The primary purpose of performing a 1031 Tax Deferred Exchange is to avoid current tax liability.
By avoiding current tax liability the Exchangor preserves capital and makes this capital available for the re-purchase of replacement property.
Preservation of capital, in turn, allows for:
1) Return of investment on this capital;
2) Larger down payment on replacement property;
3) Lower monthly payments on replacement property;
4) Greater ability to leverage replacement property;
5) Possibility of deferring taxation forever.
Here is an example of how exchanging property increases the power of the Exchangor's Investment dollar.
Property Basis Calculation:
Purchase Price = $100,000.00
Less Depreciation = $ 30,000.00
Adjusted Basis = $ 70,000.00
Tax Calculation:
Current Sales Price = $175,000.00
Less Basis (From Above) = $ 70,000.00
Taxable Gain = $105,000.00
Tax Due = $ 22,500.00
(25% of $30,000.00 plus 20% of $75,000.00)
Cash Available for reinvestment:
Exchange: No Exchange:
Sale Price = $175,000 Sale Price = $175,000
Cost of Sale = $10,000 Cost of Sale = $10,000
Less Mortgages = $50,000 Less Mortgage s = $50,000
Cash from Sale = $115,000 Less Taxes = $22,500
Investment Power = $460,000 Cash from Sale = $92,500
(4 times cash) Investment Power = $370,000
This example shows you how as an exchangor, you maintain control over an additional
$22,500.00, which you would have had to pay the Government with a regular sale.
You now can use this $22,500.00 to increase your net worth.
You can see how Exchanging has many creative advantages over regular Real Estate Practices.
Be creative and have more fun in Real Estate
Benefits of a 1031 Exchange
The Business of Solving Real Estate Problems
Real Estate Exchanging
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