Wednesday, September 07, 2011

How the 1031 Exchange Affects Income Property Investors

Section 1031 of the Internal Revenue Code has been called the single greatest wealth building tool available to real estate investors. If you are unaware how Section 1031 of the IRC can magnify your returns and help you create wealth, review this:

An investor who purchases $100K worth of Microsoft stock in 2000 sells the stock today for $200K. The investor yields a whopping 100% return, correct? Well yes, but don’t forget that when tax time comes around, our Microsoft investor will owe the IRS and State Taxing Authority about $30K. After taxes, the profits from the Microsoft investment plummets from $100K to $70K. Still not a bad return, but after taxes our Microsoft investor now has only a total of $170,000 to reinvest.

Now let’s contrast this with an investor who makes the same returns in the real estate market. A property purchased for $100K, appreciates to $200K. The investor earns the same $100% return. The major difference however, is the investor can elect a 1031 Exchange and defer the capital gains taxes. Doing so leaves the investor with a total of $200K to reinvest.

The effect taxes have over the long term are dramatic. I suggest having performing real estate in your portfolio.

If you want to invest in secure West Los Angeles multifamily or commercial property please consider using my services to aquire/manage/sell as needed.

Sincerely Keith Lambert