1031 Exchange | Real Estate Investing

Foreign.

Hi everyone. Welcome to our Freedom Real Estate Group vlog series. We are on number 37. My name is Mark Widring. I'm the director of investments here at Freedom Real Estate Group. I'm joined today by Mr. Randy Brown, who is our new senior CEO of the company. So today we're going to talk a little bit about 1031 exchanges and cost segregation studies in lieu to a podcast that we're going to be doing a little bit later in the series as well. I know that when I'm working with some of our investors and we're talking about 1031 exchanges, they always have questions like when is it appropriate time to do that? Or you know, will this fall into that? Do you.

Yeah, there's a. So when you're unpacking whether a 1031 exchange makes sense to you? And so just to back up just a little bit, first I, something about the way you were doing the intro there kind of reminded me of something that happened when I was a kid. So my, my dad used to work for the road service and, and road maintenance and stuff. And so when I was maybe 10 or 11, something like that, he lost his job and it was because they said he was stealing. I was like, what? My dad, I mean, my dad drives a bus for a church. Like he's a good dude or whatever. And then I came home and all the signs were there, man. Right. All right, all right, so I'll get it. All the signs where they had street signs.

Right? Okay.

So people, I don't mean to cut you off, but so, you know, in a former life, tax strategy was, you know, my primary focus. It still really is, you know, a large focus for me. But tax strategy was a way to like in the accounting world to actually make meaningful impact on clients lives. And so it doesn't matter how much money you make, one of your most expenses or biggest expenses, most expensive items is going to be taxes. And so when you're talking about real estate investing, a 1031 exchange is a, it's a huge tool. And then, you know, and saving taxes along with the cost segregation study and there's, there's no way to really unpack in this vlog series all of the nuance that goes in and out of a 1031 exchange. So that's why we're going to do a podcast next week about it. But just touch base about the 1031. Basically what that is is it's a strategy where if you have gain in a buy and hold or a long term hold investment. Real estate investment really works for things other than real estate. But in the real estate world, you have a, you bought something for say $100,000. During that time, it's appreciated 200,000. And just to keep the math easy, how is, how can we best navigate the tax implication that would come from that $100,000 of spread right. Now for people who are going to come at me or whatever, I understand that there's more spread.

Right.

We depreciated the property. We also have other nuance in there, like, you know, we had closing costs and things like that. That would be part of our basis. But what happens is the, the government has given us a tool where we can put those funds with an intermediary and then get into a new property and kick that tax consequence down the road.

Sure. Right.

So when. Go back to your original question. When do you do a 1031 exchange? You do a 1031 exchange when it makes sense.

Right.

You've made money.

Right.

If you're in all the stars.

Right. If you haven't made any money on the deal, then you're not going to do a 1031 exchange if you need immediate access to all the cash.

Right.

Can't do a 1031 exchange.

I was going to say, because didn't they. So they just changed this tax law in 2018, if I'm not mistaken. And it's only on investment properties.

Right.

It used to be on other things, but now the 1031 is only for real estate.

Correct?

Well, it has to be the same type. So it's 366 days. You have to have owned the property for 366 days. So. So it's a long term investment.

Gotcha.

When I say it's available for other things like these things, this whole law was, came into fruition about like, like chickens being exchanged for cows and land and farmland and stuff like that where there wasn't any actually realized gain. Right. That's one of the calculations. It's boot. When you're doing the calculation, the no money exchanged hands. So my net worth may have gone up by a certain amount of money, but I didn't receive any money. Sure, right. Because I got this for that instead of getting cash for this.

Gotcha. So this is not like there's no fix and flip. This is not set up for somebody that just wants to buy a property, you know, put some money into it, make equity and turn around and then try to, you know, defer that.

It's definitely not for a fix and Flip.

Okay, perfect.

It's a long term. It's buy and hold.

Okay.

Very good investment. So one of the first steps in making sure that a 1031 makes sense to you is to do the basis calculation.

Yep. Right.

What is the, what was my cost to get into the property? How much have I depreciated tax wise in the time that I've held it? What have I done to improve the property? What it cost to get into the property and then project out what my cost to sell are going to be, if any improvements I need to make. But you need to apply your tax rate and see, okay, this is the incremental change it's going to make.

Sure.

But let's just say you're at a, you know, 15% tax rate on that deal where we just talked about $100,000. That's $15,000 of real money that can rol next deal.

Right.

And a lot of people like to start their portfolio small.

Right.

They get into, you know, three, four, five single families.

Yeah.

And then they use that accumulation of wealth to move into larger properties and then over time move into bigger properties and things like that. And that is a huge tool where you don't have to take that $15,000 of fuel out of the engine as you're, you know, driving the car down the, the path to wealth and real estate.

Right on.

And some of the things that, that I, that I tried to point out to our future investors are there's a, there's many rules that come with it, but the ones that you obviously want to pay note to are the timelines.

Timelines, for sure.

I mean, and so the timelines, if I'm not mistaken, are that you have to identify the property or is it up to three properties within 45 days and then after you've identified the property, you then have an additional 135 days to take possession and close on it. Is that. That's right.

So there's some.

Yeah, yeah.

I mean, 100. The additional 135 days. So, yes, what you're saying is correct. It's real easy to just say I've got 45 days to identify six months to close.

Right, right.

And it's all from that. The, the day of the money going to the intermediary.

Right.

The, the main thing to remember is I don't, you know, this money is going to a third party who's going to manage those funds.

Yeah.

And then you have a certain amount of time. But this for the vlog, you know, we're Just going to kind of high level. We'll dig into all those weeds and that kind of stuff on the next. In fact, I think that was probably enough of a teaser.

Yeah, absolutely.

I'm gonna say get there, you know?

Absolutely. So end of the day, obviously a 1031 is something that you can help with alleviating your tax liability on investment properties. Rolling that over, timelines, lots of rules. These are things that we're definitely going to get into. On the podcast, we didn't even talk.

About cost segregation studies.

Exactly. So you definitely.

Oh, my goodness, these time constraints. What is going on with these things?

You're definitely going to have to tune into that, you know, fountain of knowledge over here who is going to just, you know, going to have you.

Cost segregation studies, Tax Cut and Jobs Act. Oh, my goodness. If building an empire and letting that engine run the are, you know, is part of your goal, then these. These things have. Obviously you've heard these terms before, so we're going to take time to just kind of break them down and maybe run through some examples.

Absolutely, absolutely.

Thanks for doing this. I pulled him in. I was like, hey, man, you got to record this with me. So he brought the encyclopedia with him and that kind of stuff. Now he's director of investment, so he knows all this stuff too. But I put him on the spot and he did a great job, so.

Absolutely. Well, we appreciate everybody tuning in. As always, invest smart, live happy. You got it.

Thanks.

Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on this show are not guaranteed. All investment strategies have the potential for profit or loss.