The 6 Rules of Using a 1031 Exchange


The six rules for using a
1031 exchange for real estate investing. That’s today’s show. Let’s dive in. Hey, everyone. I’m Clayton Morris. I’m Natali Morris. And together we
form Morris Invest. We’ve been flipping houses
for a number of years now. We buy and hold real
estate for the purposes of creating passive
income and legacy wealth for you and your family. So if you’re new to the show,
go back into the archives. We have tons of great episodes
where we talk about everything from tax benefits to
setting up your Profit First system for you
different bank accounts for real estate investing,
liability protection, all of those things. But on today’s episode,
we’re going to dive deep into the most powerful tool
in the real estate arsenal– the 1031 exchange. You know, we’ve had Tom
Wheelwright on the show before a number of times, our
tax accountant at ProVision. And he said, this is one
of the most powerful tools that any real estate investor–
it’s probably in the tax code, would you say, maybe like
the most powerful tool for continuing to build
wealth throughout your life? Oh, definitely. The 1031 exchanges is– I think he calls
it like some kind of little magical
wealth-building tool. It’s like a magic wand. Right, exactly. So we’ve been deep
diving some of this. In the office at
Morris Invest, we get a lot of investors who
will call us up and say– maybe they already own like
two properties with us, et cetera– but they’ll
say, hey, you know, we’re about to sell
this house in Phoenix and we wanted to use that
money in order to buy 5, 6, 7, 10 rental properties. And can you help us do that? So there are some rules. And absolutely we always are
able to accommodate that. And so we kind of walk
through some different stages with some investors and explain
certain things that they need to have in place ahead of time. But today, we’re not going
to go over that piece of it. I think we’re going a deep dive
some of the nitty-gritty rules that we can really take
advantage of for the 1031, right? I never really was sure of
the details of how it worked. And I think I’ve
mentioned several times that I’ve been reading
Loopholes of Real Estate by Garrett Sutton. And he has a great chapter
on the 1031 exchange, with the details of
exactly how it works. And I thought, oh, OK. Because a lot of times
people will ask us, oh, I want to sell this
property for $300,000 and buy five for $50,000. Can I do that? And I’ve never been quite
sure how that works. So I read this chapter, which
everyone should read this book. And I thought, OK, now I get it. I completely get the
specific rules of it. So I wanted to share
that with our audience. But you really should
be reading this book. I want to reiterate that
we’re not tax accountants, we’re not financial advisers. We’re just people
who like to share the things that we learn because
we get excited about learning. And so we want you to
learn along with us and then continue
your learning process. A lot of times in
our house, the way this works is Clayton will
hear other people like us who like to share things in their
podcasts, and he’ll say, Natali, go learn this. And then I’ll find the
book and I’ll– yes, we take responsibility for what
we learn and what we execute on. But you just need someone
to share things with you in order to be able to do that. So that’s our goal today
is to share something with you so that you learn. Whether or not this works
for you, we can’t say. But it is, again, an awesome,
awesome investor tool. And if you’re new
to the show, you should go back and check out
episode 197, Garrett Sutton. If you’re listening to
the podcast, go to iTunes, download it. We did an episode called
“The Legal Loopholes of Real Estate Investing.” He is Robert Kiyosaki’s
tax attorney– excuse me, he’s Robert Kiyosaki’s
attorney and is one of the rich dad advisors. So throughout the
whole month of August, we did the legends series. We did Robert Kiyosaki, Tom
Wheelwright, Ken McElroy, Garrett Sutton. So go listen to those episodes. But Garrett’s book, The Legal
Loopholes of Real Estate Investing– there’s a lot
of great nuggets and chunks in there. Nugget chunks? Nugget chunks. That we’re going
to dive into today. All right, so
what’s one of the– Good words. You know, today our daughter’s
pooped for the first time, speaking of nugget chunks. I was changing the diaper
and she just went, pop. Oh, good. Isn’t that so cute? Got to make sure we get
her on the vocabulary. That’s the most important word. All right, so a lot of times
we do episodes like this. And I go through
the wonky parts, and Clayton glazes
his eyes over. And then I say something
that I know he is like, oh, that’s why I care about this. For instance, our
episode on passive loss– you were kind of like,
oh, why do I care? And then all of a sudden, like
I made a point halfway through and you’re like,
that’s why I care. So I want to lead this
with why you should care about the 1031 exchange. So the 1031 exchange,
let me tell you briefly what it is again. It’s the tax code
that allows you to exchange one rental
property for another and not pay taxes
on the gains, OK? Why do you care? This is a podcast where we
talk about buying and holding. So in theory, you want
to buy these properties and hold them forever,
and continue to gain, to earn rental income, right? But there’s one
example in his book that really makes it clear
to me why you should care. Now, obviously, maybe
you want to continue to own bigger things. Maybe your goal is to have a
few single family properties and then you want to own
commercial real estate. Maybe you like the
idea of that, right? That’s great. So this is one way that you
can build up your portfolio into higher-valued assets. Maybe that’s your goal. Fine. But he also gives this
example of a couple that had owned real estate. And then they want to slowly
pass it onto their kids as they reach retirement age. And they’ve built up their
money that they want to live on, and they want to pass this
down to their children. So what they do– let’s say they have an
asset worth $500,000. Right They’ve owned
it for a while, now they’re ready to sell it. So what they do is they sell it,
and they take a 1031 exchange, and they buy something worth a
million dollars– an apartment complex, or a strip
mall, or whatever. And so they buy something with
that $500,000 worth $1 million. They have 50% ownership
of it, and their kids now own 50% of that. So their money can
completely finance the deal. But now they only own
50% of their new asset. So they hold that for a
year or so, over a year. And then they decide, OK,
I’m going to buy something worth $2 million. They sell it, they
make a small gain. Now they own something
worth $2 million. They use the profit to
finance the next thing. Now they own 40%,
but the kids own 60. They do this a couple of times. What they’ve done is passed on
something to their kids worth, say, in the end $5 million that
was not taxed along the way. They phased themselves out. Now their children have this
amazing cash-flowing asset that was gained tax-free. Isn’t that amazing? OK, so yes, we’re thinking about
doing this years down the road, right? You may not care so
much about it now. But I think that’s
one way because I do intend to continue to keep
the things that we own now. But maybe years
down we’re like, we don’t want to own this anymore. We want to pass this down
into someone else’s ownership. That’s a great tool. But all the time we have
investors who call us and say, you know, I just
inherited a property. It’s worth $400,000. Can I 1031 exchange that? Yes. So the 1031 exchange– we’re going to go through
a couple of rules. So the first rule is
that your 1031 exchange has to be on an
investment property. You cannot 1031 exchange
your own property. Or you cannot 1031 exchange
something that you live in. There are some, I guess,
workarounds in that. For instance, I had an
apartment in San Francisco that I did live in. But then I rented it out for
a couple of years after that. So as long as it had become
an investment property, then I could 1031 exchange that. Which after I read this chapter,
I was really kicking myself that we didn’t. Why, no. I mean, here the
thing is that you want to make sure
that you go back and you listen to
our early episodes where we explain what
a 1031 exchange is, the mechanics of how to do it. We’ve had some great
interviews with people who can set up your 1031
for you, they walk you. You can call them– we have their phone number
right in the episode– you can call them, work with them. They’ll do it for you. But you have to identify
those properties 45 days after closing. You have 45 days to
identify the property– Right, you’re getting
ahead of me on the rules. But yes. OK. And then if you don’t do it and
then you close on the property, you’re screwed. You’re literally out
all that tax money. And then you’re going to have
to pay capital gains on it. You lose the opportunity to. Yes. And so we lost that
opportunity because we didn’t know what we didn’t
know that many years ago. And so yes, you
made a nice profit on the sale of that
A Class property. You were happy to wash
your hands of that thing and get rid of it. But then we didn’t roll
it into 1031 exchange. We could have rolled
that into three, four, or five rental
properties and we didn’t. And we ended up
paying taxes on it. These are the things you learn. That’s why we do this
podcast so you don’t make the same mistakes that we do. Right, so we’re dopes. But you don’t have to buy
the same kind of investment property in a 1031 exchange. So if you own, let’s say,
a pink walk-up in Brooklyn and you rent that
out to hipsters, you do not then
have to go and buy another pink
walk-up in Brooklyn. You can use that to buy
another investment of any kind. So you can then go
and buy a strip mall– Or strip club. –or single family. I guess you could
own a strip club. In theory, there’s
no rule against that. I guess it depends
state-by-state on whether or not that’s legal. Quick question on the
having lived in it and then you turned it
into a rental property. Do you know off the
top your head is there a law, like how much
time you have now to convert it to a rental
property before you can– like for instance, I
had an investor recently who had a primary residence,
a condo, that they’re going to then convert
to a rental property in order to do a 1031 exchange. So they have to rent
it out for a year. Is it six months? Do we know the answer to that? Maybe we should
do some follow-up. Well, you have to have
kept your investment for a year and a day. A year and a day, OK. So if they have converted
it into investment, I’m going to assume that
the same laws apply. And that has to do
with making sure that you’re in within
like a separate tax year so that you’re not
getting quick gains on it. So if you have rented it out
and you haven’t lived there, it has to have been, I want to
say, at least a year and a day before you can call that
an investment property. Good. So that was rule number one. What’s for rule number two? Still within rule number one– you can’t do this for flips. This is for buy and holds. If you’re going to
flip it within– that’s why you need to have
it for a year and a day because the IRS wants this to
be investment property that you are continuing to hold and
then you’ll have gains on. So these are things that you
actually have rented out, not something that you flip. You can do this
on vacation homes, but that’s a whole
other ball of wax. So we can talk about
that some other day. Now, rule number two is
that you have 45 days within the close period to
identify your properties. That doesn’t mean you
have to close on them. That means you have
to sort of put up your red flag, stake your claim
and say, this will be mine. Right, so when you started
working with the 1031 exchange company, they’re getting
the paperwork together, you’ve started this process. Then you identify those
properties 45 days after closing. You have that window to do that. But it’s very important that
you, of course, go and work with the 1031 exchange company
to get everything set up first before you close. Again, otherwise you’ll
be kicking yourself. You cannot then retroactively
start going and looking for properties that you
want to roll it into. That’s illegal. Yes. Now, usually your tax– I’m sorry, your
escrow person will be familiar with this
process and they’ll know how to slap the
paperwork on your sale. But we’re going to talk about
experts for the 1031 exchange later in another rule. But you typically want
three properties or less on your list. Now, the reason for
that is that there are no limits on your list if
it has three properties or less. So say you made $150,000
and you’ve identified three $50,000 properties. You’re set, right? But if you want to buy
more than three properties with your gains, you
become subject to the 200% rule of section 1031, which
allows the 1031 exchange. That says that since your
list is more than three, the total combined purchase
price of everything on the list cannot be more than twice
the selling price of your old property. Now, if you’re buying
the single family turnkey properties that we talk
about all the time, you probably won’t
have that issue. But if you’re then
taking your 1031 exchange and leveraging it
into a mortgage, and you buy something
that’s more than 200%– twice the selling price
of your old property– then you’re going to
trigger some taxable gains. So that becomes an issue. So that’s something
to think about. You can identify three or less. But if you’re going to identify
more than that, you just have to make sure it doesn’t
exceed twice the value, OK? Makes sense? Exactly. So just real numbers here. For instance, someone
is selling a house. They’ve made a profit of– they’re selling it for $400,000. And you can’t exceed, you can’t
buy something for more than– what’s the math on that? What did you say? 400,000? Then you can’t buy something
worth more than $800,000. So they would have to buy–
they could roll that into– if they’re selling a single
family home in Los Angeles, they’re selling it for
400,000, the ROI was really low and they wanted to convert it
into higher ROI properties, they might buy– let me just do
some math on that. So if they bought like our new
construction or something like that– let’s say
400,000 divided by 68– that’s about five,
that’s 5.8 properties. So they could then
go up to six, seven. They can go up but they can’t go
beyond 10 of these properties, basically, because that
would exceed that 200% mark. Right. So sometimes people take the
gains on their 1031 exchange and then just use the cash
and buy something with cash out right. But then sometimes
people take it and use it for the down payment
of a mortgage into something bigger. And so both things are allowed. So you’re thinking about, again,
the purchase price of what you’re getting in the end, OK? Now, rule number
three is that you have 180 days from the day you
close on the sale to complete the purchase of the new thing. Now, the IRS is not friendly
with that 180 calendar days. So if 180 days falls on, say,
the 4th of July or Christmas, they do not give a butt crack. It still counts. So if your 100 days
falls on Christmas and you know your
title company is not going to close an escrow
for you on Christmas, you better get it done early
because the IRS will then take that opportunity to tax you. The only exception is
if that 180th day falls on the due date
of your tax return and you have not purchased
your replacement property, then you need to
extend your tax return. So they’re only really
friendly with their own– Taxes. Right, their own rules. But holiday, Sunday,
your birthday– they don’t give a rat’s behind. So you’ve got to be
careful with that. Because they will
take the opportunity to trigger a taxable event. Now, whether or not your auditor
has a little bit of leeway with that, I don’t know. But I would not chance it. All right. So 45 days to identify
the properties, and then you have 180 days,
or equal to six months, to close all of those
investment properties that your roll into– Right, they don’t
even use the term six months because if
there’s a leap year in there, that gives you
more of monthage– if that’s even a word. I just made it up. So you have to be really strict
with yourself on the 180 days. OK, rule number four–
you want to find a qualified intermediary. The problem with this is
that pretty much anyone can be an intermediary. So you can’t say, oh, I
take this $100,000 gain and I put it in my
own checking account, and then I’m going to take that. You can’t touch the
money in between the sale of your old property and the
purchase of your new property. By law, this money
has to be held by an independent
third party called a qualified intermediary. So they are the ones who prepare
the exchange documents, hold the money in an escrow
account, and then put it down for the purchase of
the new property. Now, this becomes problematic
because I can ask our neighbor Carson to hold that money. Carson is 11. And that would be fine. But then, let’s say– I don’t know, Carson’s
not a good one because he’s not going
to get into trouble. Also he’s in seventh grade. Yes, Carson’s in
the sixth grade. But OK, in theory, I could
ask Carson and Carson’s very trustworthy. And so that might not
be a terrible idea. But let’s say we
ask Eddie Haskell, who lives down the street. Or Bernie Madoff. Let’s say you ask Bernie Madoff. Let’s say you ask Bernie Madoff. That’s a great one. I was trying to think of someone
offensive who wouldn’t actually offend anybody. Is No one’s really
supporting Bernie Madoff. It’s harder than you
think on the fly. OK, let’s say you asked Bernie
Madoff to hold your money. And then Bernie Madoff puts
that into his own account. And then Bernie Madoff now
gets into all of this trouble and the government
comes after him. They can actually
take the money that he was holding on your behalf if it
was in an account in his name, even though you can say, wait,
that wasn’t even his money, we had an agreement, he
signed the paperwork. So the court has stated
a number of times that money held in a separate
account for the intermediary was protected from the
intermediary’s creditors. So you have to make very sure– that doesn’t make any sense. You have to make very sure. You have to be very careful– is what I was trying to say– that your intermediary puts
that money in an escrow account, not in their own
personal account. Because if something happens,
which has happened before– obviously, if the courts
have ruled on this, then this has clearly
happened where you give it to your intermediary and
the intermediary defaults on their own finances. And then the creditors
come a-calling, and they can take your money. And then you’re SOL. So I would recommend you go back
to episode 53 of our “Investing in Real Estate” podcast. If you’re listening
to the audio version, check that out please
and download it. Lance Growth was our guest. Many of our investors
we’ve pointed to, we’ve sent over to
work with Lance. He’s great. He handles 1031 exchanges. He does all of that. So we’ve had a lot
of our investors that we’ve worked
with or he’s helped a lot of people that have
nothing to do with our company at all. But he will handle
all of that for you. So if you have a 1031 exchange,
check out Lance’s company and he will be an intermediary. What do you think the fees
are on something like that? I have no idea. I have no idea either. Typical legal fees. Yes, probably a
few hundred bucks. I would think it’s almost
like the closing cost. Typical closing costs
for properties that we do are like $500,
$800 for a closing. But it will be on
the HUD, right? Right, it’ll be on the HUD. OK, rule number 5. How you held title
on the old property is how you have to take
title on your new property. So we’ve talked
many times about how we have different LLCs
set up in different states for our holdings. So if I sell something in
Florida in house right foot, I cannot then buy something
in Indiana in house left foot, right? House right foot has to be the
new owner of whatever house right foot sold. Interesting, OK. Makes sense? Right. So this is not something scary. You just purchase it in the
same LLC, in the same business entity, or your own name. Right. A lot of times
these investors have been left something
in their name from their parents or
their grandparents. Well, then you
can’t say, great, I take this thing that was in
my own inheritance in my name and buy it in LLC. Doesn’t work that way. Unfortunately then
that leaves you up– we’ve talked many
times about how you don’t want to hold
things in your own name. So you can later either– you could either quit claim
that into your own name, that’s one option. You’d have to talk to
your attorney about whether or not that
triggers some local taxes. You don’t know, so you want
to talk to someone about it. But the rules are– how it’s purchased, it has to
be purchased in the same entity. So purchasing, and
then, of course, you can transfer it later. So close and then
do a deed transfer. Just call up your title
company or an attorney, and for a few
hundred dollars you can transfer it
over to the business entity of your choosing. Right. So you want to talk to
an expert about that. OK, rule number six is that
you must buy equal or up, OK? So if you’ve purchased something
and you’ve sold it for 400,000, you have to then buy something
else worth 400,000 or more. You can’t take that and then use
a 1031 exchange for something worth 100,000. Now, we have talked
about that you can buy several things worth 100,000. But you can’t just
buy one thing for less and then keep the rest of it. Doesn’t work like that. And also, you have to
reinvest all the cash that you gain from the sale. So let’s say you sold
something for 400,000, but you had a mortgage on it and
you had bought it for 300,000. Your gain is $100,000. You can’t say, oh, OK, I’m going
to 1031 exchange for something else that’s 500,000
and I’m going to keep some of this
cash in my pocket. You cannot. You have to use all of the
cash into the new thing. Makes sense? Also, the gain is what you’ll
be taxed on if you hand this down to your children. That’s the whole point. Right, so the gain is 100,000. So you hand this down
to your children. You’re only then–
and then if they choose to sell it after
your death and they have it, they just decide to sell out
your portfolio of properties, they’ll be taxed just on the
gain, not the massive amount of wealth that you’ve built
up with the actual properties. So the gain is what
you’ll be taxed on. So important that you have to
use the full amount of that when you’re going up and up
and up in your real estate investing. Awesome. OK, and one other point is
that there’s no requirement that the debt on
the new purchase be equal or greater
to the amount of debt on the old purchase. The debt, the IRS doesn’t
care about really. What they care about is that
you have exchanged your gains. Because if you sold something
that you bought for 300,000 and you sold it for
400,000, what they would get their hooks in
is that $100,000 gain. And so you’re sort of
kicking the can down the road so that they
can’t, all the while increasing your net worth,
increasing your portfolio, and increasing your
monthly cash flow, which is all we really care about here
on the Grizzly Bear Egg Cafe. What podcast are we on? This is the “Investing
in Real Estate” show. Oh, OK. I’ve had a podcast that
I do with my nerd friend. We talk superheroes. Have done it for 10 years. It’s called the
Grizzly Bear Egg Cafe. And thinking about cash
flow there too, but less so. No, we just talk about
the new Star Trek show and stuff like that. Can you believe we’ve been
doing that show for 10 years? Holy smokes. 10 years this year. So anyway, that is
such a powerful tool, the 1031 exchange. I mean, you think about it. You can just keep up– you know,
if you find a great property, you’re holding it for
a number of years. The idea is you’d
never want to sell it. But unless you can upgrade– if you can take that
low ROI property that you have in Phoenix,
it’s only making you 3% ROI. But you’ve had it for
a number of years. You moved out, you
moved to New York. Now you’re renting
it for four years. Now you’re going to sell it. Great, you might
make $400,000 on it. But the ROI is really low
because your cash flow is terrible. That’s an opportunity
to convert that cash into eight rental
properties that are going to have a high ROI– 10% to 12% net return. That’s the power of
the 1031 exchange. That’s why this is such
a really incredible tool. Yes. So hopefully you learned
something about this. And now when we get all
these questions like, can I buy more than one, we
have a better handle on it. Because before I
only was vaguely familiar with what it did. But now I see exactly
how powerful it was. I can’t recommend
this book high enough. It’s the Loopholes of Real
Estate by Garrett Sutton. And we’ll have links to
that in the show notes. Indeed we will. And we’ll be back on
Thursday with another episode of the “Investing in
Real Estate” show. I’m really excited because we’re
listening to the audio version. We’ve got Brent
Daniels who’s going to be joining us on the show. He’s going to show us how to
find discounted properties. It’s a fantastic method. If you don’t have a large
arsenal of cash right now and you want to go out
there and try to build up a quick arsenal of cash,
maybe $50,000, $100,000, it’s one way to do it. And Brent is going to
show us how to do it. That’s how I got my start
in real estate investing. So Brent is going to
walk us through how to do all of that and more. So until next time, everyone. Go out there, take action. Become a real estate investor. We’ll see you next
time here on the show. Bye-bye. Bye, everyone.

52 thoughts on “The 6 Rules of Using a 1031 Exchange

  • Great stuff! I actually had training on the 1031, and it became of use this past weekend. The fellow who is mowing our lawn on a rental that is FINALLY coming to the end of rehab asked us last weekend if we were interested in selling (he has a nephew that is looking for a house, and it rehabbed into a very nice interior.) I actually told him that I could not sell the house for a year and a day.

    Your content is really great for people like me who have just embarked on this journey into passive income!

    Thumbs up.

  • So you can't take a 1 million dollar 1031 exchange and buy 5 500k house's with 200k down each? That exceeds what is allowed by the IRS?

  • If you live in the house for 2 years within the last 5 years ending on the closing date of sale, then it is considered your primary residence at least partially. You have to consider the exclusion on gain for primary residence first, and then put the rest of the gain under 1031. See the publication for "selling your home" for more details. For full treatment under 1031, you have to live in the home less than 2/last 5 yrs. So, i'd say 3 years and one day as a rental to avoid alot of headache with the numbers. (Not legal advice)

  • Now that the Whitehouse has released a framework for the proposed tax overhaul, i think you should post a video on your opinion of how those changes could affect the types of investors you work with. You can read it at whitehouse.gov/taxreform. 9 pages. Granted, nothing is set in stone yet.

  • I habe a foreclosure I bought and fixing it up, we r almost at the year mark, if I wait to sell after the year, do I qualify for 1031 exchange?

  • Hi morris long time listener. Do i need to ask my property mgr for invoice or bill or receipt when it comes to fixing something? Every other month ther is something to fix which leaves me less $$ than rent. How do i fix this? What do you recommend? Im far from place..like 2 hours away and these property mgr have been good.

  • if i want to invest in property outside of my own state, should i look for legal help within my state, or in the state im looking to buy property in?

  • I appreciate the wealth of information that you are giving us free here. I only ask, is it possible for you to start using a dry erase board to actually SHOW how the numbers work out while you are talking? I see most other real estate help channels do this. I think it would help your subscriber base significantly.

  • Can you make a video on various recomended resources? Where and how to obtain knowledge for simpletons like me.

  • Great info keep it up.. can you use the 1031 exchange for overseas properties? Secondly just to confirm info.. my mother owns a rental townhome worth approx 800k they purchased for 360k years ago and there is no debt on it. If we sell and 1031 exch it would we have to use the entire 800k to purchase properties or can we just use the profit of 440k? Just trying to make it clear for me thanks.

  • Dear Sir, If I bought a rental house 1 1/2 yrs ago cash for 40K and sold it for 100K……..At the sale, could I get my 40K down payment back and just put the 60K profit in a 1031 for my next purchase or do i have put the whole 100K in the 1031 ? Thank you. AC

  • I love how you guys each have your own offices to capitalize on the highest possible deductions… smart thinking… not sure if that is the purpose behind it but that was my first thought when I saw that you were in different rooms.

  • so you are talking about moving up and up and up in your property values with the 1031 exchange process, but could you potentially sell a property worth 200k which you have a loan on for 100k offering you a gain of 100k and then roll that over into a property that is only worth 100k and have no gains but downsize your debt and still reap the tax benefit of the 1031 exchange? is it the property value that has to be matched by the next property or just the gains?

  • i thought i understood 1031's, then i watched this and realized i didn't know the half, great video. is there another 1031 video on youtube you would recommend?

  • Great episode. Quick question. Let’s say you buy a property for 50,000 and end up selling it for $100,000. And with that hundred thousand dollars you want to buy two properties for $35,000 each and put $20,000 into each of them to renovate. Is that a legitimate way to do a 1031 exchange, or does the actual purchase price of the two properties have to be $100,000 or more? Does that make sense?

  • If you sell a paid off property and use money to pay off another rental you are buying is that considered a 1031 exchange. What is the best tax strategy for this ?

  • Awesome vid!! I am wondering if you sell an Investment Property with a 1031 Exchange and you purchase a multiplex. Let’s say a fourplex. Can you live in one of the units?

  • If my LLC has a Construction loan $40k, AND I had also used my business CCs to buy supplies and obtained private personal loans, holding costs, and Contractors etc another $45k, and I want to do a 1031 exchange…IF I sell for $120k, it looks like a $80k profit on HUD and I would need to have the entire $80k held in escrow and would not have any money I need to pay off contractors and privatel loans, and CC expenses incurred in the renovation of the property. I actually only profited $25k. How do I make sure the other costs are taken out of the profit on the HUD at the closing?

  • As far as "rule #1", if you live in a property for a time and then sell it, it's my understanding that you don't pay taxes on the gains at all, so why would you want to convert it to a rental in order to do a 1031, which is only tax deferment? Aren't you creating a tax burden for yourself by doing that? I think the rule is something like if you've lived in the property for 3 of the last 5 years or something to that effect.

  • 1. Must own the property for more than 1 year
    2. If you buy more than 3 other properties, you can't buy something more than 2x the original property value. If you buy 3 or less, there is no limit.
    3. You have 45 days to identify the new properties, and 180 calendar days to complete the new purchase
    4. Find a qualified intermediary
    5. How you hold title on your old property is how you must hold title on your new property
    6. All the cash of the sale of the original property must be used to purchase the new property / properties. You can't take money out of the exchange.

  • Question..I thought if you lived ina property for at least 2 of the preceding 5 years, you could sell and not be taxed on gains? So couldnt you then use that money to buy a rental without that portion being taxed when you later sell the rental?

  • Do you have to use the entire amount of the sale of your current property in the exchange? Can you withhold a portion of it? For example, i'm selling my property for $112k. I initially purchased the property for $60k and have paid it off. Can I withhold $60k of it and use only $52k in the exchange? Would I be taxed for the $60k? I'm not talking about waiting the 180 days period but to withhold the $60k up front. Thank you.

  • I was told by another investor that if you have a multiplex held in an LLP or S Corp, you can in fact be a tenant and still run the exchange through the legal entity, even though it is your residence, since the owner is the LLC, and it is not the residence of that ‘owner’. Any thoughts?

  • No year and a day tax code mandate. It should be longer than a year and the longer the better, it's very grey. If you sell to a related party then it's going to be at least 2 years. Please please please speak to a tax professional before doing anything! Very critical.

  • NOTES:

    The 1031 Exchange is a powerful tool to maximize wealth while minimizing tax burdens. Here are six rules to keep in mind.
    1. In a 1031 exchange both properties must be business or investment. You can’t do it with a primary residence.
    2. If you sell something, within forty-five days you have to identify the exchange property.
    3. You have six months (180 days) to complete the exchange after the sale. This is a firm deadline.
    4. You have to work with a company who holds the money in escrow. You will never have access to it. It goes from the sale to the escrow to the purchase.
    5. You have to take title on the new property in the exact same way as the old.
    6. You have to buy an equal or more valuable property.

  • If you inherit a property and sell you will not have to pay gains on the profits, they do a stepped up value on the transfer that begins on the date the person passed away. So the basis for gains gets reset, which is another great way to transfer wealth to your family since they will not have to do anything to capitalize on the gains.

  • I've got a case. We identified the properties and we were never able to close on them. But the 1031 Exchange company or the qualified intermediary released our funds in 2019. Do we pay the taxes in 2019 or 2018?

  • I have a question. I live in one of my parents home rent free. I am in the process of buying a new home. My parents want to sell the home I am living in and use the money to help me pay for my new home. Will they have to pay capital gains.

  • Clayton, I had a call with your team yesterday with the intent of looking to 1031 into a few of your properties. We don’t own the current property free and clear so would need to finance the new acquisitions but was told by your guy that you only allow cash purchases. Am I to believe that your services are just not appropriate for our situation?

  • This is probably one of the reasons President Trump didn't reveal his tax returns. The Liberals and Democrats wouldn't understand how the 1031 works or will probably want to ban it.

  • How Does closing costs factor in? example to try and simplify. If I buy a house for 70 K and sell for 170 K. I profit 100K. So I have to go find another house for 170K but I will have to pay closing costs. So should I find one for 160 K and leave 10 k for closing costs? insight is appreciated

  • For 200% rules I have searched online and YouTube, it’s not clear whether all or subset of the identified replacement must be purchased, does anyone know? For 3 properties rule, it’s clear on many resources online that any or all 3 needs to be purchased.

  • Stopped watching at 7:31 because it shouldn't take this long to get to the point.
    There are cat videos I should be watching!

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