Why You Should Consider a 1031 Exchange?


What is a 1031 Exchange?
A 1031 exchange is a three-way exchange in which an intermediary, usually a title company or escrow agent, is used to facilitate the transaction.

Section 1031 of the tax code provides one of the best strategies for the deferral of capital gains taxes which would ordinarily arise from the sale of real estate. Exchanging defers the recognition of the capital gains tax, leaving the property owner with substantially more proceeds to purchase a replacement property. The tax code states, "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for other productive use in trade or business or for investment purposes."

What are the benefits of a 1031 exchange?
  1. Deferral of capital gains taxes
  2. Income is usually higher than income from original property
  3. Potential for greater appreciation
  4. Improve quality of property
  5. Reduce risk profile
  6. Diversification
  7. Consolidation of Assets
Below we have outlined examples of the increase in after-tax cashflow you might expect utilizing various assumptions that we would be glad to review with you. You should consult your accountant to confirm what the actual returns will be for your specific situation.

Current Property ValueYears HeldExisting After Tax Cash FlowEquity In 10 YearsExchange After Tax Cash FlowExchange 10 Year Equity
$1,000,0005$24,610$1,032,963$34,427$1,674,489
$1,000,00015$27,736$1,343,916$48,394$2,344,544
$5,000,0005$123,050$5,164,813$172,133$8,374,433
$5,000,00015$138,681$6,719,582$241,970$11,722,721
$10,000,0005$246,100$10,329,636$344,267$16,744,887
$10,000,00015$277,362$13,439,164$483,940$23,445,442

Assumptions:
1) Original property purchased at 9 cap rate /has appreciated 3% annually
2) Original purchase with a 60% Loan to Value at 8%, amortized over 25 years
3) New acquisition financed with 75% Loan to Value at 6.5% interest, amortized over 25 years
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Contact us so we can help you with your next 1031 exchange.