

Taxes
     Federal and State combined can be up to 40%.

Leverage
    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.

Cash Flow
    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.

Appreciation
    Exchange commercial property for single-family rentals that appreciate faster.

Change Location
    Exchange property from one geographic location to another.

Diversify
    Exchange one large property into multiple properties.


What is a 1031 Exchange?


 

Sale vs. Exchange

bullet Property was purchased 2 years ago for $200,000  
bullet Sales price is $300,000  
bullet Mortgage on property is $150,000  
Capital Gain: $300,000-$200,000=$100,000
Capital Gains Tax: $100,000x15%=$15,000
  Sale Exchange
Sale Proceeds: $150,000 $150,000
Tax Payable: $15,000 None
Cash to Invest: $135,000 $150,000
Potential Combined Purchase Price with 15% Down $650,000 $750,000
Property Values ten years later with appreciation rate of 5%. $1,070,556 $1,235,257
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.