How a 1031 Exchange Can Build Equity
The example below shows you a hypothetical analysis of the cumulative effect of how an investor’s equity could potentially grow over time if they performed 1031 Exchanges every 5 years into new properties, and if they didn’t utilize 1031 Exchange at all. In the right column of this example, the investor pays capital gains taxes on each property sale and then reinvests in new properties. In the middle column, they utilize 1031 Exchanges for every property sale and subsequent purchase. If the investor is smart and takes advantage of the tax code, they will perform 1031 Exchanges with each property sale and potentially grow their equity to just over $2.9M over 20 years.
If, however, they decide they want to pay capital gains taxes with each property sale, their equity only grows to $1.7M. The difference, $1.2M, is the positive effect of sequential 1031 Exchange. All the details for this analysis are shown below. This
is merely a hypothetical example, and may not be indicative of individual investors results, which may differ.
Hypothetical Equity Build Over 20 Years With and Without 1031 Exchanges
Assumptions- All Hypothetical:
Start with equity from investor’s rental house sale
50% loan-to-value on each purchase
Appreciation Rate 3%
Costs of Sale 5%
Tax Rate 30%
Reinvest all proceeds from property sales
Buy twice as much property as Proceeds After Each Sale