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1031 Tax Free Exchange
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| There are many
ways to build an estate. One avenue is through investing in real
estate. Careful consideration is given in selecting apartments, land,
warehouses, or other types of investment properties. Likewise, the same
consideration should be give when moving to another investment
property. Many take advantage of another method left to them: The
tax-deferred exchange!
The tax-deferred exchange allows the
investor to defer paying capital gains tax on their investment
properties. Conversely, an investment property that is sold without a
tax-deferred exchange can force the seller to pay up to 38% of their
gain in taxes! If an investor is looking to purchase other investment
properties, then an exchange makes much more sense, because there is
now a larger amount of money available to purchase the replacement
properties. An investor is able to use the money they would have paid
in taxes, and put it to work for them in another investment property.
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The difference Between a Sale and an
Exchange
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Assumptions:
The sale price is $250,000 with a loan on the property of $100,000.
Assume that the property was purchased for $150,000 a couple years ago.
Capital Gain: $250,000-$150,000=$100,000
Capitals Gains Tax: $100,000x28%=$28,000
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Sale |
Exchange |
| Sale Proceeds: |
$150,000 |
$150,000 |
| Tax Payable: |
$28,000 |
none |
| Cash to invest: |
$122,000 |
150,000 |
| Amount of Purchase with
25% Down: |
$488,000 |
$600,000 |
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| With an appreciation rate
of 10%, it would take the seller four years to reach the value of the
exchangor's property. The exchangor clearly has the advantage over the
seller who pays taxes and then reinvests. |
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Why Exchange?
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In short, the
advantage of a 1031 Exchange is that you can defer your capital gain
until the end of your life, as long as you do not sell your investment
property. And you can do multiple 1031 exchanges over the years and
keep deferring your capital gain until you either pass away or finally
sell your investments and do not continue buying other investment
properties.
Taxes:
Federal- 15 to 28%
State- 7 to 9%
Combined- Up to 37%
Leverage:
By having more money to put down, a bigger property or multiple
properties can be acquired.
Sell Later:
By exchanging today, it is possible to sell in the future when there is
a more favorable capital gains rate.
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 when $10,000 is worth
less. |
| What properties qualify? |
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