A 101 on 1031 Exchange Benefits

A 101 on 1031 Exchange Benefits

October 2, 2015

Did you know that it is possible to save up to 40% in taxes upon selling your real estate asset? Educated real estate investors across the US are utilizing the 1031 exchange as a part of their investment strategy. This enables the selling of a property and deferring the capital gains taxes from the profit by reinvesting in a like-kind asset. The IRS recognizes that selling one property and replacing it with another investment property will allow for the deferral of taxes indefinitely – as long as the capital is reinvested in real estate that is not considered as your place of residence.

The usage of the 1031 exchange clause will not only save you on those federal capital gains liabilities but also on the following: depreciation recapture tax, the Affordable Care Act Surtax, and state capital gains tax. These taxes can accumulate to well over 40%, and the deferral of such taxes is a tremendous investment bonus.

The bottom line is that a 1031 exchange enables tax deferral, a greater yearly cash flow, and a higher capacity for wealth creation.

Deferral of Taxes – An Example Case

Sean and Lisa invested in a small apartment block in Los Angeles 10 years ago for $1,280,000. They invested $480,000 of their own finances and took a mortgage of $800,000. A couple of years down the line, the property’s adjusted basis may look like this:

PURCHASE PRICE

ADJUSTED TAX BASIS

The investors, Sean and Lisa, now decide that it is time to sell the property. The estimated current value is $2,500,000. The closing fees associated with the deal total $40,000. The realized gains will look as follows:

REALIZED GAINS

If part of the mortgage has been paid off leaving $560,000 of the mortgage, the net cash received will looks as follows:

NET CASH RECEIVED

So, how does the 1031 exchange come into play? Let’s see how much Sean and Lisa would owe on taxes following the sale with realized gains of $1,440,000, which is in the high tax bracket in the State of California.

TAX LIABILITY NOT USING THE 1031 EXCHANGE

With a 1031 exchange, 37.3% taxes can be deferred, saving Sean and Lisa a whopping $535,340.

How Does the 1031 Exchange Support a Higher Cash Flow and Wealth Creation?

Sean and Lisa could either put their money back into real estate as part of an immediate 1031 exchange with a 50% mortgage or opt for stocks and bonds. If each investment produces a 6% annual cash yield, what will be the outcome?

An annual gain of over 40% is due to the 1031 exchange. Sean and Lisa are on their way to real wealth creation by investing back into real estate.

The graph below illustrates how using 1031 exchanges can create wealth.  It compares the cumulative cash flow and equity build up Sean and Lisa would receive by utilizing 1031 exchanges with the cumulative cash flow and equity build up they would receive if they reinvest the proceeds from the sale of their property in stocks and bonds instead*.

iintoo works to help investors interested in 1031 exchanges

While the benefits of 1031 exchanges are clear, the process of doing a 1031 exchange is complex and involves several hurdles.  These include identifying and purchasing the right replacement property (or properties) within the time frame allotted by the IRS.  Fortunately, you don’t have to go it alone.  iintoo, an online real estate management company, helps investors who are interested in 1031 exchanges overcome some of the major hurdles involved in the process.

iintoo offers ownership shares in a wide range of properties that have passed its rigorous due diligence and approval process to investors who seek above-average returns, a steady passive income stream, and no landlord duties. To maximize potential returns and mitigate risks for investors, iintoo negotiates favorable deal terms with, and receives personal guarantees from, reputable real estate companies.  iintoo also offers complete project oversight throughout the investment life cycle, including progress reports and the handling of quarterly returns.  On iintoo’s secure digital platform, 1031 Exchange investors can choose your replacement property or properties, invest, receive regular updates on the status of your investment and connect with like-minded investors as well as with iintoo’s team of real estate experts.  Register today to find out how iintoo can help you reap the rewards of a 1031 exchange.

 

* Basic assumptions: $500,000 beginning equity; 6.0% initial cash-on-cash return. Real Estate: 3.5% capital appreciation and NOI growth rate; 50% LTV mortgage, 5.0% interest rate, 30-year amortization; 80% of basis is depreciable, 27.5-year straight line depreciation, 5 years between trades; 1.0% of purchase price transaction costs per trade. Tax rates: Federal Capital Gains 20% (as of Realized Gains minus Depreciation taken), Tax on Depreciation Recapture 25%, Affordable Care Act Surtax 3.8% (as of Realized Gains) and California State Capital Gains Tax 12.3% (as of Realized Gains). Stocks & Bonds: 3.5% annual growth in cash flow. No reinvestment of cash flow in either option.
** Neither iintoo, iintoo GP LLC, nor Dalmore Group LLC give tax or legal advice, therefore you should review any planned financial transactions that may have tax or legal implications with your personal tax or legal representatives or advisors.

Join iintoo's Community

We’ve made it easy to connect with fellow investors so you can enjoy a wealth of real estate investment experience. Join our family today to share, learn, and invest with the best minds in the industry.

Start Now
*When we refer to “Equity Protection” we are referring to an arrangement where iintoo epiic GP LLC, the general partner of each covered issuer (“Covered Issuer”), promises that, even in the event the underlying project is not profitable or records a loss, the investor in the Covered Issuer shall receive a specified amount equal to the original principal investment he/she/it provided (less other amounts already received by such individual investor during the course of the investment) subject, however, to significant limitations including but not limited to repayments for losses in the Covered Issuer are only made up to a maximum amount of funds available from the retention account and the policy (where such policy limit may be less than the total amount invested), repayments are on a first come, first serve basis, and losses are aggregated across Covered Issuers subject to the same retention account and policy. iintoo epiic GP LLC, and not investors, is a party to the policy with Everest Insurance®. As a result, investors have no direct legal rights under the policy. In addition, beyond use of the Equity Protection proceeds from the retention account and the policy, neither iintoo epiic GP LLC nor the Covered Issuer has any obligations to indemnify investors for losses. For more information, please see “Business of the Company—Equity Protection” and “Risk Factors—Risks related to the Equity Protection” in any of our issuers’ private placement memoranda.

The above may contain forward-looking statements. Actual results and trends in the future may differ materially from those suggested or implied by any forward-looking statements in the above depending on a variety of factors. All written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the previous statements. Except for any obligations to disclose information as required by applicable laws, we undertake no obligation to update any information contained above or to publicly release the results of any revisions to any statements that may be made to reflect events or circumstances that occur, or that we become aware of, after the date of the publishing of the above.

Private placements of securities accessible through the iintoo™ social network real-estate investment platform (the “Platform”) are intended for accredited investors. Such private placements of securities have not been registered under applicable securities laws, are restricted and not publicly traded, may be subject to holding period requirements, and are intended for investors who do not need a liquid investment. These investments are not bank deposits (and thus are not insured by the FDIC or by any other federal governmental agency), are not guaranteed by and iintoo Investments Ltd. (“iintoo”) or any third party working on our behalf, and may lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the Platform. Investors must be able to afford the loss of their entire investment.

Equity securities are offered through Dalmore Group LLC. ("Dalmore"), a registered broker-dealer and member of FINRA/SIPC. Any real estate investment accessible though the Platform involves substantial risks. Any financial projections or projected returns are projections only, and iintoo makes no representations or warranties as to the accuracy of such information and accepts no liability therefor whatsoever.

Investors should always conduct their own due diligence, not rely on the financial assumptions or estimates displayed herein, and should always consult with a reputable financial advisor, attorney, accountant, and any other professional that can help them to understand and assess the risks associated with any investment opportunity. Any investment involves substantial risks. Major risks, including related to the Equity Protection and/or the potential loss of some or all principal, are disclosed in the private placement memorandum for each applicable investment.

Neither iintoo nor its affiliates nor Dalmore Group LLC makes investment recommendations nor do they provide investment advisory services, and no communication, including herein or through the Platform or in any other medium should be construed as such.

iintoo, its employees and affiliates are not insurers or insurance brokers, and do not offer insurance services, advice or information to new or existing investors. Insurance is provided to Iintoo epiic GP LLC (and placed through Cobbs Allen, a licensed insurance intermediary) by Everest Insurance®, subject to all of the terms and conditions of the applicable insurance policy, to support iintoo’s equity protection undertaking as further specified and described in the confidential offering materials of iintoo. Everest Insurance® is not a sponsor or promoter of any offering described herein.

The Terms of Use regulating your use of the Platform can be found at: https://www.iintoo.com/terms-of-use/ The Platform's Privacy Policy can be found at: https://www.iintoo.com/privacy-policy/ By accessing this site and any pages thereof, you agree to be bound by our Terms of Use and Privacy Policy.

About Everest® Everest Re Group, Ltd. is a Bermuda holding company that operates through the following subsidiaries: Everest Reinsurance Company provides reinsurance to property and casualty insurers in both the U.S. and international markets. Everest Reinsurance (Bermuda), Ltd., including through its branch in the United Kingdom, provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers. Everest Reinsurance Company (Ireland), provides reinsurance to non-life insurers in Europe. Everest Insurance® refers to the primary insurance operations of Everest Re Group, Ltd., and its affiliated companies which offer property, casualty and specialty lines insurance on both an admitted and non-admitted basis in the U.S. and internationally. The Company also operates within the Lloyd's insurance market through Syndicate 2786. In addition, through Mt. Logan Re, Ltd., the Company manages segregated accounts, capitalized by the Company and third party investors that provide reinsurance for property catastrophe risks. Additional information on Everest Re Group companies can be found at the Group’s web site at www.everestre.com

© 2019 iintoo Investments Ltd. All Rights Reserved.