The Compounding Benefits of a 1031 Exchange

While financial benefits of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange are experienced within the 180-day exchange period, there are additional, compounding benefits that are not readily visible at the completion of your exchange.

Let’s take a look at the long-term benefits of utilizing a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange for your qualifying real estate transaction.

Suzy Investor owns a retail center she has been renting out over the past 20 years. She has taken annual depreciation deductions of $10,256 since 1990, reducing her tax basis to $244,880. She decides to sell the retail center at market value of $1,250,000, and rid herself of management responsibility by reinvesting into a passive investment opportunity, such as a DST.

Without leveraging a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , Suzy will incur the following tax liability, leaving her only $942,400 to reinvest.
 

federal capital gains tax (20%): $153,000

depreciation recapture tax (25%): $51,280

state capital gains (5% varies by state): $38,250

net investment income tax (3.8%): $29,070

Total Tax Liability: $271,600

Reinvestment Total Without a 1031 exchange: $942,400 ($1,250,000 - $271,600)

However, should Suzy engage a Qualified Intermediary prior to the sale of her retail center and structure her transaction as a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , she will defer all levels of tax above and have the total $1.25 Million to reinvest.

The immediate benefit is obvious; Suzy has an additional $271,600 to reinvest. The less obvious benefit is how that additional amount compounds over the proceeding years. With Suzy utilizing a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange and reinvesting the full $1.25 million, at a 7% compounded rate of return over the next 10 years she will have earned nearly double the investment for a total of $2.45 Million.

Without a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , the reinvestment amount of just $942,400 after 10 years at the same compounding rate of return, only earns $1.85 Million, roughly only $500,000 more than her original reinvestment amount with the use of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange . That equates to $600,000 less over 10 years should a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange not be utilized.

Utilizing a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange not only provides investors with immediate benefits, it continues to produce returns on investment in the future.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified  A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.