Let’s talk 1031 exchanges. Most of us have not idea or never heard of a
1031 exchange in real estate investing.
But investors have been using this law to propel their real estate
business into space. Institutional
investors have been using this for years.
That’s why you see a hotel that was under the Hilton brand for years all
of the sudden change to a Marriot. They
did an exchange which benefited both Hilton and Marriot.
Why is 1031 such a powerful tool in your real estate tool box? Let’s look at an example.
1031 Example
|
Investor
|
Gain |
Tax Rate |
Tax Paid |
After |
New |
|
A -1031 |
$100,000 |
20% |
$0 |
$100,000 |
$500,000 |
|
B- Cashout |
$100,000 |
20% |
$20,000 |
$80,000 |
$400,000 |
1031 Example – Year 5
|
Investor
|
Gain |
Tax Rate |
Tax Paid on Transaction |
After Tax Investment |
New Property 20% Down Pmt |
Cumulative Taxes Paid |
|
A |
$638,140 |
20% |
$0 |
$138,140 |
$690,700 |
$0 |
|
B |
$510,512 |
20% |
$22,102.40 |
$88,410 |
$422,0248 |
$42,102.40 |
1031 Example – Year 10
|
Investor
|
Gain |
Tax Rate |
Tax Paid on Transaction |
After Tax Investment |
New Property 20% Down Pmt |
Cumulative Taxes Paid |
|
A |
$881,532 |
20% |
$0 |
$190,832 |
$954,160 |
$0 |
|
B |
$564,180 |
20% |
$24,426.40 |
$97,706 |
$488,528 |
$66,528.80 |
1031 Example – Year 20
|
Investor
|
Gain |
Tax Rate |
Tax Paid on Transaction |
After Tax Investment |
New Property 20% Down Pmt |
Cumulative Taxes Paid |
|
A |
$1,682,217 |
20% |
$0 |
$738,057 |
$3,640,285 |
$0 |
|
B |
$689,036 |
20% |
$40,101.60 |
$160,406 |
$802,032 |
$106,630.40 |
As you can see the gains in investment
value are tremendous. There are other
advantages as well.
There are 6 basic requirements for a
1031 exchange.
1.
The property must be held for investment. No flips.
2.
The investor has 45 days to identify the new property.
3.
The investor has 180 days to close on the new property.
4.
A qualified intermediary must be used in the transaction. The investor must not touch the money.
5.
Title Requirement: However the
taxpayer holds title to the old property is how the taxpayer must take title to
the new property.
6.
Reinvestment requirements/Equal or Up Rule: The money invested in the new property must
be equal to or more than the amount of the gain minus transaction costs.
Contact me for more information.