IS IT TIME FOR YOU TO DO A 1031 EXCHANGE? Increases In Housing Prices May Suggest a Strategy For Investors (Feature Article from the March 2006 Issue of ARIZONA SUNLANDS)   In the year 2000, Ed and Sally bought a Scottsdale rental home for $170,000, which their accountant is depreciating over 28.5 years, giving them a deduction of nearly $6000 per year. If Ed and Sally are in a 30% tax bracket, the depreciation deduction has been worth about $1,800 per year in tax savings to them. Of course the good news is that their rental home is now worth $540,000, but they might be missing out on the other good news which is that without taking on any additional debt, they could be enjoying an annual depreciation expense of over $16,000 per year, with a tax savings of $4,800 per year, which would mean $3000 more cash in their pockets each and every year. How could that be? The 1031 Section of the Tax Code provides that Ed and Sally can sell their first property for the $540,000 value it now has, and if they move all of the proceeds of that sale into one or more new investment properties, they don’t have to pay any tax on recapture of the previous appreciation they took. They can also defer paying any tax on the increased value of the property, also known as "capital gains." Even if Ed and Sally simply traded their old $540,000 valued home for another identical home of the same value, the benefit comes from the fact that they would now be depreciating a $540,000 asset, instead of a $200,000 one. Now consider Dr. Bob, who has a portfolio of about 10 rental homes which he bought at an average price of $50,000 nearly 30 years ago. Lets say that today his investments are worth on average $250,000, however, since the homes are fully depreciated, all of the rental income, less any management, repair or maintenance expenses, is subject to the IRS. However, if Dr. Bob were to sell all of these properties, and move his 2.5 million dollars of equity into new real estate investments, he would have a new annual depreciation deduction of nearly $88,000 per year. If Dr Bob is in a 30% tax bracket, trading his old properties for new ones could put over $25,000 cash per year into his wallet. In a market such as Phoenix where home prices have increased dramatically in a relatively short time, the 1031 Tax Deferred Exchange is the major vehicle enabling investors to enjoy immediate benefits short of liquidating properties and pocketing the gains, but only after paying taxes. The two examples above are hypothetical, and the numbers may vary according to specific circumstances. We did not take into account that some portion of the property value must be ascribed to land, which is not depreciable, but the numbers serve to illustrate the need for ALL investors to speak to their accountants or tax advisors to ascertain what benefits they might realize from a 1031 Exchange.