Capital Gains Versus a 1031 Exchange
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This is part four in my series on 1031 exchanges. Keep in mind that I’m using the current capital gains rate of 15%. Depending what happens on November 6th, these number may change … radically.
See attached for calculations
One of the primary advantages of a 1031 exchange is not just the tax savings, but the purchasing power it can create. Using some leverage, the Exchanger can purchase two to three times more investment real estate for the replacement property.
Investors are shocked to find out that capital gains can be far high than the federal rate when you add state taxes. In California for example, capital gains are taxed at the earned income rate. Plus, depreciation taken over the ownership period is taxed at 25%, resulting in a sizable percentage of the profits to paying taxes. Under the 4th calculation, the net equity times three (assuming a 33% down payment) is the value of property you could purchase after paying all capital gain taxes.
Using a 1031 exchange allows the exchanger to defer all capital gains taxes allowing to use the entire proceeds of the relinquished property to acquire considerable more real estate as the replacement property(s)
