Far too many real estate investors view tax deferred exchanges the same way some view hammers. Everything they see is a nail. It’s merely another tool.

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Transcript:   Tax deferred exchange gets everybody excited because the only thing they know about it sometimes is it gets you out of paying capital gains taxes. That’s true enough. The word they never hear or sometimes don’t hear anyway, is deferred. You will owe the tax at some point, and if not you, maybe your heirs. For every good thing that happens in a tax deferred exchange, there is something that the code gets a little bit of payback. For example, take one guy who buys a small income property. He’s just buying it with his cash down and gets a loan and now he owns it. He may end up with 10,000 a year in depreciation. He’s subtracting the value of the land which may be anywhere from 10 to 30% of his purchase price, and then he just, for lack of … I won’t go into all the details, but you just take the rest which is called improvements on the land. You divide that by 27-1/2 years. That’s your 10 grand maybe. The other guy buys the duplex next door, but he does it via a tax deferred exchange. What I call excess baggage you’re carrying from previous ownership, the tax code makes you take it with you. When you buy a home or a duplex or a 4-plex or whatever, what you paid for that property give or take is what’s known as your basis, your cost basis. Let’s say you paid 100,000 dollars. If you owned it for 5 years, and you had 4,000 a year of depreciation, you would have taken 20,000 dollars in depreciation. The IRS says, you’re adjusted cost basis is now the 100 that you paid minus the 20,000 in total depreciation you’ve taken in the 5 year whole. Now, if you sell it for 150, you’re gain is not 50,000. 150 minus 100. It’s 70,000. 150 minus 80. Now, there’s a lot more things that affect your adjusted basis upon sale. It has to do with the cost of selling it when you get rid of it. All these other things, but we’re just going to keep narrowly talking about tax deferred exchanges. The number 1 thing you should know about them is that if at all possible, avoid them. The only reason you ever want to do it, is that the capital gains taxes in terms of dollar amount are so onerous that you just can’t get around that barrier. It just takes the flavor out of even doing what you want to do. Then you do it because even by deferring your taxes and taking that extra baggage with you to the next property, it’s worthwhile long run. What that excess baggage does is on the property that you end up with or the properties in many cases, instead of getting what your buddy got which is 10,000 a year on his purchase, you’re only going to get maybe 6-1/2, 7,000. That’s because you had to bring your other one with you. You can only depreciate extra over what you left as the difference between the debt you left versus the new debt you acquire. You might have left 100,000 in loan balance when you started your tax deferred exchange, and you might have bought a whole lot of property, but your loans only increased by 80,000. You can only depreciate 80, and you really can’t do that. You’ve got to still take the percentage of the land value from what you purchased away from that 80,000. If it’s 20% you’re taking 16,000 away. Your depreciable basis on that exchange is now 80% of 80,000. 64,000 dollars. Your depreciation is way less than it would have been and add insult to injury, down the road if you ever want to sell that property, your capital gain will be larger because part of that baggage you were forced to take with you when you did that tax deferred exchange was that it kept that cost basis that you brought with y...