Sellers: Leverage
Leverage is a method of acquiring real estate worth many times the value of the initial investment while Tax deferment increases leverage.
To understand how tax deferment increases leverage, the investor has to comprehend that every dollar saved by tax reduction allows an investor to purchase 4-5 times as much real estate. Leverage occurs with exchanging, not with selling. This is easily shown in this chart:
| Sale | Exchange | ||
| Proceeds | $200,000 | Proceeds | $200,000 |
| Tax Owed | -$80,000 | Tax Owed | $-0- |
| Cash To Reinvest | $120,000 | Cash to Reinvest | $200,00 |
And for each investor that purchases property with a 20% down payment, using leverage, each could buy a property worth:
- Sale of property: $600,000
- Exchange of property: $1,000,000.
In this example, the investor who took advantage of the 1031 Tax Exchange has $400,000 more property than the investor who sold property.
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