5 Powerful Benefits of a 1031 Exchange Explained


Why a 1031 exchange is
perhaps the number one way to build wealth. What is a 1031 exchange? That’s today’s show. Let’s dive into it. Hey, everyone. I’m Clayton Morris, longtime
real estate investor and founder of Morris Invest,
which is a turnkey real estate company. I’ve been in business
for a number of years. And we’ve worked with
a lot of 1031 exchange customers over the years. Those are the
individuals that are trading a property that’s not
producing very much cash flow. And they want to buy a lot
of cash-flowing assets. And you can do it tax free. So let’s go into the
benefits of a 1031 exchange. If you are new to
this theory, if you are new to this
tax strategy, then prepare for your mind
to be blown away. And if you’re old school,
you’ve been down the pipe, you certainly understand
a 1031 exchange, maybe you can take
away a few key pointers here as well that may help
the advanced person who is watching this as well. All right, I’m going to go
through five key areas of what makes a 1031 exchange
so incredibly powerful. All right, tip number one
on this list, of course, is the tax benefits, the
deferring of all of your taxes because you’re rolling
one asset into another. So you’re not going to
pay taxes on the benefits and the profit of the
sale of this property. We worked with a
client recently who had to sell a couple
of Nevada properties. They were underperforming. When I spoke to them
on the phone I said, I’ve got to ask you– he was a doctor. I said, what is your return on
investment on these properties? And he said, not
as good as yours. He said, they are not good. He spent most of his time
in the hospital, working. He didn’t have time to
really watch and figure out how to make sure that his
portfolio was cash-flowing. So he had these
overpriced assets. They were rented. But they were producing
such a minimal return on his investment that he wanted
to move those three or four properties– that were
like $300,000 in profit– he wanted to move those into
lower-cost properties that would produce a
much higher yield. So we helped him do that. But guess what? He didn’t pay any taxes
on it because he set up a 1031 exchange. He set it up with a
1031 exchange provider. There’s a link below in the
description of a company that we work with on all
of our 1031 exchanges. They do a fantastic job. So you basically call them up. You set up your 1031 exchange. You’re done in a day or two. It’s that simple. And then when you sell that
lower producing property, the profits go right into
that custodial account. And then you’re not touching it. So you’re not touching it. It’s not a taxable event. And then you’re
rolling those profits into these other assets. It’s a killer way to
save on your taxes. The second reason a 1031
exchange is so powerful is because it allows you
to grow your portfolio. This is what the rich have
been doing for so many years. They’ll take the
profits of a sale, after eight years of owning an
apartment complex or a number of different properties, pieces
of land, it doesn’t matter, and then they’re trading up. They’re going to
buy something more. They’re going to use
the profits and roll it into a higher-producing asset. They’re going to increase their
net worth just by doing that. And again, all tax free. So you can also
diversify your portfolio. So maybe you decide to
sell a commercial building. And you want to buy 20
residential rental properties. You can do that because
the like and kind– you can do that. Now, you can’t sell comic
books and buy real estate. That doesn’t work that way. It has to be for a
like and kind asset. But that’s the power
of the 1031 exchange. Number three on this
list is something I alluded to in number one,
which is about getting rid of a crappy asset. Let’s be honest– the reason
that we work with so many 1031 exchange clients
in our office is because they’re transferring out
of a low performing, low cash yield asset into a
high performing one. We had another
client just recently who had to sell seven
properties in Minnesota that were not producing anything. They were way overpriced. And they were not even rented. So he sold them for a
profit in the market. So he got some appreciation
on these single family homes that he had. And then he was able to roll
that profit through a 1031 exchange, tax free, into a
number of performing properties that had tenants inside. So the properties
we do are usually in the 50,000,
60,000, 70,000 range. And the rent is anywhere from
650 to 900 to $1,000 a month in rent. So you do the math. Trading up a $300,000
property that’s maybe rented for $1,000 or it was vacant– now you’re rolling that
into a higher producing, higher ROI property, again, tax
free, using a 1031 exchange. So powerful. Number four on the list is
that this is a long-tail play. This is a long-game
strategy, meaning that you can keep doing this
over and over and over again. This is what I plan to do. And by doing a 1031 exchange–
we’re selling off some assets now, putting them into the
1031 exchange for profit, and then buying higher
producing ROI properties. And then I’m going
to do that again. And I can do it again and
again and again until I die. Because step five
on this list is being able to hand down these
properties and the profits to my kids tax free. You follow me here? Now, remember– let’s go back. Let’s say we go back like
five or six transactions ago. Let’s say I’m just starting out. Let me paint this
picture for you. Let’s say I’m the
guy in Nevada who’s got four properties
that are overpriced and not producing much. Take those four properties,
I sell them for a profit. I take that profit
in a 1031 exchange. And I buy 15 single-family
rental properties that are cash-flowing. Maybe I look at three of those
properties in my portfolio and I say, wow, these three
have really appreciated nicely. So if I sell them, I’ll
make a nice profit. Great. So now I’ve got that
chunk of properties. I sell off three of them,
in a 1031 exchange again. Maybe they’ve doubled in profit. I take those three, put those in
a 1031 exchange, sell them off. Now I use the profit
from those three to maybe buy seven or
eight more properties. See how your portfolio expands
and expands and expands? And then by the
time I die, I’ve not paid any taxes on those
profits because I’ve kept doing 1031 exchanges. Then I hand them
down to my children. And guess what? They don’t pay any taxes. The death of the owner
doesn’t transfer any taxes to the children. That’s an amazing way
to build legacy wealth. That’s what we talk about
here on the channel. It’s building legacy wealth. It’s building a dynasty. You want to build a dynasty? Using a 1031 exchange is
a killer way to do it. Now, if you want to figure out
what your financial freedom number is, how many
rental properties it would take for you to be financially
free, we give it away for free. It’s three pages, totally free. Just click on the free
download right here. And you can watch
how many expenses can be wiped away
with the cash flow from your rental properties. Thank you so much for
subscribing and sharing this channel with
your loved ones. I cannot wait to read
your comments below. If you are ready to take action
and set up a 1031 exchange, we will help you do it. Until next time,
everyone, go out there. Take action. Become a real estate investor. I believe it’s the number
one way to build wealth. We’ll see you next time.

19 thoughts on “5 Powerful Benefits of a 1031 Exchange Explained

  • Hi Clayton my name is lloyd loy I'm ready to buy a property from you and would like to talk with you one on one your team have my number thanks

  • Good info as always Clayton. I have been preaching your system to my Real Estate clients for years, to no avail. I lived in a very high price ski town; where nothing penciled as an investment. I would tell my clients to sell their Park City places and I would find them a Realtor in a Midwest town for better Roi (using a 1031). I will be holding my primary house for another 1.75 years and take the $250k primary home tax gain; then turn that property into multiple homes in the Midwest. Maybe we will do some business then! Keep up the good work.

  • and what if ur kids decide to sell the homes and quit investing in real estate? then do they pay taxes or still wont have to?

  • i knew it was something about you. you're a pro at this. with your broadcast background, your videos are so good. thank you so much for this valuable information.

  • So you only pay taxes on investment property? If its your personal house and you lived there for 2 years or more and its appreciated in value and you sell it you dont pay taxes on it right

  • So when I sell my low producing property for the higher producing property I defer the taxes… I understand that but how soon do I have to buy another property to keep this ball rolling?

  • Awesome video! Many don't realize how powerful this tax code is for new investors and even experienced investors!

  • How long do you have to hold the property you exchanged for before you can use at as a personal property…. to avoid taxes?

  • This might be a dumb question but if you still have to pay taxes when you cant keep going with 1031 and pay one big tax why not just pay taxes on all deals

  • Isn't there a timeframe after u sell tho? like 180 days to buy a new property In order for that profit to be tax free ?

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