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1031 Tax Deferral Strategies for Real Property   
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Home   |   What is a 1031 Exchange?   |   Sample Savings  

Sample Savings

Example Scenario 1:
Tim decides to sell a duplex that he has owned as an investment property for 10 years originally purchased for the amount of $70,000, and is now worth $750,000. His real estate broker has recommended that he engage Liberty 1031 to act as his Qualified Intermediary in a tax deferred exchange, thereby deferring payment of capital gains taxes. The real estate broker finds Tim an office building valued at $3,000,000 for his replacement property. Tim is successful in the exchange process and as a result does not have to pay capital gains taxes in the amount of $102,000. ($750,000 less original purchase price of $70,000 equals $680,000 profit. Capital gains tax is 15% times $680,000 equals $102,000.) He is able to purchase the office building leveraging the net proceeds from his duplex. Tim was able to purchase a property worth $408,000 more using the 1031 exchange.

  Sale Exchange
NET EQUITY 680,000 750,000
CAPITAL GAINS TAX 102,000 0
EQUITY TO REINVEST 648,000 750,000
PROPOSED ACQUISITION* $2,592,000 $3,000,000
*(Presuming 25% Downpayment)    


Example Scenario 2:
Isadora Investor owns a 10 unit apartment building, which she bought 3 years ago for $150,000. She discussed her situation with her Financial Advisor, who suggested she implement a 1031 Tax Deferred Exchange for the acquisition of a different investment property. Isadora has found a Buyer to purchase her apartment building for $900,000. Instead of selling the building directly, Isadora consummates a 1031 tax deferred exchange. As a result, she defers capital gains tax of $112,500 on her $750,000 profit ($900,000 less original price of $150,000 equals profit of $750,000 times 15% current federal capital gains rate equals $112,500 capital gains tax). Isadora uses Liberty 1031 as her Qualified Intermediary and closes on 60 acres of unimproved land at the purchase price of $3,600,000. No capital gains tax is then due as Isadora has completed a valid tax deferred exchange exchanging one investment property for another. Isadora was able to purchase a property worth $450,000 more using the 1031 exchange.
 
Sale
Exchange
NET EQUITY 750,000 900,000
CAPITAL GAINS TAX 112,500 0
EQUITY TO REINVEST 787,500 900,000
PROPOSED ACQUISITION* $3,150,000 $3,600,000
*(Presuming 25% Downpayment)    


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