Nothing illustrates the power of this tool better than an example, even a highly simplied one like I am using here.  Call 573-302-2320 if you have any questions.

A 1031 Exchange allows your clients to sell his or her investment property and defer the capital gains tax into a new investment property of equal or greater value.

The true power of exchanging is found in being able to meet investment objectives without losing equity to taxes.  This allows clients to leverage their purchases to build greater wealth many times the amount of their initial investment. 

Investor Jack Smith owns a building that he purchased 10 years ago for $500,000.  His basis, the amount he paid for the building, was $100,000.   This is what his transaction looks like with no 1031 exchange: 

Sales Price of Property	$500,000
Cost Basis	($100,000)
Capital Gains	$400,000
Taxes Due
Federal 15%	$60,000
State	$20,000
Equals	$80,000
Proceeds	$420,000

  

Here’s the same sale using a 1031 exchange.  This is a highly simplified example, it doesn’t even consider the considerable savings of depreciation recapture and avoiding the Alternative Minimum Tax (Click here to read more about these).

 

Sales Price of Property	$500,000
Cost Basis	($100,000)
Capital Gains	$400,000
Taxes Due
Federal 15%	0
State	0
Equals	0
Proceeds	$500,000

NO 1031
Assuming a return of	6%
Able to re-invest	$420,000
Cash Flow (6%x$420,000)	$25,200

With 1031
Assuming Return of	6%
Able to re-invest	$500,000
Cash Flow (6%x$500,000)	$30,000

 

$30,000 - $25,200 = $4,800 or 19%  

By utilizing a 1031 exchange, under this example, you could increase your buying power by 24% from the sale of your existing property and receive and additional $4,800 annually. 

 

 

 

 

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.