 Deferring the payment of tax can result in the building of a great amount of personal wealth to those who do a 1031 Exchange. For
example, assume that the tax, if you did not do a 1031 exchange would be $100,000. Now assume that you do a 1031
exchange and you use this money to buy a more expensive building. If you use 3 to 1 leverage (i.e., $3 of borrowed money for
each $1 of equity), you could buy $400,000 more property by not paying the tax.
Now assume your new property appreciates at 7% a year. In 10 years your new property will have doubled in value. This means that the additional part that you bought with your tax dollars is now worth $800,000. If you sell the property at that point and pay back the loan of $300,000 that is applicable to the tax deferral, you will have $500,000 left.
In other words, in this example deferring the tax allowed you to create an additional $500,000 of personal wealth. Obviously
several exchanges have the potential to build substantial wealth over your lifetime.
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