The mathematics of a 1031 Exchange vs. a sale: Always consult a professional qualified intermediary

We all know in the real estate investment arena today, that the "best kept secret" is a "1031 Exchange." A 1031 Exchange, a T.D.X., a like-kind exchange, a tax-deferred exchange, 1031 starker exchange, or just a plain real estate exchange all are one in the same. We are referring to "Section 1031" of the Internal Revenue Code, which allows the opportunity to pay no tax when disposing of income-producing property or investment held property. This concept is nothing new, it has been available since the early 1900s when the first exchange laws were enacted. Although, many people have heard of a "1031 Exchange" today, most don't realize that in many cases, when disposing of their property, they can lose as much as a third of their selling price in the form of taxation. The following case study example explains the numbers game associated with a "1031 exchange" and will show the difference between a sale vs. a 1031 Exchange. Example: Lets assume that Mr. & Mrs. Taxpayer have acquired a 4-unit apartment building in 1986 for $100,000. and today, they are disposing of the apartment building for $150,000. This analysis shows the mathematics of a "1031 Exchange." In our example a tax saving's of approximately $42,600 can be achieved by structuring a transaction as a 1031 Exchange vs. a sale. As always, it is important to consult with a professional "qualified intermediary" when thinking of disposing of either an income-producing property or an investment held property. Sale vs. 1031 Exchange AnalysisIf Property is Treated As A SALE: Basis @ Acquisition (1986) $100,000 + Capital Improvements 0 Less: Depreciation Expense 90,000 = Adjusted Basis 10,000 Selling Price (Today) 150,000 Less: Cost Of Sale 0 Less: Adjusted Basis 10,000 = Total Gain/Profit 140,000 - Suspended Losses 0 = Total Gain/Profit After Suspended Losses 140,000 Less: Depreciation Recapture 90,000 X Top Tax Rate 25% * + 9% ** .34 = Tax Liability 30,600 Long Term Capital Gain 50,000 X Top Tax Rate 15%* + 9%** .24 =Tax Liability 12,000 TOTAL TAX LIABILITY 42,600 If Property Is Treated As A SALE: Selling Price 150,000 Less: Cost Of Sale 0 Less: Mortgage Balance Gross Proceeds 150,000 Less: TO: TAX LIABILITY 42,600 - Recapture of I.T.C 0 = NET PROCEEDS AFTER TAXES 107,400 If Property Is Treated As: A "1031 Exchange" Selling Price 150,000 Less: Cost Of Sale 0 Less: Mortgage Balance 0 = Gross Proceeds 150,000 Less: TO: TAX LIABILITY 0 -Recapture of I.T.C. 0 = NET PROCEEDS AFTER TAXES 150,000 TAX SAVING'S through a "1031 Exchange" $42,600 (*Federal, **State)