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Benefits of Tax Deferred Exchanges (IRC Section 1031)

February 15, 2021 by chorton Leave a Comment

Exchanging Real Property - IRC Section 1031

Building estates with PRETAX dollars.

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)

Why exchange real property?

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???”

Looking for land to invest in Contact one of our Realtors at Preferred Properties of Texas

Search Texas Farm & Ranch Land for your next 1031 investment

Filed Under: Commercial Properties for Sale, Investing, Land for Sale Tagged With: investing, land for sale, land for sale in texas, Preferred Properties of Texas, stephenville tx, texas ranch land for sale

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Preferred Properties of Texas

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