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Sample Savings When You Use a 1031 Exchange

1031 Example Savings 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 $136,000. ($750,000 less original purchase price of $70,000 equals $680,000 profit. Capital gains tax is 20% times $680,000 equals $136,000.) He is able to purchase the office building leveraging the net proceeds from his duplex. Tim was able to purchase a property worth $544,000 more using the 1031 exchange.**

Sale Exchange
NET EQUITY 680,000 750,000
CAPITAL GAINS TAX 136,000 0
EQUITY TO REINVEST 614,000 750,000
PROPOSED ACQUISITION* $2,456,000 $3,000,000
*Presuming 25% Downpayment
** The above example does NOT reflect the additional depreciation recapture taxes that would have to be paid by the taxpayer. These additional taxes would result in receiving less funding to invest if there were a sale, rather than a Section 1031 exchange.

1031 Example Savings Scenario 2:

Isadora Investor owns a 10 unit apartment building, which she bought 4.5 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 $700,000 times 20% current federal capital gains rate equals $140,000 capital gains tax). Isadora uses Liberty 1031 as her Qualified Intermediary and closes on 60 acres of unimproved land at the purchase price of $3,400,000. 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 $560,000 more using the 1031 exchange.**

Sale
Exchange
NET EQUITY 700,000 850,000
CAPITAL GAINS TAX 140,000 0
EQUITY TO REINVEST 710,000 850,000
PROPOSED ACQUISITION* $2,840,000 $3,400,000
*Presuming 25% Downpayment
** The above example does NOT reflect the additional depreciation recapture taxes that would have to be paid by the taxpayer. These additional taxes would result in receiving less funding to invest if there were a sale, rather than a Section 1031 exchange.

About Stephen A. Wayner, Esq., CES

Stephen Wayner is an attorney, Certified Exchange Specialist (CES), and Managing Director of Liberty 1031. Mr. Wayner is recognized as a leading authority on the subject of 1031 exchange transactions. He is a current board member of the Federation of Exchange Accommodators (FEA) and is the author of numerous books and articles on 1031 Exchanges and real estate investing. Mr. Wayner has been cited as an expert on 1031 Exchanges in publications including USA Today, NewYork Times, Business Week, and The Wall Street Journal among many others.

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Benefits of a 1031 Exchange

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What to Expect In The 1031 Process

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