How a 1031 Exchange Can Increase Real Estate Profits by Over 35%

Discover how to utilize a 1031 Exchange to save more than 35% on your upcoming property sale or acquisition.

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A 1031 Exchange has the potential to boost real estate profits by allowing investors to roll their entire equity into a new property without incurring any capital gains tax. In this discussion, we will explore into:

• The tax-saving benefits of a 1031 on a relinquished property.

• The ways in which a 1031 enhances the profitability of your real estate portfolio.

• Considering the long-term opportunity gain when assessing the value of a 1031 Exchange.

Tax Savings on the Relinquished Property

When you sell and exchange your qualifying identified property in a 1031 Exchange, you avoid paying any capital gains taxes on the funds. This can often amount to over 35% of your profits from the property sale. Instead of losing that 35% to taxes, the 1031 Exchange allows you to roll that amount into exchange funds for the purchase of another property. For most property owners, the 1031 Exchange instantly translates into tens of thousands of dollars in tax savings alone.

Increased Profits on the Acquired Property

The second way an exchange enhances real estate profits is by increasing the profitability of the acquired property. This is made possible due to the larger funding base enabled by the 1031 Exchange tax savings.

For instance, if you exchange from a 4-unit property where residents pay $1500/month to a 6-unit property where residents also pay $1500/month, the additional revenue, whether used for mortgage principal, operating expenses, or classified as profit, directly contributes to the overall value of your portfolio. This addition can result in an extra $180k over the 5-year period ($1500 x 2 extra payments x 12 months x 5 years = $180k extra).

Future Income from Successive Exchanges

With additional rental income accelerating the reduction of the mortgage principal, the property owner of the acquired property gains the ability to later relinquish this property as part of a new 1031 Exchange. For instance, the owner of a 6-unit property generating $1500/month per unit in rental income can exchange into a 10-unit property charging $1500/month.

If this second exchange takes place 2 years after the initial exchange, the cumulative 5-year value of the exchanges would be ([2 years of the 6-unit property]: $72k + [3 years of 6 additional units]: $324k = $396k). This calculation does not even account for the appreciating value or increased equity of the property acquired in the second exchange. You can perform these calculations yourself using our Exchange Value Calculator below.