A Sale vs 1031 Exchange

The benefits of IRC Section 1031 exchanges can be tremendous! Conversely, the damage of not doing an exchange can be simply devastating. Investors are often able to defer tens or even hundreds of thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid §1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long-term, interest-free loan from the IRS. Additionally, upon the death of the property owner, heirs may inherit the property at a stepped up cost basis – eliminating the tax burden completely. Note: While we can provide exchangors with an understanding of general tax ramifications of an exchange, 1031 Exchange Place does not provide tax advice. We encourage exchangors to always seek the assistance of their tax advisor to best understand their specific tax liabilities. 

• Someone purchases a rental property for $200,000.
• They sell the rental property for $400,000.
• Upon the sale, there is $200,000 of debt and the property has been fully depreciated.
• The capital gain is approximately $350,000 (assuming 75% of the property is depreciable). If the investor does not do an exchange, federal capital gain taxes could look something like this:

Let’s take a look at a few scenarios to show the power of a 1031 exchange.

• Purchasing Power: The first comparison analyzes the value of the new property that could be acquired in a sale versus an exchange. It illustrates that the real power of a tax deferred exchange is not just the tax savings—it is the increase in purchasing power generated by this tax savings!
• Rental into DST: Look at the difference in cash flow when utilizing an exchange to go from an actively managed property to to a passive cash flowing investment like a DST.
• Raw Land into NNN: Most raw land sellers have a low cost basis and are seeking a passive income stream. Keeping the proceeds in real estate by utilizing a 1031 exchange can make a huge difference in leveraging the value of their property.

1. Preservation of Equity
2. Maximize return on investment
3. Increased cash flow from larger properties