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1031-exchange-deferred-taxesIn last week’s article, we explored the anatomy of a 1031 exchange and the government’s reasoning for creating such a powerful tax-saving tool. This week, we’ll look at a hypothetical example such that we may more clearly understand how a 1031 exchange works. We’ll close by addressing some common concerns. Let’s get to it!

Ted’s First Investment Property

Ted understands the advantages or real estate investing and does everything he can to acquire his first investment: a nice little income property located at 101 Main Street. After careful analysis, he purchases it for $400,000 and pays $8,000 in acquisition costs. Over the next year, he operates the property as a rental—this is crucial because simply acquiring property for the sole purpose of resale does not qualify for a 1031 exchange. During this time, Ted replaces the roof and makes some other capital improvements totaling $15,000. He also takes a depreciation tax deduction of $5,333.