Mark Kohler explains how 1031 exchanges let real estate investors defer capital gains taxes by swapping appreciated property for like-kind real estate. You have 45 days to identify a replacement property and 180 days to close. A qualified intermediary must handle the transaction, and the strategy only works for real property, not stocks or businesses.
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Hi, Mark Kohler here and let's talk 1031 exchanges. I love this strategy and it's primarily used when you have highly appreciated real estate. And that could be a rental property or it could be real estate tied to your business somehow. But it only works on real property. You can't 1031 exchange a business or stock. So if you've got a property that's got a big gain in it from when you bought it and you know, got some appreciation, let's talk 1031. Now, some of you may know this is a big topic, so I'm going to hit the highlights here, talk about it broadly, the issues and you can determine if maybe it's a good strategy for you. Then you can research more or get a consultation. Now, here's the concept. You're going to take one property and buy one of equal or greater value and you pay no tax. In fact, though, what you really do is defer the tax. So if this Property is worth 200 grand and your basis was 100 and you've got a hundred thousand dollar gain, you're looking down at the barrel and you're going to buy a new property of $200,000 or greater, and then the gain, you don't pay it, you still have a basis over here of 100, so the gain is still there. You've got this little hundred thousand dollars hidden in this property, but you can keep the property another five or 10 years and then buy something of equal or greater value down the road. So you kind of kick the can and don't pay the tax for now. That could be a huge benefit when you couple it with other strategies in the future. Now, the next cool principle is, is that you can exchange for one or sell one and buy three. So if we stick it here and we've got this $300,000 property, I can buy three properties that equal $100,000 each for a total of 300,000. So I bought property in whole that's equal or greater to 300 grand. So I can buy one, sell one and buy three, or I could sell three 100 and buy one for 300. So I could do the reverse of this. But the beauty is it can be multiple properties exchanged on either end of the of the. Now let me hit how it works and I'm going to hit this diagram quickly here and you can review it if you need to. Here you are the taxpayer and you've got a house and you want to sell it, you want to trade it for a property over here. And this seller has a property just that fits your liking, but he doesn't want your property. So how are you going to exchange this one for that one of equal or greater value? When are the stars going to align and this come together? It never does. So what happens is someone gets in the middle, called a qualified intermediary. This is like an escrow or a title company type service. And they're going to be the middleman between this transaction because you're going to find a buyer and this buyer actually wants your house, not this guy. And so what happens is you sell the property through the QI kind of exchange, if you will, or escrow, and the buyer gets your property. The buyer puts in the money and then the money sits there until you're ready to find or buy that new property. The money goes over here at the right time, you never touch the money and this property goes bink, bink over to you. So the property sold, the money goes in, the money goes to the seller and you get the property. And again, you didn't touch it at all. The qualified intermediary did all the paperwork. So you walk away with no tax. Now let's talk some timing rules, because the IRS is cool about this and it's a pretty awesome strategy, but they don't want you taking a long time with that money sitting in the Qi. They're like, if you want to do a 1031, let's move it along. So the first deadline or rule you've got to know about is the 45 day identification period. So within 45 days you've got to identify in writing with a fax or an email or something that can be date stamped that shows the world what you're going to buy. So within 45 days. So as soon as you sell your Property, you've got 45 days to kind of let everybody know what you're going to buy. Is it going to be one property, is it going to be three properties? Is going to be 10 properties. Now there's some rules on how many, if you're going to do more than three, how many you have to identify and can identify and how many you have to close. And there's some special rules you want to do some research on that if you're doing multiple properties. But the basic point is within 45 days you've got to identify what you're going to buy. You don't have to buy it, but you got to put it in writing. Now, the next important deadline, the replacement period, and you have 180 days from the sale or that's 135 days from the end of your identification period. So kind of 135 here in the middle, right? So what you're going to do is sell the property and they say you got to buy whatever you're going to buy within six months or 180 days. On the 45th day, you're going to tell them what you're going to do, but then you got to do it within the six months. Now, the cool part here is if, say, you fail on any of these levels, you don't find anything you want to buy or you don't close on what you identify. Okay, cool, deal's over. You take the cash, you pay the tax, but if you want to follow through, that's when you defer the tax. Now, there's a lot more to study here and learn about the process. If you're considering a 1031 exchange, but it really comes down to this, pull out a piece of paper and go option one, if I just sell this on the market, just take my licks and pay my tax. What am I going to net after taxes? What am I going to net and what do I want to do with the money? Do I want to go buy other property? By the way, you can't take the money and just pay off other property you own. Got to buy something new. Or you'd say, well, maybe I'll do the 10:31 exchange and take option two. What am I going to net with no tax being paid? And with that it's kind of cool because you can say, well, I can take this net. Maybe it allows me to buy two extra properties where here I can only buy one because I got to pay after tax. So there's lots of options. So run the two and see if it could maybe work in your scenario to have this extra money to buy more and not give that money to the government. Anyway, the 1031 exchange is an awesome strategy for anybody that buys real estate on a regular basis and has appreciated gain. But if this looks like it could work for you, get a consultation. Anybody at our tax law firm would love to be of help, whether it's on the accounting side or legal side. So give us a holler. Let's analyze this and see if it's a good fit for you. Thanks so much for watching and if you found that helpful, please look in the description below. 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