Here's another spreadsheet for your entertainment and enlightenment. If you've been following this blog for awhile, you may remember an earlier spreadsheet that compared buying and holding a property for ten years to buying the same property, holding it for five years, exchanging into another property, and holding the new property for another five years.
This new spreadsheet takes a little different approach. Its purpose is to compare the value of exchanging to simply selling and reinvesting without the benefit of an exchange.
Remember, there are four sources for income/profit from a real estate investment:
- Cash flow before taxes
- Tax benefits
- Principal reduction
- Appreciation
This spreadsheet ONLY addresses #4, Appreciation.
In the first section of the spreadsheet, you can enter the assumptions that you want to use. Here's a screen shot of that section, populated with some assumptions I made:
You can see that this sample investor is starting with $25,000 as a down payment. He's going to finance 90% of the purchase price of this new property.
When the property is sold, the assumption is that the sale expenses will be 7% of the total sale price, and that depreciation recapture, federal capital gain taxes and state capital gain taxes will total 30% on the gain recognized.
We go on to assume that properties will appreciate at 3% per year over the time frame of the comparison, and that each property will be held for five years.
All of these numbers are variable; you can use whatever you think is fair. The assumptions apply to each purchase and sale throughout the time frame of the comparison.
The next section of the spreadsheet calculates the net profits and available capital to move into the next property. It looks like this:
Comments: The Net Profits after the first period (which is five years, based upon the assumptions entered above) without the benefit of a 1031 exchange are $13,672. Adding the profits to the original $25,000 gives the Available Capital of $38,672 to use on the next property. In comparison, the exchanger would have $19,531 in profits and $44,531 as a down payment on the next property. Profits after the second period start to diverge between the exchanger and the non-exchanger even more: $21,149 for the non-exchanger, $34,790 for the exchanger. ($59,820 in Available Capital for the non-exchanger versus $79,321 for the exchanger.)
You can start to see the impact that deferral of taxes has on one's investment potential. Looking at the next section of the spreadsheet will drive the point home:
Comments: It is not uncommon to see the Net Profits double after only three periods based on reasonable assumptions. They don't quite double using my assumptions, but I'd still rather be moving into the fourth property with almost $62,000 in profits versus only $32,714. You can follow through the fourth period and see the Power of the Section 1031 Tax-Deferred Exchange!
If you are interested in obtaining your own copy of this spreadsheet, it is downloadable here: Power spreadsheet. Or, if you would prefer, we would be happy to email this spreadsheet to you. Simply send an email to us and put "Power spreadsheet" in the subject. We will promptly send you the spreadsheet. We hope it's helpful to you and that you'll have some fun with it. Remember that it is just an exercise and does not predict the future.
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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange
Ken Tharp
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Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
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Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Power of the Section 1031 Tax-Deferred Exchange - Free Spreadsheet * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
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