A 1031 exchange defers capital gains tax when you reinvest in a like-kind property within strict timelines. If you miss those deadlines, a lazy 1031 uses cost-segregation and bonus depreciation on a new property to create a first-year loss that offsets the gain, though you'll owe depreciation recapture later.
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This week we are talking about the lazy 1031 exchange. But before we kind of get into that, we'll just run through what a normal 1031 exchange is. And a normal 1031 exchange is, it's basically a way where you can sell a property and move the proceeds from that sale into another property and not have to pay tax on that gain. And it doesn't necessarily eliminate taxes. What it does is you're kind of kicking the tax can down the road. Because you're moving the gain into another property. So if you sell that other property later on, you could have a gain there. So what a lazy— and now the thing about these 1031s is that they're— yeah, they're awesome because you kind of can continue doing that. You can kind of just keep doing that strategy the rest of your life if you wanted to. But what happens is you have to make sure that you are identifying a property within 45 days. You have to close the whole transaction within 180 days. You have to move the money to what's called a qualified intermediary. You can't really touch it or otherwise it could contaminate the whole deal. And those things oftentimes are not done properly. So what happens if, just suppose in January you sell a property and you forget to do any of these things like you didn't plan for it, you didn't use a QI, you didn't identify a property soon enough, you didn't close the transaction soon enough. What happens? Am I going to get stuck with that, that tax bill? Maybe. But there is this thing called the lazy 1031, and a lazy 1031 says that if you buy another property in the same tax year, right, and we do a cost segregation study, you bonus depreciate it, you create that big loss in that first year, you can offset the gain from the sale of that first property with the losses generated from that new property that you bought. Now, again, it has to be in the same tax year, and it's not— again, it's not a magic wand where you're getting rid of taxes, because later on, if you sell that second property down the road, you're going to have recapture, depreciation recapture issues, right? So we'll get into that in another video. But this is a way that if you kind of miss all the hoops that you have to jump through, through a traditional 1031, you still can kind of help alleviate the tax bite by using the lazy 1031. Now, again, these are informational, educational. These are just so you know that these things exist. Please talk to your tax advisor to make sure that these things are, number one, done properly. Number two, will actually benefit you. And that takes a little bit of strategy. So if you need help, let's talk. Talk soon.
