Jan, 2009

Here's a spreadsheet for your entertainment and enlightenment. This purpose of thisĀ  spreadsheet is to compare the value of exchanging to simply selling and reinvesting without the benefit of an exchange.

If you study real estate investment, you already know that there are four sources for income/profit from a real estate investment:

  1. Cash flow before taxes
  2. Tax benefits
  3. Principal reduction
  4. 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 we made:

1031 spreadsheet

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:

1031 spreadsheet

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:

1031 spreadsheet

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 these assumptions, but it is clear that moving into the fourth property with almost $62,000 in profits versus only $32,714 helps one grow wealth faster. 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.