A 1031 exchange is a way to exchange one investment property for one or more investment properties of equal or greater value without having to pay the capital gains tax.
The advantage to the 1031 exchange is that you can increase your portfolio and value of your properties without ever having to invest more that your original down payment from your first property. One investor may buy a property as a rental property and consider that a great investment as long as it brings money in each month. But let’s look at another example and see how the 1031 exchange can increase your portfolio.
The first example is of a person who bought the rental property and rents it out for 15 years making money from the rental every month. If that investor bought a $250,000 property with $45,000 down minus the mortgage interest deduction and the money earned from the rental income will earn 19% on his money the first year. But each year the percentage earned on the $45,000 will decrease. By the end of the 15 year your percentage earned on your $45,000 will decrease to only about 3%. But if you were to do a tax exchange every year, your $45,000 would continue to earn 19% every year and your taxable income will continue to decrease. If you are an Oregon or SW Washington resident please feel free to contact me and I will gladly meet with you and show you how you could earn 19% every year instead of in just the first year.
Todd Clark – broker
Kastings & Associates