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
|Sell Old and Buy New Investment Property Every 5 Years||Perform 1031 Exchanges||DO NOT Perform 1031 Exchanges|
|Year 1 Cash Investment (proceeds from sale of home)||$1,400,000||$1,002,500|
|Year 5 Hypothetical Proceeds After Sale||$1,683,669||$1,144,689|
|Year 10 Hypothetical Proceeds After Sale||$2,024,815||$1,307,046|
|Year 15 Hypothetical Proceeds After Sale||$2,435,085||$1,492,430|
|Year 20 Hypothetical Proceeds After Sale||$2,928,484||$1,704,108|
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
A 1031 exchange can be an effective tool for building wealth. However, investors must work with their professional tax advisor to meet the requirements of IRC Section 1031, as failure to comply with IRC Section 1031 or an unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities, including tax penalties.
This is neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, loss of principal, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Employees of Archer and LightPath Capital, Inc. do not provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision. Archer is a branch office of LightPath Capital, Inc. Securities offered through LightPath Capital, Inc. Member FINRA/SIPC.