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1031 Exchange Example: Todd & Amber

Published on: June 13, 2023

Lower Taxable Income and Boost Depreciation through 1031 Exchange into DST

Owning an investment property comes with a distinct advantage: depreciation deductions. But what happens when your property is fully depreciated, and you can’t use it to offset your taxable income anymore? That’s where the expertise of 1031 Exchange Place comes into play. Through a real-world example, let’s delve into how we assisted Howard and Lee Anne in both reducing their taxable income and significantly increasing their depreciation via a 1031 Exchange into a Delaware Statutory Trust (DST) property.

The Case of Todd & Amber: Real Estate Investors in Seattle

In 1993, Todd and Amber invested in a 10-unit apartment building in Seattle for $850,000. Fast forward to 2020, they decided to retire. The property’s worth had ballooned to $3,200,000, bringing in a net income of $110,000 per year. The couple listed their property for sale and sought our expertise to execute a 1031 Exchange. Their primary objective was clear: establish a new depreciation shelter to lower their annual taxable income, as their property would be fully depreciated by June 30, 2020.

The Objectives for the 1031 Exchange

  • Lower Annual Taxable Income: As their existing property was reaching the end of its depreciation cycle, the main goal was to find a new investment vehicle for continued tax benefits.

Details of the Relinquished Property

  • Purchase Price: Acquired for $850,000 in 1993.
  • Depreciation: Benefit of $27,818 annual depreciation for the last 27.5 years.
  • Valuation and Earnings: Valued at $3,200,000 with an annual net income of $110,000 in 2020.

The Math Behind the 1031 Exchange Tax Savings

To maximize your gains, it’s crucial to understand the different layers of taxation involved when selling an investment property. Todd and Amber could avoid an astonishing $733,924 in capital gains tax through a well-executed 1031 Exchange.

Breakdown of Tax Savings

  • Net Proceeds: $3,008,000
  • Original Tax Basis: $850,000
  • Estimated Taxable Gains: $2,158,000
  • Capital Gains Tax Avoided: $513,604
  • Depreciation Recapture Tax Saved: $220,320
  • Total Taxes Deferred: $733,924

1031 Exchange Strategy: Increasing Depreciation through DST

Finding a high-value investment property to increase your depreciable basis can be challenging, especially for retirees like Todd and Amber who may not qualify for property loans. However, DST offers an excellent solution. The debt in a DST is secured at the trust level, making it a non-recourse obligation, which doesn’t affect the owner’s balance sheet but still provides depreciation benefits.

Replacement Property Portfolio

With our guidance, Todd and Amber diversified their portfolio into DST properties, designed to not only provide a stable monthly income but also a greater depreciation shelter.

  • Total Exchange Proceeds: $3,008,000
  • Portfolio Allocation: Diversified among 31 properties in 10 different states, with varying asset classes and interest rates.
  • New Basis for Depreciation: $3,764,444

The Outcome of a Well-Planned 1031 Exchange

By exchanging into DST real estate, Todd and Amber successfully deferred their taxes, ceased active property management, and increased their annual income by a staggering 64%. Additionally, they created a new depreciation shelter, which would continue to reduce their taxable income for years to come.

Secure Your Financial Future Today

Don’t let the benefits of depreciation escape you. If you, like Todd and Amber, are seeking to lower your taxable income and enhance your investment portfolio, it’s time to act. Contact 1031 Exchange Place to unlock unparalleled financial benefits and secure a prosperous future.

Authored By:

1031 Exchange Advisor

Nicholas has been a dynamic figure in the 1031 exchange industry since 2007. With over two decades of experience in marketing and web development, Nicholas has demonstrated his entrepreneurial spirit by owning an INC 500 company and maintaining a multi-year presence in the INC 5000 list. He is renowned for his dedication and passion for his work. Outside of his professional endeavors, Nicholas is a devoted father to two teenage boys. Together, they share a love for mountain biking and exploring the outdoors on their ATVs every weekend. Nicholas’s commitment to excellence is evident in both his career and personal life.