Page 34 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

Tax Deferral Through 1031 Exchanges

The Declaration of Independence may tell us that all men are created

equal but the government definitely favors us real estate investors!
,
Not only do we get to depreciate (that is, take a tax deduction on)
the value of our investment real estate, but we also get to use an aston-
ishingly powerful tool called a Section 1031 Tax - Deferred Exchange .
It ’ s like an IRA account on baseball steroids. You can legally sell
one property and buy another, while deferring all tax payments on

your profits. That doesn ’ t sound impressive until you stop to think
about it.
Let me give you an example. Say you bought an office building for

$ 1 million and you sold it two years later for $ 1.5 million. To make this
very simple, I will assume that there are no closing costs in the transac-
tion. This means that you will walk away with a $ 500,000 profi t.
You can ’ t walk far, though, because your friendly IRS agent is
standing there, wanting 15 percent of your profit to cover your long -

term capital gains tax. So you hand him $ 75,000 of your profi t, leaving
you with $ 425,000 to reinvest.
If you put 20 percent down on your next property, you could afford to
purchase one for $ 2,125,000, again assuming no closing costs. Not bad.
With the 1031 Tax - Deferred Exchange, however, you can tell the
friendly IRS agent that all of your profit is going right into your next

property. (There are detailed rules on how to do this, but just bear
with me while I describe the general principles.) The IRS man nods,
steps aside, and tells you to have a nice day.

Because you can use all of your profits for a down payment on the
next deal, you can buy a property worth $ 2,500,000 ( $ 500,000 is
20 percent down on $ 2,500,000). You ’ ve just bought a property that ’ s
$ 375,000 larger, with that much more potential for cash fl ow and
appreciation.
You can do this as many times as you wish, and each instance will
be tax - deferred. Yes, eventually you will pay taxes on that profi t. But
it ’ s now much greater profit, because 100 percent of your proceeds

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