Robert Farnsworth

Should I Sell or Exchange?
There are many strategies to wealth building. One avenue is through investing in real estate. Careful consideration is given in selecting apartments, land, warehouses, NNN or other types of investment properties. Likewise, the same consideration should be given when moving to another investment property. Unfortunately, many investors do not plan ahead. They will sell and pay taxes, then acquire other properties. Smart investors will take advantage of another method left to then: the tax deferred exchange!
The tax deferred exchange allows the investor to defer paying capital gains tax on his investment properties. Conversely, an investment property that is sold without a tax deferred exchange can force the seller to pay up to 20% of his gain in taxes! If an investor is looking to purchase other investment properties, then an exchange makes much more sense, because there is now a larger amount of money available to purchase the replacement properties. An investor is able to use the money he would have paid in taxes and put it to work for him in another investment property.
The Difference Between a Sale and an Exchange.
Assumptions: The sale price is $250,000 with a loan on the property of $100,000. Assume that the property was purchased for $150,000 a couple years ago.
Capital Gain:$250,000 - $150,000 = $100,000
Capital Gains Tax: $100,000 x 20% = $20,000 Sale Exchange Sale Proceeds: $150,000 $150,000 Tax Payable: $20,000 none Cash to reinvest: $130,000 $150,000 Amount of purchase with 25% down: $520,000 $600,000
With an appreciation rate of 5%, it would take the seller three years to reach the value of the exchanger's property. The exchanger clearly has the advantage over the seller who pays taxes and then reinvests.
Why Exchange?
Leverage: By having more money to put down, a bigger property or multiple properties can be acquired.
Interest Free Loan: The exchanger in essence is receiving an interest free loan in the amount of the taxes owed. In the example, using this money to reinvest rather than paying taxes increases your cash on cash return over One percent!
Time Value of Money: A dollar today is worth more then a dollar tomorrow. Instead of paying $10,000 in taxes today, pay it in the future when $10,000 is worth less.