Through a properly structured 1031 Exchange an investor sells a property, reinvests the proceeds in a new property and defers all capital gain taxes. IRC §1031 (a)(1) states:

"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 either for productive use in a trade or business or for investment."

To understand the powerful protection an exchange offers, consider the following:

An investor has a $500,000 capital gain and incurs a tax liability of approximately $125,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold.

If the investor obtains a cash on cash return of 8% with either an exchange or a purchase, reinvesting $500,000 yields $10,000 more each year than investing the after tax $375,000.

The chart below shows the differences in investment return. Foreground is return on $375K invested at 8% and background is return on $500K which would be available with an exchange. Difference at only 7 years is nearly $220K.

As the above example and chart demonstrates, exchanges protect investors from capital gain taxes and consequently facilitate significant portfolio growth through increased returns on investment by having the dollars not paid to Uncle Sam work for the investor. Calculate your tax liability.

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SALES CONTRACT

Exchange Contract Cooperation Clause