The main benefit of a 1031 Exchange is greater tax efficiency, which translates into more purchasing power and investor flexibility. Used correctly, this means higher returns, more cash flow, and even improved estate planning through the power of stepped-up basis transfers.
More Buying Power
The Federal government taxes 15-20% on capital gains (depending on your income).
Most state governments take an extra 3-10%. Rates climb as high as 13.3% for California investors (and this rate seems likely to rise in the near future).
Conservatively, that’s 25% to tax collectors and out of your pocket.
Here are the states with the highest gains taxes.
Capital Gains: The 20 Highest-Tax States
Remember: RE investors also face depreciation recapture taxes. These are normally 25%.
Since real estate tends to be quite pricey, the taxes due upon sale get very large, very quickly.
That’s a big drag for investors.
Put another way:
You can purchase more — and/or better — real estate with extra capital.
Consider 25% more buying power.
After every deal.
Savvy real estate investors frequently rely on 1031 exchanges.
Larger, more valuable properties generate (on average) higher returns.