There is talk in Washington, DC about eliminating the Internal Revenue Code Section that allows for “Tax Deferred Exchanges.”
“Don’t it always seem to go, that you don’t know what you’ve got til its gone…”
Benefits of Tax Deferred Exchanges (IRC Section 1031)
To save taxes, yes, but said more succinctly, to build your estate with pre-tax dollars.
Using proper exchange techniques results effectively in interest free loans from the government. Other reasons to exchange include:
Increasing depreciable basis by acquiring property encumbered with a larger debt.
Acquiring sheltered income by exchanging for unimproved land for improved property.
Acquiring property without cash, when sales may be impossible.
Consolidating assets by exchanging many properties for one larger property.
Receiving nontaxable cash by exchanging and refinancing after and independent of the exchange.
Diversifying holdings without tax consequence.
Example of the Advantage of Building Equity with “PRETAX DOLLARS:”
Sale Price: $150,000
Adjusted Basis: $ 50,000
(Original Cost, plus Capital Improvements, minus Allowable Depreciation)
Recognized Gain: $100,000
Tax Bracket: 30% (for purpose of example)
Capital Gain Tax Paid to the IRS: $ 30,000
Balance to invest in next property: $70,000
Leveraged 4 to 1 results in a purchase of a $280,000 property
10% annual appreciation results in $28,000.
If you structured the sale in accordance with section 1031, and did not have to pay the taxes at that time (Deferred Taxes), you could invest the entire $100,000 leveraged 4 to 1 and purchase a $400,000 property.
At 10% appreciation, your increase in equity is $40,000. Multiply this $12,000 equity buildup over a 20 year investment horizon and the result is substantial.
Don’t let Congress take this tax benefit without saying anything…
“Don’t it always seem to go, that you don’t know what you’ve got til its gone…take Paradise, put up a parking lot???”
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