Want to Reposition Your Investment for Stronger Returns?

Normally when an investor sells a real estate holding for a gain, capital gains tax is due in conjunction with the sale.  A 1031 exchange in real estate, sometimes known as a 1031x or tax-deferred exchange, offers investors the opportunity to defer payment of capital gains taxes on the gain on a sale of an investment property under certain conditions.   Use of a 1031 exchange enables investors to keep a significantly greater amount of their capital invested and generating returns, since payment of tax liability is deferred.

Example 1:  John Investor purchased a single family home in California in 1998 for $300,000 that he rents to tenants as an investment.  He notes that in 2010, he is receiving $2,000 per month in rent and that his investment home has appreciated to $500,000 in value, a gain of $200,000.  John would like to increase the amount of rent that he receives to improve the performance of his investment.


Current Investment of $500K




John decides to sell his home in California and invest in properties in Memphis, TN where the rents are higher relative to the values of the homes.  He observes that in Memphis that he can get at least $1,000 per month in rent for a home valued at $100,000.  So if he were to invest $500,000 in Memphis, he could purchase 5 homes and receive $5,000 in rent each month instead of $2,000.  John thought it was quite attractive to receive 2.5 times the rent that he presently receives each month, so he decides to purchase in Memphis.


$500K Replacement Property Sample Portfolio

Cash Purchase of 5 Meridian Pacific Homes




Normally, in the absence of a 1031 exchange, John would receive a gain of $200,000 upon the sale of his CA house, on which capital gains taxes would be due.  In 2010, the long-term capital gains rate is 15%, and is slated to increase to 20% in 2011.  Using the 15% capital gains rate, John would owe $30,000 in taxes on his $200,000 gain, so his net gain would be $170,000.  He therefore would only have $470,000 to invest in Memphis, and would be unable to buy 5 houses at $100,000 each.  Thus his return on investment would fall accordingly.

In order to defer payment of income taxes on the gain on the sale of his investment property, John decides to take advantage of a 1031 exchange. After learning the guidelines he needed to follow, which were surprising simple, John was able to roll over the full $500,000 in sales proceeds, including his entire $200,000 gain, into his 5 new replacement properties with no capital gains tax to pay for 2010.

By working with Meridian Pacific’s 1031 Exchange Replacement Property Program John was not only able to avoid a $30,000 tax hit on the sale of his investment, he was able to increase his yearly rents received on his investments by over $35,000 with the repositioning of his assets.

Please contact us for further information on how we can help you today.