The Benefits of IRC Section 1031 Tax-Deferred Exchanges

Tax deferred exchanging is an investment strategy that should be considered by anyone who owns investment real estate. Anyone involved with advising or counseling real estate investors, including real estate agents, lawyers, accountants, financial planners, tax advisors, escrow and closing agents, and lenders, should know about tax deferred exchanging.

People often fail to consider tax deferred exchanging as an investment strategy because they are misinformed about the requirements of exchanging. However, once their misconceptions have been cleared up, property owners usually find that Section 1031 is worth considering.

Tax Benefits of Exchanges in Detail

The benefits of a tax deferred exchange are substantial. The tax money you save is available to reinvest in the next property. You can purchase more property for your continuing wealth building program. Compare the results of the following sale and exchange.

The owner sells a property for $800,000 that has a basis of $400,000 and a loan balance of $300,000. The property has been held for several years, so the federal tax rate is 15% on appreciation, and the state tax is 8%. The capital gain is $400,000, and the tax is approximately $92,000.

In a sale the owner would have $408,000 to reinvest, and with an exchange he would have $500,000. If he pays 25% down on the next property, he could buy a $1,632,000 with a sale, but a $2,000,000 property if he used an exchange, a difference of $368,000.

Non Tax Benefits of 1031 Exchanges

Eva PradaLew GeerJamie LattimoreJohn Fox