IRC Section 1031 is an exceptional option for taxpayers who invest in real estate in part because of the opportunity to leverage their investment and obtain appreciation on someone else’s funds such as a lender while deferring the capital gains taxes on their sale. In the example below, the taxpayer leveraged into a property worth $1,500,000 from a property worth $750,000. The taxpayer did so in part by using that portion of the equity which otherwise would have been paid in taxes as part of the down payment. To acquire the $1,500,000 replacement property the taxpayer had to increase the amount of debt owed.
BENEFIT:
The 1031 exchange allows the investor to avoid paying the capital gains taxes on their sale while giving them the ability to purchase a higher valued property with increased leverage and no additional equity needed.