Leverage with 1031 Real Estate Exchanges
"Every dollar saved will allow an investor to purchase 4-5 times as much real estate..."
This is possible through leverage. Leverage is a method of acquiring real estate worth many times the value of the initial investment. Tax deferment increases leverage. To understand the power of leverage, consider that ten percent appreciation is converted to a 50% profit with a 20% down payment. The following example shows the value of leverage by illustrating the benefit of exchanging versus selling.
$200,000 x 40% = $80,000
If the investor sold property with a gain of $200,000, they would pay taxes of $80,000 and have only $120,000 left to reinvest. On the other hand, the investor who exchanges pays no capital gains tax, leaving the entire $200,000 to reinvest.
| Sale | Exchange | |||
|---|---|---|---|---|
| Proceeds | $200,000 | Proceeds | $200,000 | |
| Tax Owed | -$80,000 | Tax Owed | -0- | |
| Cash to Reinvest | $120,000 | Cash to Reinvest | $200,000 | |
If each investor purchases a building with a 20% down payment, using leverage, each could buy a property worth:
Sale Value: $600,000
Exchange Value: $1,000,000
In a single transaction, the investor who exchanged has $400,000 more property than the investor who sold property.
"The true power of exchanging is the ability to meet investment objectives without losing equity to taxation."