Why should anyone consider an exchange?
Well any property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should always consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20%-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70%-80% of what it did previously.
What is the difference between a sale and an exchange?
Let’s take a couple of examples. One of a sale and one of an exchange. In each case, let’s assume that our sales price is $350,000. Assuming that our closing costs are something on the order of $25,000.
That means in the case of a sale, our federal capital gains tax would be approximately $91,000, leaving us $234,000 from our original sales price of $350,000 for reinvestment. If I did that same transaction as an exchange and I subtract my $25,000 in closing costs from the $350,000 sale price but because I have that no capital gains taxes, that leaves me $325,000 rather than $234,000 for reinvestment.
So that’s the difference between a sale and an exchange and why one should always consider an exchange.