NCE Main

Packages Online Main

Conference Main

Feedback to NCE

Here’s a Specific Example

Sample Profile Of Investor/Taxpayers

Investor/Taxpayers purchased a piece of rental income property seven years ago for a total purchase price of $104,000. They had a 30 year fixed rate mortgage on the property. The original loan amount was $70,000. Today the mortgage has paid down to $66,864. The improvements were 80 percent of the value and they have depreciated $23,296. Today, the property could sell for $200,000. Investor/Taxpayers have a positive cash flow, but are considering their options. Try to put yourself in their shoes as they analyze their options.

They analyze their primary options as follows:

Option 1 - SELL OLD PROPERTY & USE MONEY TO PURCHASE NEW PROPERTY

• Pay $40,021 income taxes on the gain.
• Out of old Property and into new property.
• Have $81,115 to reinvest in new Property worth $238,572. (at same 70 loan-to-value ratio as before)
• Increase depreciation deduction from $3328 to $6940 per year.
• Property taxes would increase from $1250 to $2982
• Since income taxes were paid can keep all or part of remaining money for trip to Hawaii.

Option 2 - 1031 ROUTE. Trade into more valuable property.

• Pay ZERO income taxes on gain, since gain is deferred.
• Go out of old Property and into new.
• Have $121,136 to reinvest in upleg worth $356,300. (again based on 70 percent loan-to-value ratio)
• Increase depreciation deduction from $3328 to $9040 per year.
• Property taxes will increase from $1250 to $4454.
• Skip trip to Hawaii or pay for it out of pocket.

Option 3 - REFINANCE & KEEP OLD PROPERTY, USE LOAN PROCEEDS TO BUY ADDITIONAL PROPERTY.

• Pay ZERO taxes because there is no recognized gain.
• Keep old Property with equity of $60,000 and get another new property.
• Have $67,536 to reinvest in additional Property worth $198,635 (again based on 70 percent loan to value ratio).
• Total equity in old & new properties $127,536.
• Increase depreciation deduction from $3328 to $9106 per year.
• Keep low ($1250) property taxes on old property. Property taxes on new property are $2483. Total property tax $3733.

Option 4 - DO NOTHING - STAY PUT

• Pay ZERO income taxes on gain because there is no gain.
• No adjustments to new property.
• Depreciation stays at $3328 per year.
• Keep old low property taxes of $1250.
• Have positive cash flow.
• Go to Hawaii on cash flow.
• Pay some income taxes on annual profits.

If you were the taxpayer/investors what would you do ? (See choices above).

If you had to come 'out of pocket' with money to pay taxes under Section 1031, what would you do?

How many will investors will voluntarily pay the tax?

How many will just do nothing and keep what they have?

How many will borrow against their equity and use that untaxed cash to go into the next investment?

How many will opt for the installment method?

You can rest assured that, given these choices very few investors will choose to pay the tax.