1031 Exchange Tax Free Real Estate Investing

 

1031_Exchange_Tax_Free_Real_Estate_InvestingThe 1031 exchange is a technique that allows real estate investors to sell their investment properties and parley the profits into their next acquisition tax free. Well, perhaps it is more accurately described as “tax deferred”. There are many rules that you must follow in order for the 1031 exchange to be allowed by the IRS, but when you handle all the details correctly, you can build wealth much faster by avoiding capital gains tax, depreciation recapture, state taxes (in certain states) and for some taxpayers, the new 3.8% ObamaCare tax. You’re about to discover the ins and outs of the 1031 exchange so that you can decide how and when to employ this tax saving technique to your own investments.

 

 

 

Here is a summary of what you learned in the video above:

1031 Exchange: Tax Free Real Estate Investing

 

The 1031 Exchange is a section of the US tax code which describes how a real estate investor can buy a piece of real estate for intent of investing and resell in a few years without having the money they gained from the sell taxed as long as they reinvest it. It would be as if you bought a house for 80,000 and after a few years, you sold it for 100,000. So you have a gain of $20,000 that can have some significant taxes hitting it. There’s a capital gains tax, depreciation recapture taxes, local taxes, and possibly the Obama tax depending on your income. If your whole intent in selling the house was to reinvest the money, With the 1031 Exchange you can take the complete $20,000 and put it towards a new investment without paying any taxes on it.

The intent must be for RENTAL properties, not for flipping houses.

Net Selling Price

If you bought a house for $80,000 but are now selling it for $100,000 the new investment you want to apply the gain towards must be at least $100,000 or bigger. It can be multiple properties that are less than the $100,000 but the total amount must be at least $100,000 or bigger.

 

Identify the Properties
You have 45 days to identify the property you want to buy and then close the deal within 180 days. If you do not close within 180 days they will send the gain money to you and then you will have to pay the taxes on it.

 

Your Intent and Length of Ownership
Length of Ownership needs to be at least two years in order to be considered “safe harbor”
Intent to rent out properties

 

Same Tax Payer
You cannot buy and sell with partners. If you own the money, then when you go to buy the new property, it must be in the same name.

 

The Process:

 

  • Get the property you are selling under contract with a new buyer
  • Identify the Intermediary
  • Intermediary will approve the HUD closing statement
  • Money goes into an Escrow Account
  • Identifying Period 45 days
  • Closing Period: 180 days

 

Quick Tip Example:

 

  • Bought a property for $80,000 Cash
  • Put $10,000 worth of Rehab into it
  • If you want to do a 1031 Exchange then create your own Mortgage with you as the borrower
  • So that at the HUD closing it will show a $90,000 payoff to you
  • Technically you do not want that money in Escrow so in order to get paid on the closing statement you make your own mortgage.

 

What if you identify the property you want to buy before you have a contract on the property you want to sell?
Reverse 1031: The property is purchased first in the name of the EAT (Exchange Accommodation Title Holder.) You must have the cash and loan to buy it, then sell your property, and the proceeds on what you already purchased will go over to the new property.

 

In Closing

 

The vision and the reason why the 1031 is such a valuable tool is because you can take a rental property and sell it, then take the proceeds to your next investment, refinance, and do this again with an even bigger property. It is long-term wealth building. Take advantage of this if you are planning on or already own rental property.

Comments

  1. More info

  2. Mary A. Leonard says:

    Hi Phil,

    Thank you for sharing this information. I am new at this and want to learn all I can.

  3. Phil:

    Did I understand you to say that the newly purchased propery must be a rental property?

    -E

  4. OMG, that 1031 concept sounds so exciting, I will look at it in depth, thank you so very much.

  5. Okay, Phil here’s my scenario;
    In 2013, I bought a REO for $20k. I put $13k of rehab into it and it’s currently a lease-option rental, where the 2-year lease period ends next month. The house will sell for $48k.
    When I go to closing, I plan to use the proceeds to pay off a balloon mortgage balance of $26k on another investment property I had since 2011. So my question is:
    WILL THIS SATISFY the 1031 EXCHANGE TAX FREE RULE?

    • Phil Pustejovsky says:

      I don’t think so. You would need to take the gains on the deal you are selling ($15,000) and use that money to buy a new property that is more than $48,000.

    • My 1031 exchange person told me that I have to start from the base and then go up. So if I bought a property for 400,000 and I refinance the property and did improvement for another 450,000 then my base for that property would be 850 minus depreciation. If I sell that property for $3 million then I’m responsible for the games off 850 -$3 million. So if I purchased three properties that total $1 million then I’m still responsible for over $1 million in capital gains which is taxed 23%.

  6. Very nice Phil Thank you I need this information

  7. Jacob Vincent says:

    Phil,

    I gotta tell you thank you so much for sharing your knowledge to us aspiring and new real estate investors. Watching this made me wish that I had started in the RE investing game back in the pre-bubble years when it was so easy to get started. But as someone who is looking to play only in the Buy & Hold space, this knowledge is definitely valuable!

    Thanks!
    Jacob

    • Phil Pustejovsky says:

      Best day to have begun investing in real estate was 20 years ago…the next best day is today.

  8. Herman Natividad says:

    What would you do with a rental property that is under water? Was loan modified and a balloon payment of $84,000K was created to make things worse. Law office of Brian P. Butler people lied to me to get me to modify what was an up to date mortgage loan although it was 3x behind some years back in the year 2008. I filed for bankruptcy in 2010 and discharged in 2011. I feel stock but I want to move on also.

  9. Very good, thank you. You explained the essentials very simple. I understand it better.

  10. Hi Phil,

    Just wanted to drop an email to let you know how much I enjoy watching your RE vids and reading your investor book. Very educational and informative. I have always been interested in RE investing. I have 2 properties currently, 1 rental and the other my primary residence in a pretty exclusive county in VA. My next plan is to buy a beach condo and provide rental availability for at least 1 week and not more than 1 month at a time. This way I would be receiving some rental income that will help me with the mortgage as well as the association fees. I am guessing that there will be a bit of a tax break for this condo when I file my taxes.
    Again, thank you for all the wonderful RE information you provide. Your the BEST!!!

  11. Hi Phil,

    I thought this was a great video. It’s nice to hear someone talk about how to benefit from the tax code for investing, rather than be a victim of it. It was a bit confusing for me, but I’m sure I can get the answers I need to better understand. Thanks a million.

  12. on the very last part you did a refi and then you said you can do another 1031…when you pull cash out with a refi is that a taxable event so that’s why you would do another 1031 or are you just saying with that property you can do another 1031 after a few years of renting to buy another bigger nicer property?

  13. Unfortunately, doesn’t apply to Canada 🙁

  14. I would like to know how the commission plays into this 1031 EX?
    Thank you

    • Phil Pustejovsky says:

      Commission is an expense on the closing statement like every other expense on the closing statement.

  15. Please send me information on this 1031 tax

  16. Latasha Kinney says:

    Love this new information

  17. I wonder if you have seminar or video on promissory notes or rent with option to buy
    thanks

  18. A million thanks, Phil!
    I don’t know if you emailed me this link to me personally or not, but I really appreciate your making this video!
    Margareth

  19. Bobby sahye says:

    Great and excellent piece of advice.Thank you very much

  20. Dr. Steven McNeel says:

    Dear Phil,

    Can a 1031 be used when the property being sold is a lease/option? Thanks and I remain,

    your most Humble Servant,
    Steven

  21. However, at the end there is no escape from big brother partner.
    If you sell and want to get out at certain age, you will pay all those deferred taxes at the end, yes?

    • Phil Pustejovsky says:

      Keep doing 1031 exchanges and then when you head to heaven, you’re heirs can pick up where you left off without taxes if they decide to sell.

  22. What about donations? For instance, if someone was to donate a building to a non for profit organization?

  23. Leslie Volochenko says:

    in your statement i always thought it was 45 days plus 180 but it is total of 180 days
    to close this deal from the beginning.
    is it not better to take some of the income and pay it on your Taxes?

    i sold a lot made $110,000 i had to pay $11,000? to the IRS. we did an estimate and the accountant missed it.!!! I had to pay more tax and a penalty.
    3 months later i purchased a missile base but i did not use the tax ideas

    this is when you use people that do not know what they are doing.

  24. Linda Chea says:

    Hi Phil,
    I would like to ask you about another method that I am about to do is the C453 Transaction and a separate Loan that we can get the money after sold the property. I do not want to buy another property and do the 1031 exchange. I am no longer want to be landlord. This C453 has to work with S..Crow Collateral Corp. that is dealer that will help us to get the money and pay less than tax. They said that this is the best method to defer tax gain even better to rescues when 1031 exchange failed. I do not trust to do thisC453 yet that is why I am asking you to help me decide. Thanks

    • Phil Pustejovsky says:

      In simple terms, you are selling on an installment contract, and so long as the borrower pays you, everything is great and you end up getting paid over time. But if those payments stop coming in, then you have a real problem on your hands.

  25. Francois G says:

    Is it possible for a South African that is in the USA on a student visa to qualify for a mortage loan and if so ,which banks can i approach.Thank you.

  26. if you own rental property free and clear, can you refinance and get some money out for your personal use without IRS issue. 2) If You buy your house for 100K, you sell it for 120K but the loan on the house is 130K Do you still owe IRS.

    • Phil Pustejovsky says:

      (1) Yes
      (2) Maybe. Since you resold for more than your cost basis, you technically created a capital gain when you sold it, regardless of how much you owe.

  27. Balak Jignyasu says:

    Wonderful Video.

    After multiple iterations and cash out refinance, can I make the final property my primary home to avoid depreciation recapture?

  28. Dave Fralick says:

    Phil,

    Is there a way to roll profit in flips into another property similar to the 1031 exchange on rentals? If so do you have a video on that process?

  29. Carlos Castellanos says:

    Hello Phil,

    First and foremost, thank you for sharing your knowledge and experience. You are an exceptional teacher and your information has helped me immensely . I think I’ve watched every single one of your videos at least twice. Some 4-5 times.

    I own a vacant waterfront lot in Punta Gorda FL free and clear. Would I be able to roll the proceeds of that sale into a rental property using the 1031 exchange?

    Thanks again. Wishing you and your family a wonderful Thanksgiving : )

  30. Love the video!!

  31. Will Shaban says:

    Which is better a 1031 Exchange as an individual or creating an LLC and deducting your expenses that way?

  32. Cliff Fung says:

    Thank you Phil, all your videos are very knowledgable for investing.

    Thank you

  33. Javier Caballero says:

    200K house bought 10 years ago, always rented as of today
    I want to build a new house, 300K investment
    And after I’d like to sale it
    Estimated sale price 700K
    Depreciation 25K
    May I use 1041? If yes, how much is the minimun cost of the new investment? 225K?

  34. SO WHEN YOU SPEAK OF AN INTERMEDIATOR YOU ARE TALKING ABOUT AN ATTORNEY?

  35. Dionisio Castaneda saavedra says:

    Thanks Phil.
    i just get it about 1031 free tax n i going in deep video watch on online to learn more. Thanks again. Im dionisio castaneda saavedra from New York

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