With few restrictions, whether an exchange involves a parcel of real property, an airplane, a broadcast spectrum, or a fleet of cars, exchanges allow businesses and individuals the flexibility to sell property to whomever they wish, and to buy new property from whomever they wish. Exchange transactions do not require any significant changes to the terms of the sale and purchase agreements.

Owners of appreciated real or personal property assets can increase their returns by deferring their capital gains. By reinvesting the potential capital gain tax liability through an exchange, investors increase their return. For example, if we sell an asset for $1,000 and pay the federal, long-term capital gain rate applied to most persons, the taxpayer will net $850 after tax. In a properly structured exchange, the taxpayer has $1,000 to invest at the conclusion of the exchange.

Assuming a rate of 10% on invested capital, the value at the end of one year for the hypothetical exchange is $1,100 versus $935 for the hypothetical sale. At the end of year two, the values are $1,210 versus $1,028.50. Because of the effect of compounding of interest, the difference in year one between the two investments was $165.00. By year two, that difference had increased to $181.50. Carried forward, these amounts continue this trend, with the exchange value continuing to outdistance the taxable sale significantly. Properly structured and administered, an exchange becomes an invaluable tax-saving tool and an integral element of the business cycle.

For a more detailed explanation of the various elements and regulatory requirements of tax-deferred exchanges, please refer to a complimentary copy of the [Resource TBD] booklet available on the Resources page of this website.