How to Read This Model

Plain-language guide for family members and lenders. No financial background required.

What this model answers

Your family is selling Willow Tree Lodge for $8,500,000. Using a 1031 exchange, the proceeds roll directly into new investment properties without triggering a large tax bill. This model answers: after buying the new properties and paying the mortgage, how much monthly income will the family receive? The goal is $12,000-$17,000/mo from real estate alone (add SS $3,300/mo for full family income).

The three scenarios

Scenario A1

Parents live in the new home

$1.5M of sale proceeds buys a home cash for Mom and Dad. The remaining $3.616M goes into income-producing rental properties. No mortgage on the home. Model deducts $2,083/mo carrying costs (taxes, insurance, maintenance).

Scenario A2

New home rented to a tenant

Same $1.5M home purchased but rented to a tenant at ~$4,500/mo. Parents rent elsewhere temporarily. Rental income adds to the family total.

Scenario B — Strongest income

Full amount in rental properties, parents rent temporarily

All $5,116,000 into income-producing properties. Parents rent in the market ($6,500/mo default — adjust slider). After 12-18 months, they buy a home separately using a refinance cash-out. Highest Year 1 income potential.

Color coding

Green Above $15K/mo (RE only)

Gold $10-15K/mo

Orange Below $10K/mo

All income figures are real estate cash flow only. Add SS $3,300/mo for full family income. The model deducts debt service (mortgage payments) and income taxes from all figures — what you see is truly after-mortgage, after-tax cash flow.

Key transaction facts

Sale price$8,500,000

Real estate (flows to exchange)$8,400,000

FF&E / equipment$100,000

SBA loan payoff at close($2,977,000)

Closing costs($307,000)

Net invested in new properties$5,116,000

Target close of escrowSept 15, 2026

45-day ID deadlineOct 30, 2026

180-day close deadlineMarch 2027

Parents' Social Security (not in totals)$3,300/mo

Tax deferred by 1031 exchange~$1,640,000

RE income target (excl. SS)$12,000-$17,000/mo

Willow Tree Lodge — 1031 Exchange Model

DK Barot Family Trust · Sale $8,500,000 · Net exchange equity $5,116,000 · v5

Exchange waterfall

Gross sale price$8,500,000

Less: FF&E — personal property (PSA v3)($100,000)

Real property to exchange provider$8,400,000

Less: SBA 7(a) loan payoff($2,977,000)

Less: closing costs($307,000)

Net equity to exchange provider$5,116,000

Tax at sale — with vs. without 1031

Deferred gain (1031 defers this)~$6,164,000

FF&E — ordinary income regardless$100,000

§1245 bonus/179 recapture (ordinary)$129,187

§1250 building recapture (25% fed rate)~$1,547,480

NOL carryforward offset($165,000)

Est. tax WITH 1031 (fed + CA 2026) —

Est. tax WITHOUT 1031 (fed + CA)—

WITH 1031: only non-deferred items taxable — FF&E, §1245/§1250 recapture, offset by NOL. WITHOUT 1031: full $6.16M gain also taxable. California taxes all gain as ordinary income at 13.3% — adds ~$811K alone. Confirm all with CPA.

Basis & Depreciation

All figures from the 2024 federal depreciation schedule (Form 4562). Confirm with CPA.

Split-basis mechanic (Reg §1.168(i)-6): replacement property basis splits into two buckets. Bucket 1 — carryover basis ($2,071,253) continues motel's existing schedules at ~$41K/yr. Bucket 2 — any purchase price above the carryover basis depreciates fresh at 39 years. In Scenario A with a ~$10.3M income portfolio, excess basis generates ~$165K/yr additional shelter — total Year 1 is ~$206K/yr.

Gross cost basis

$3,747,920

All assets on schedule

Accumulated depreciation

$1,676,667

MACRS + bonus/§179 + 2024

Net adjusted basis

$2,071,253

Confirm with CPA

Land (non-depreciable)

$1,248,886

Two parcels

§1245 recapture (ordinary income)

$129,187

Bonus/§179 on personal property

§1250 recapture (25% fed rate)

~$1,547,480

Building depreciation

Active assets with remaining basis (12/31/2024)

Asset	Acquired	Cost	Accum. depr.	Remaining basis	Life
Motel Building 2	2/22/05	$813,336	$414,502	$398,834	39 yr
Room remodel	6/30/22	$292,964	$19,099	$273,865	39 yr
Asphalt parking lot	12/10/21	$46,000	$9,586	$36,414	15 yr
Circuit breaker panels	2/28/22	$35,900	$2,647	$33,253	39 yr
Property improvements	7/01/23	$38,960	$7,402	$31,558	15 yr
Electrical panels	10/15/24	$23,680	$127	$23,553	39 yr
Concrete walkways	12/10/21	$29,000	$6,043	$22,957	15 yr
Laundry equipment	10/15/22	$20,382	$5,466	$14,916	7 yr

Replacement property depreciation shelter

Component	Basis	Less land (22%)	Depreciable	Annual shelter
Carryover basis	$2,071,253	($455,676)	$1,615,577	~$41,400/yr
Excess basis (Scenario A ~$10.3M portfolio)	~$8,260,000	(~$1,817,000)	~$6,443,000	~$165,200/yr
Total Year 1 shelter — Scenario A				~$206,600/yr
Fresh purchase at $8.4M (no exchange)	$8,400,000	($1,848,000)	$6,552,000	~$167,900/yr

The 1031 exchange defers $1.64M in taxes and preserves the full depreciation benefit at Scenario A's leverage level. Confirm §1.168(i)-6 election with CPA.

Inputs

Tax rate, SFR assumptions, and parents' rent are global. Cap rate and loan rate are set independently on each scenario tab.

Live interest rate — 10-yr Treasury (FRED)

Live rate unavailable — enter loan rate manually

Commercial spread above Treasury 275 bps

100150200250300350400

Suggested loan rate = unavailable (live Treasury not loaded)

Sets the loan-rate slider on Scenario A, Scenario B, and All Scenarios to the suggested rate (rounded to the nearest 0.5% the sliders support). You can still override each slider manually — a "manual" badge appears next to any loan rate you change afterward. Fetched once on load; no auto-polling.

Global settings

Blended tax rate (fed + CA) 38%

LTV — income properties 65%

50%55%60%65%70%75%

LTV applies only to income properties. SFR is purchased all-cash from exchange proceeds — no SFR mortgage. Commercial lenders typically allow 65-75% LTV depending on asset class. Multifamily is highest; NNN retail slightly lower.

SFR assumptions (Scenario A)

SFR purchase price $1,500,000

SFR market rent — A2 only $4,500/mo

SFR operating expense ratio 35%

Covers: property management ~9%, vacancy ~5%, insurance ~3%, maintenance ~8%, misc ~10%

Annual SFR carrying costs (A1)$25,000/yr ($2,083/mo)

Scenario B — parents rent in market

Parents' monthly rent $6,500/mo

Locked figures (from signed documents)

Total exchange equity$5,116,000

FF&E allocation (PSA v3 locked)$100,000

Net adjusted basis$2,071,253 — confirm with CPA

Accumulated depreciation$1,676,667

NOL carryforward$165,000

Parents' Social Security (excluded from RE totals)$3,300/mo

Scenario A — SFR inside exchange

$1.5M SFR purchased cash from QI proceeds. Remaining $3,616,000 into income properties.

Assumptions — Scenario A (independent from other tabs)

Cap rate 7.0%

4.5%5.5%6.5%7.5%8.5%

Loan rate 6.5%

4.5%5.5%6.5%7.5%8.5%9.5%

Tax rate: 38% (adjust in Inputs tab) | LTV: 65% (adjust in Inputs tab)

RE income target: Green >$15K/mo Gold $10-15K/mo Orange <$10K/mo Add SS $3,300/mo for full family income

Income property cash flow (after mortgage + taxes)

SFR cash flow

Total family income summary

Required cap rate to hit income targets — at current loan rate

Scenario B — Full investment, no SFR

All $5,116,000 into income-producing properties. Parents rent temporarily, buy SFR after 12-18 months.

Assumptions — Scenario B (independent)

Cap rate 7.0%

4.5%5.5%6.5%7.5%8.5%

Loan rate 6.5%

4.5%5.5%6.5%7.5%8.5%9.5%

RE income target: Green >$15K/mo Gold $10-15K/mo Orange <$10K/mo Add SS $3,300/mo for full family income

Scenario B puts the full $5,116,000 to work in income-producing properties. After 12-18 months of documented rental income, a cash-out refinance on one property provides the down payment to buy the SFR separately — at full market value with a fresh depreciable basis.

Income property cash flow (after mortgage + taxes)

Family income summary

Required cap rate to hit income targets — at current loan rate

SFR purchase path — Year 1+ plan

Estimated 12-month surplus at current income—

SFR purchase approach20% down from cash-out refi + $1.2M residential mortgage

When can you refinance after 1031?No statutory minimum — 12-18 months is standard practice

Tax advantage vs. buying inside exchangeFresh basis at purchase price — full §121 eligibility preserved

SFR bought as primary residence or rental?Either — primary residence preserves §121 up to $500K exclusion

All scenarios

Scenario A equity fixed at $3,616,000. Portfolio size varies by LTV. Income is RE cash flow only (add SS $3,300/mo).

Assumptions — All Scenarios tab

Cap rate 7.0%

4.5%5.5%6.5%7.5%8.5%

Loan rate 6.5%

4.5%5.5%6.5%7.5%8.5%9.5%

RE income: Green >$15K Gold $10-15K Orange <$10K

After-tax monthly income — all scenarios

Sensitivity matrix

After-tax monthly income (RE only) across all cap rate and loan rate combinations. Three separate matrices — one per scenario.

Open Questions

Items requiring CPA confirmation or further analysis before close.

Critical: How do we pay the ~$625K tax bill even WITH the 1031 exchange?

The 1031 exchange defers the $6.16M gain but does NOT eliminate all 2026 taxes. Three items are taxable regardless:

Item	Amount	Federal tax	CA tax (13.3%)
FF&E ordinary income	$100,000	~$23,800 (37%)	~$8,900
§1245 bonus/179 recapture	$129,187	~$47,799 (37%)	~$17,174
NOL offset	($165,000)	(~$61,050)	(~$21,945)
§1250 building recapture	$1,547,480	~$386,870 (25%)	~$205,814
Total WITH 1031		~$397,419	~$209,943

Combined ~$607,000 tax due in 2026 even with the 1031 exchange. This money cannot come from QI proceeds (those must be reinvested). Sources: (1) $100K FF&E proceeds paid directly at close, (2) personal savings/CDs, (3) EIDL bridge funds returning after payoff, (4) IRS installment agreement.

Why Section 121 matters: A primary residence exclusion (up to $500K of gain) could significantly reduce the §1250 recapture exposure. However, all prior returns show 100% business use — claiming §121 now is high audit risk. This is the single most important question for your CPA.

Tax basis and gain — CPA must confirm

Question	Why it matters	Priority
Confirm basis $2,071,253 and accum. depr $1,676,667 Schedule shows MACRS $1,510,731 + bonus/179 $129,187 + 2024 $36,749. Prior documents missed the bonus/179 component, overstating basis by ~$166K.	All projections depend on this	Critical
Section 121 primary residence — is it supportable? Parents lived on-site ~30 years. But ALL Form 4562 schedules show 100% business use — no Form 8829 ever filed. Claiming §121 now contradicts 20+ years of returns.	Could exclude up to $500K gain. High audit risk.	Critical
Items 17 & 18 — misclassification since 2014 Windows (Bldg 2, $12,500) and Bathroom Remodel (Bldg 1, $10,769) listed as Furniture & Fixtures but depreciated over 39 years — the real property method. Wrong category, possibly wrong life.	§1245 vs §1250 characterization at sale	Critical
NOL carryforward — exact amount ($127K–$165K range) 2024 Form 172 shows ~$165K but the 2023 Schedule C discrepancy (see below) may affect this.	Each $10K NOL saves ~$5K tax in 2026	Active
$100K FF&E vs. 571-L county record ($134,915)	Form 8594 consistency — both parties must file same allocation	Active

Replacement property and exchange structure

Question	Why it matters	Priority
Confirm Reg §1.168(i)-6 split-basis election Model assumes split-basis. CPA must advise elect-in vs. elect-out. Total lifetime deductions are the same — only timing differs.	Year-by-year depreciation amounts	Active
Cost segregation study on replacement properties 100% bonus depreciation available 2026. Could reclassify 20-30% into 5-15 year property generating $200K-$400K Year 1 deductions — not yet modeled.	Major upside not in current model	Pending
EIDL payoff — pay now, not at close ~$476K from personal funds before close. SBA posting: 7 days. PIF letter: 4-6 weeks. Target: early August 2026.	$476K becomes boot if paid from QI proceeds	In progress

Tax return history — discrepancies across three preparers

Finding	Detail	Status
Three preparers 2018-2024, no continuity review Guzman & Gray (2018-2022, retired) → TP TAX LLC (2023 only) → Unknown (2024). No single CPA reviewed full history.	New CPA must reconcile before filing 2025	Open
2023 Schedule C — ~$29,785 gap between preparers TP TAX: Sched C = -$7,107, AGI = +$2,833. 2024 comparison column shows 2023 AGI = -$36,892. Unexplained $29,785 gap.	Possible underpayment + penalties. Affects NOL.	Open
Accumulated depreciation understated in all prior documents Prior briefs used only MACRS $1,510,731, missing bonus/179 $129,187 + 2024 $36,749. Corrected to $1,676,667 in this model.	Corrected in v4b r3. Update any shared documents.	Corrected

WTL 1031 Model v5

How to Read This Model

What this model answers

The three scenarios

Color coding

Key transaction facts

Willow Tree Lodge — 1031 Exchange Model

Exchange waterfall

Tax at sale — with vs. without 1031

Basis & Depreciation

Active assets with remaining basis (12/31/2024)

Replacement property depreciation shelter

Inputs

Live interest rate — 10-yr Treasury (FRED)

Global settings

SFR assumptions (Scenario A)

Scenario B — parents rent in market

Locked figures (from signed documents)

Scenario A — SFR inside exchange

Assumptions — Scenario A (independent from other tabs)

Income property cash flow (after mortgage + taxes)

SFR cash flow

Total family income summary

Required cap rate to hit income targets — at current loan rate

Scenario B — Full investment, no SFR

Assumptions — Scenario B (independent)

Income property cash flow (after mortgage + taxes)

Family income summary

Required cap rate to hit income targets — at current loan rate

SFR purchase path — Year 1+ plan

All scenarios

Assumptions — All Scenarios tab

After-tax monthly income — all scenarios

Sensitivity matrix

Open Questions

Critical: How do we pay the ~$625K tax bill even WITH the 1031 exchange?

Tax basis and gain — CPA must confirm

Replacement property and exchange structure

Tax return history — discrepancies across three preparers

Glossary