#211 Guide to Advanced 1031 Exchange Strategies

Hey everyone, Hope you've had another awesome week. This week we're going to keep the subject going about taxes and advanced strategies. In particular, we're going to be talking about 1031 exchanges. It is that time of year, especially when I'm recording this, taxes are on the mind. This is when people start thinking, should I be moving to a different state? You start going crazy when you have to write that big check. I understand how that is living in California, but I love living here at this moment. So I'm trying to figure out the best strategies to to minimize taxes so I can justify to myself living where I want to live, paying the taxes, enjoying my life and traveling wherever I want and not feel like I have to live somewhere just for taxes. Will I ever get to that point? I don't know. But knowing that there are strategies and having smart people in your corner, like CPAs, tax strategists who know what to do, will make all of this better and easier in terms of keeping money in your pocket. So. So in last episode we talked about what the 1031 exchange is, and today we're gonna spend more time talking about some of the different type of strategies when it comes to 1031 exchanges and even one strategy that mimics the 1031. I like to call this the lazy man's 1031 exchange. Especially when it comes to syndications and how you might be able to utilize that to defer capital gains and make smart investments to keep more money in your pocket at the end of the day. So stay tuned. Welcome to the Passive Income MD podcast where we talk about creating your ideal life through multiple streams of income. If enjoy hearing about this stuff, make sure to hit subscribe. Now, let's get on with the show. Okay, so last episode we talked about the 1031 exchange, what it is and in brief summary, it allows you to exchange one property of like kind for another property. These are investments and take the proceeds from that, shift that into the new property and avoid paying the dreaded capital gains tax. Now, whenever you make money from an investment, usually the government, depending on how long you've held that investment, wants to tax you on that gain. Especially when you've had real estate or even a stock portfolio, whatever it is, where you've had a run up of the equity in that property or that investment, it can end up being a sizable amount that you pay in taxes. Now if you're trying to compound your wealth and compound growth, there's a huge difference when you're able to keep more money in and you're able to compound and move that forward. We all know that when it comes to tax deferred type stock and retirement accounts, why, that can be powerful. And so when it comes to real estate, it can be even more powerful by using this 1031 exchange we talked about, the standard typewriter. You have a delayed exchange where you have to have the property and within 45 days you have to identify the next property. And within 180 days you have to close to make this all happen. Using an intermediary as part of this process. I think that's the type of 1031 that everybody knows. But there are other kinds of 1031 exchanges and I was surprised to find this because I've never even heard of it. So there are partial exchanges. This is where you exchange a portion of proceeds of sale of one property for a percentage of ownership in another property. Now this new property, it must be equal or greater value than the old property. This provides some financial flexibility for you. It allows an opportunity to diversify again. I never even knew this existed, but you need to talk to your CPA or strategist to see if this works for you. Hey everyone. I'm really excited about this new deal by Ascent Equity Group. We have a brand new multifamily deal open right now called Sunrise and Chandler. It's perfect for this 2024 market because it has the three biggest risk mitigators built into this asset. It's already cash flowing, number one. Number two, the property is extremely well managed at 97% occupancy. And number three, it's a Class B asset with just 11% that's been renovated. So there's a ton of value that we can add. Pranay and I did a webinar about what makes Sunrise and Chandler the perfect deal for this economy. And trust me, you don't want to miss out on this one. Just go to passiveincomemd.com deal to catch the replay. Thanks everyone. You can also set up something called a two party or simultaneous exchange where you can swap one property for another at the same time and for the same value. And there are three ways to really conduct a two party exchange. You can have two parties exchange deeds with each other and you don't really need actually qualified intermediary. It's obviously difficult to find another property of exact value. And the timing swap, I mean the equity must equal the debt to avoid some situations and some issues. So this is possible, but it can be challenging. You could also have a three party exchange where you have an accommodating party that facilitates the exchange. So like you, title is passed through a buyer, then the title is passed through the seller. Again, this gets a little bit complicated, but I'm just letting you know the landscape and what's possible. Most tax advisors don't recommend this because it can be a little bit challenging to figure this out. You still don't need a qualified intermediary, but again, an accommodating party can help facilitate the exchange. Again, this can cause some major issues if this is not done correctly. And of course you can do it simultaneously with a qualified intermediary. Now, the qualified intermediary is basically a company that helps make this 1031 exchange. It makes the money go correctly, they hold it as a third party, they make sure all the paperwork is done correctly and all the documentation to make sure these swaps occur. And so that there are no future issues when it comes to your tax issues, especially if it gets challenged by an audit it or whatever that is. Of course there's a fee that comes with using these qualified intermediaries, also known as qis. But I'm telling you, when you're dealing with this amount of possible gains or not having to pay these taxes, you don't want to mess around here. You want to pay a good qi. Who knows what they're doing to make this all happen for you in a good legitimate way. Now there's also something called a construction or build to suit or improvement exchange. It gives the exchanger the opportunity to use the proceeds from the sale of the property that you're selling for new construction or renovation on the replacement property. Now the work, it's got to be done within the 180 day period in order to have any effect on the exchange. Now, if the value of the replacement property, it's less than the property that you're selling or giving up improvements can increase the value enough or be sufficient enough to meet that increase even or break even or increased value requirement to get that full tax referral that we talked about before. Now again, it's best for small construction projects because they still need to be completed before the 180 days are up. Now, just so you know, there's some disadvantages. There's some escrow fees, there's some closing costs, there's some transfer taxes that can be charged twice. Again, this is beyond the scope of really what you need to know right now, but there are some additional titles that need to happen. But at the same time, this could be a great way to satisfy this requirement and make sense for a lot of people depending on the type of property that you're trying to move into. Also there's a thing called the reverse exchange. It's when you do a property exchange, but the replacement property is actually bought first and then the current property is sold. This like kind exchange rules also apply here as well. Now this only applies again to 1031 exchange properties. And really they're only permitted in cases where the investors have the financial means to make the new property. There are provisions in the tax code explicitly stating how to really make this reverse 1031 exchange structured. There's still that 45 day rule 182. Like before all of these reverse exchange can happen. But this can allow you to close on the replacement property without having to first sell a property. It's interesting how this works out. Again, talk to your tax professional to see if this might make sense for you. I want to add some more color to the 1031 tax implications and rules. I started talking about the basics last time, but this time whenever you find that property within 45 days, we talked about that identification period for this exchange. You can actually only look at three properties max, meaning that there's this three property rule. You gotta identify those three properties that you're gonna buy into. Or there's something called the 200% rule where you can look at any number of properties so long as the aggregate fair market value of these doesn't exceed 200% of the fair market value of what properties you're giving up. So there's a three property rule, the 200% rule, and there's something called the 95% rule. Again, you can look at any number of properties without regard to the combined fair market value as long as the properties that you're going to acquire, they amount to at least 95% of the fair market value of all identified property. That's called the 95% rule. Again, these are a little bit complicated. Most people go by the three property rule, but wanted to let you know there's some other rules at play that you might be able to use to your advantage. So the cash left over, by the way, that's called the boot. You might have heard that term before. That is taxable. Lastly, I want to tell you about something that people call or refer to as the lazy man's 1031. It's actually not doing a legitimate 1031 exchange. This is a technique that many people use when they invest in syndications, where a syndication will sell, let's say you're in a deal, in a property, in someone else's deal, and it sells that year. And you know that you're going to have a taxable amount because of the money that you made from that sale. Now usually that's subject to capital gains tax. However, in that same year, if you plan correctly where that deal ends, you're able to get into another deal which by way of using depreciation, where they create paper losses for you on that new deal. The losses on the new deal can offset the gains from the deal that you just came out of. Let me just give you an example so it makes sense. Let's say you invested $100,000 in a deal and in a particular calendar year it sells and you make another $100,000. That $100,000 would normally be subject to capital gains tax. However, let's say in that same year you actually went invested in another syndication deal and because of smart tax planning and they're able to use something called depreciation or cost segregation, we've talked about it before, you can look that up, they're able to create $100,000 loss on for that investment. That $100,000 will offset your hundred thousand dollar gain, essentially kicking the tax can down the road. Many people use this as a strategy. People call it a syndication ladder. Where they go and they buy where a syndication deal sells or they exit one, they go right into another one. People can line these things up if they use smart strategy to try to defer capital gains even on these passive real estate investments, and not just on ones that they own themselves. So for those of you who are inclined to go more of the passive, just so you know, you can use this type of lazyman's 1031 exchange to keep kicking the tax can down the road and do that smartly. I'll say this helped me out significantly this year when it came to taxes. So in a couple short episodes I've given you a ton on 1031 exchanges, what they are, why do you, why you can use them, the different types and even how to do something very similar in passive real estate investments. I hope that was helpful for you, that you can utilize it in some way talking to your professional to figure out how to keep using real estate to keep more money in your pocket while you create passive income and generational wealth for you and your family. Thanks so much everyone. Have a great week and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app. You're listening to us in. And if you haven't already, make sure to hit subscribe Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. Learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.