1031 Exchange & Capital Gains Tax - What a Business Owner MUST Know!

Hey, everyone, it's Mike Andes and you're listening to the Business Bootcamp podcast. Today, a bit of a different episode. I'm going to be talking about the 1031 exchange. We'll be talking about the increased capital gains tax has been proposed and what you need to know as a business owner before we get into today's show. A big thank you, today's sponsor, which is Gusto. If you haven't already, go to gusto.com/bootcamp. You can get your dental, vision and health benefits for your employees with a tap of a button from their app. It's very, very simple and we're actually going to get it for all of our local employees starting in 2022 in January. Really looking forward to that. It's simple and easy. Check it out today for your payroll needs as well. Go to gusto.combootcamp and try it out for 90 days, completely free. Now, if you came to this video expecting politics, you will be very disappointed because I am not going to necessarily take a left or right position, and I know some people will want to try and put me on one side of the aisle based upon my comments here today. However, it's not so much about a political agenda or political discussion I want to have here. It's about business. If you've listened to my channel before, and perhaps maybe if you're new, let me be clear. All I really care about is the numbers. All I care about is business. And that is why this channel exists. And so today we're going to break down from a business standpoint why the American government and the US Government is a prime example of how not to run your business. Now, we can learn from a whole bunch of different other companies, publicly and privately traded companies that do good things or bad things that we can learn in our business. Just so happens that the democracy that we, we have in the United States is public enough for us to be able to learn the good, the bad and the ugly of what we can apply to our small businesses. I don't really care about the government. I don't really care about big businesses. I am passionate about small business own. But we can learn from big business. We can learn from big government and learn how in our organizations we can lead with heart, how we can lead by example as our small business owners with our employees, and how we can make sure that the numbers of our business do not end up like the deficits of our country. All right, so I'm going to go over a couple different things and talk about how in this country. The problem is this. This is the problem in my opinion, when it comes to the politics in this country, everything is ran based upon politics instead of business sense. And these proposals that are going to directly affect businesses and directly affect the finances of this country because at the end of the day everyone's like, oh, like we're just printing money, it's so great. No, we are an institution, we are an organization and our financials are horrible. If we look at balance sheet, if we look at a profit and loss statement of a business, we can tell the health of the organization and of that business. Same thing with a personal finances. For example, when it comes to looking at the United States government, they're broken financially, they are broke, they are absolutely very, very poor when it comes to certain business decisions. And a lot of it has to do the fact that they're dealing with things from a political standpoint instead of a business standpoint. And the takeaway that I want to have today is that in our small businesses we have to approach business decisions without political interference. I don't mean politics like government. I'm talking about internal politics within your company. Whether or not certain people are going to like you, whether or not you have friends and family in the business, whether or not you are going to be popular because of a certain decision should not have any bearing on what decisions you make in your business. Doing so will be financially imprudent, unwise and will lead to the destruction of the business. Eventually. From a financial standpoint, you might be popular, you might get the most votes. Votes you might, all your employees might like you. But if you are not making financially sound decisions for your business, you will fail. So the 1031 exchange is now proposed from the current administration, President Biden for people over making over $500,000 on their exchange. So if you're doing under $500,000 on your 1031 exchange, it's different. Now the 1031 exchange basically says that if I sell real estate and I have gains on that real estate, I can basically my taxes by buying a similar like same or higher valued property and rolling that money into my next deal. Basically as long as I keep buying new properties after I sell, I will have no tax liability. That's the long and short of it. There's a whole bunch of other things in the code, but the 1031 exchange has existed for quite some time. But what's going to happen is if you remove that the ideology is that we're going to tax the people who have a lot of money. And it sounds great. In theory, that sounds great for 99% of the population that it's not going to affect. It's going because again, you can take certain deductions up to $500,000 on the 1031. After that it's going to be taxed at a nominal tax rate. Guess what's going to happen. The assumption is that revenues are going to increase and this is how we're going to pay for all this liquidity that we've been pumping in at the stimulus checks. This is how we're going to pay for the stimulus checks is removing the 1031 and taxing the rich a lot more. It assumes that this is the problem with this assumption is that it assumes that the transaction rate that has been happening over the past, let's say 10 years is going to happen for the next 10 years. But guess what? If you are going to increase the tax rate or you're going to tax the rich because they sell properties, guess what? They're not going to sell. They're just not going to sell their property. They're not going to sell. If you're going to tax them at 30, 40, 50%, they just will not sell their property. Now what that is going to do is it's going to have a trickle down effect that's going to reduce the real estate fees. Yes, I do have notes, by the way. I took some notes. It's going to reduce, it's going to have a very consequential trickle down effect. It's going to reduce the real estate commissions, taxes that are collected on every single transaction when a house or property is sold, bank fees every single time a loan happens, all those bank fees gone. If people are not constantly selling properties. And oh, by the way, if you're in the landscaping industry, this is going to affect you too. Because every single time a property is bought or sold, the construction industry is improved. Because we have handymen, we have people coming in, doing inspections, we have things that need to be repaired, we have landscaping that needs to be improved to start to sell or buy a home. Those things are also affected. Oh, and by the way, because no longer those properties are on the market, you know what's going to happen? The same thing that's happening right now in this, in the real estate market and that is that the price of homes is going to go astronomically higher simply due to the fact that there will not be as much supply. So when supply goes down, low supply is high price. When supply goes down, the price will go up. And the reason supply will go down is because no longer will people be selling homes because they want, they don't want to pay taxes on that transaction. They don't have a 1031 to just keep rolling into the next property. And every single time they roll you, yes, they're avoiding taxes, but they're creating massive amounts of fees, transactional fees, brokers, the real estate market, banks and a lot of contractors that are also getting money all along the way. Oh, and by the way, when we lower the supply and increase the demand or increase the price, because demand is going to go up, therefore price will go up, you know, what happens is there's no affordable housing. And it only compounds the problem we have now where people can't afford to buy a house and we become a renting nation or which also is going to happen is we increase the housing program's cost. Now we're supplementing the cost of living for people. And guess what? The most inefficient form of housing is government provided housing. Very, very inefficient form of housing people. All right, the second thing is the increased capital gains tax. And again, I'm going to talk about, I'm talking about these two things and then drawing the lines of what we can learn in our small business. So basically the increased capital gains tax is going to basically take it from 20% to 40% for like the top 1% of the country, again only affecting the really, really ultra wealthy. And this is going to be part of the American family plan that basically has a whole bunch of funding for a whole bunch of the other 99%. Right? Because the agenda here is like, hey, if you're making under $400,000, you're not going to be affected by this. Only the top, your 1% is going to get taxed. And that sounds great in theory, right? And this is what happens in our small businesses. Things sound great in theory, but we got to peel back the onion. We got to realize that, okay, if we're going to only tax people are making a million dollars plus and we're going to, instead of giving them a 20% capital gains tax for long term assets that they sell, we're now going to tax them at 40%. What is going to happen? All right, well guess what? It discourages them from investing in stocks and real estate. So let's just take that. You know, why would I? It creates less incentive for me to go out and create wealth in the form of real estate and stocks. If I'm going to have to be taxed at 40% on those long term capital gains. So guess what? People aren't going to sell. And what is been said is that, you know, these things are going to create all this money, all this revenue is going to be created by these new taxes. But what they're not taking into account is the fact that these transactions, that people will not do these things. They will not sell real estate. If there's a 1031, there's no 1031 exchange. They will not sell stocks and their real estate because they don't want to pay the increased capital gains tax. It won't happen. And so, you know, say, well, okay, well they aren't going to sell because they're going to try to take advantage of the fact that if you keep, if you don't sell your property, when it comes to real estate, if you don't sell you your property or if you take your 1031 and constantly are upselling using the 1031 exchange to get bigger properties, what that allows you is keep deferring taxes until one day you die. And then all of that, those assets are transferred over to you, to whoever you're passing your heirs, you're passing it to your family, whatever it might be. And the inherited income, there is no tax for inherited income. So it's always been the case for the 1031 exchanges, like, look, I'll just keep exchanging my properties until one day I die and all my properties goes to my heirs and they get a stepped up tax basis, which means they're not going to get taxed on everything that I've been deferring. They're the basis. The value of the properties would then be assessed and then they start paying taxes on anything above that. That is what the 1031 exchange has done. Well, if we remove that, if we remove that loophole for inherited income, the thought process is, look, we're going to create $113 billion because we're going to now collect from the rich and we're going to be able to have taxes and we're going to be able to fund these operations. That sounds great. $113 billion in the next 10 years sounds fantastic. But at the same time, the plan is that we're going to spend 80 billion to step up the enforcement, the IRS, because guess what? There's going to be other loopholes that these people find out. There's a reason why they're rich. All right? Most of them did not grow up with this money. They, they were smart, they worked hard, they're going to find they have access to the best accountants and attorneys. They're going to find ways to park their money in certain spots. They're going to either not sell, they're going to stay lying low, but yet we're going to pay a. We're going to get $113 billion in increased taxes. If again, we're assuming that they keep doing what they've always. Which is not going to happen, let's assume that maybe $80 billion is actually going to be collected over the next 10 years. Because guess what? People are not going to sell. They are going to hold on to things. They don't have to pay taxes. So really that revenue is not going to be earned. 113 is not going to happen. Let's say it's 80. But that sounds great. We're going to make $80 billion in increased revenues. We can give that to housing programs and to tax credits and to free education and health care. No, but we're going to pay 80 billion to IRS enforcement. And the reason you have to do that now is because you're basically creating more loopholes for these people to take advantage of. Now, again, the point here is not to say that 1031 exchange is bad or the increased capital gains tax is bad or to say that left or right or anything like that. I'm not against housing. I'm not against all of these things that are provided by the government. I think there's absolutely a place for government in society. However, the problem is this. The government is the most inefficient. When you look at the numbers. When you look at the numbers, the government is the most inefficient method of creating housing, health care, as well as jobs. When they brag on a podium about how many jobs they have created, you might as well be saying like we. They're bragging about the most inefficient use of funds. A private sector job that is profitable and is much more efficient can be. There's multiples of those jobs that could be created if it was in the private sector. What I'm saying, the reason all of this has been said is when you look at the government, when you look at big businesses, you can learn in your small business what works and what does not. If you wanted to look at a company and there's like massive deficits and there's massive amounts of debt and people are very unhappy and there's unrest.

Take note, there's a reason why. And the reason potentially could be the fact that we aren't looking at the full picture of the organization. When we make decisions in our business as small business owners, we need to look at the financial implications of doing so. Yes, I want to give lots of money to my employees. Yes, I want to have big offices and bigger equipment and nicer things for my employees. And I want to do more and more. But there has to be financial sense behind it because guess what? I will go out of business if I spend too frivolously and I'm not thinking about the bottom line and I don't make sure that the financial sense of the business and every decision makes sense. That's what's happening in our government. And I promise you, if your small business takes the same direction where we just make things because it's popular, because we're trying to get the next vote, we just want our employees to be happy. I want my employees to love me too. I want to have a great culture too. I want people to warm fuzzy thoughts about me too when it comes to their boss or the person that hired them or their leader. Yes, I want them to like me as well. But that cannot come at the risk of the financial future of your business. What does that mean? It means you might not be able to afford health benefits right away. It might mean that you can't afford to buy the big shiny office or the big shiny truck or the big shiny whatever it is that potentially might make you look better, but on the inside, it's decaying the finances of your business. I promise you that if people could take a hard look at the 10, 15, 20 year implications of decisions they make in their business, they'd come up with something like this. It doesn't make sense. I encourage you to take every single thing that happened in your business and look at it the same way. What are the implications, why? What is the intrinsic value and reason why I'm making decision? Is it to look popular? Is it look like my business is successful is to make other people happy. Maybe it's a friend, maybe it's a family member, maybe it's an employee. But making other people happy and being popular is not necessarily the best thing for your business. And doing what's right for your business is the long term strategy. Because you need to stay in business to keep the employees. You need to stay in business to be able to provide for your family. You need to stay in business to make sure that you can actually afford a good living and be with your friends on the weekend. So stop trying to go after what's the end result and saying, oh, I gotta make my employees happy, gotta make my family have gotta make my friends, gotta look good in front of everyone else. That's what leads to debt. That's what leads to bad decision financially. And trust me, you do not want to be running the deficit of the United States government. I'm Mike Andes, Business bootcamp podcast. I'll see you next.