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If you would like to trade up, or simply change some of your Real Estate holdings without being killed on your taxes, then a "1031 Exchange" should be part of your strategy. What the heck am I talking about? I'm glad you asked!
If you have held a property for investment purposes but are ready to make a change, then you need to plan ahead to protect your profits from the tax man. In addition to your Capital Gains, the IRS will also be coming after the depreciation deduction you have taken on your prior tax returns.
You didn't think there were going to forget about all that money you have been deducting, did you? Sorry, they aren't. But if you know how the IRS works, you shouldn't be surprised that they also provided a loophole big enough for Investors to drive a truck through. The process is a little complicated, but in a nutshell, the IRS will let you defer the taxes due from Capital Gains and recaptured depreciation indefinitely, and maybe eliminate them forever. Yes, you heard me right. Deferred the taxes for now, and possibly eliminate them forever.
This loophole is called a 1031 Exchange, and the name comes from Section 1031 of the Internal Revenue Code. This section of the code is where you can find the guidelines regulating the dos, don'ts, and the timelines for pulling this off. They don't make it easy, but it is not that hard either.
There are very specific timelines that need to be followed and certain rules about property values that need to met, but overall the process is pretty straightforward as long as you have a knowledgeable professional helping you with it.
My experience Real Estate Investing and 1031 Exchanges...
I think it is funny that most Real Estate agents will be happy to show you "investment property", but they haven't ever had any of their own, and don't know the things that will really help their Investor clients be successful. My first tenant picked up his keys in January of 2000, so I've been at it for a while. At one point, I owned over 50 units and controlled another 50 through long term options, in a mix of houses, condos, duplexes, and apartments worth about $10 Million. Along the way, I built the highest rated Property Management company in Auburn, Badger Properties. In 2013, I decided to start making changes to simplify my life, and I spent the next few years scaling back my business to something I could handle myself. Unfortunately, that's when I realized the difference between selling in a "tax smart" way and just selling without considering the tax implications. The difference can be sickening, I can tell you from my own experience. I've paid over $230K in income taxes in a single year - and that was an expensive lesson I'd like to help you avoid.
As part of my newfound appreciation for the power of the IRS, I went from "knowing about 1031's" to making them a core element of my personal investing strategy and a major part of my Real Estate Brokerage. My Brokerage is called Auburn Investment Properties, and we have helped our clients do many 1031 Exchanges, both as buyers or sellers, or both. In 2018, more than half of my transactions involved a 1031 on one side or the other, moving between $1-2M of investment capital from one property to another while deferring (and possibly avoiding) the taxes on those properties. I don't know for sure that I've done more 1031 deals than anyone else in Auburn over the past few years, but it is certainly possible. I know that no other Brokerage focuses as much on serving Investors as mine does. I can speak your language because it's my language too!
If you have held a property for investment purposes but are ready to make a change, then you need to plan ahead to protect your profits from the tax man. In addition to your Capital Gains, the IRS will also be coming after the depreciation deduction you have taken on your prior tax returns.
You didn't think there were going to forget about all that money you have been deducting, did you? Sorry, they aren't. But if you know how the IRS works, you shouldn't be surprised that they also provided a loophole big enough for Investors to drive a truck through. The process is a little complicated, but in a nutshell, the IRS will let you defer the taxes due from Capital Gains and recaptured depreciation indefinitely, and maybe eliminate them forever. Yes, you heard me right. Deferred the taxes for now, and possibly eliminate them forever.
This loophole is called a 1031 Exchange, and the name comes from Section 1031 of the Internal Revenue Code. This section of the code is where you can find the guidelines regulating the dos, don'ts, and the timelines for pulling this off. They don't make it easy, but it is not that hard either.
There are very specific timelines that need to be followed and certain rules about property values that need to met, but overall the process is pretty straightforward as long as you have a knowledgeable professional helping you with it.
My experience Real Estate Investing and 1031 Exchanges...
I think it is funny that most Real Estate agents will be happy to show you "investment property", but they haven't ever had any of their own, and don't know the things that will really help their Investor clients be successful. My first tenant picked up his keys in January of 2000, so I've been at it for a while. At one point, I owned over 50 units and controlled another 50 through long term options, in a mix of houses, condos, duplexes, and apartments worth about $10 Million. Along the way, I built the highest rated Property Management company in Auburn, Badger Properties. In 2013, I decided to start making changes to simplify my life, and I spent the next few years scaling back my business to something I could handle myself. Unfortunately, that's when I realized the difference between selling in a "tax smart" way and just selling without considering the tax implications. The difference can be sickening, I can tell you from my own experience. I've paid over $230K in income taxes in a single year - and that was an expensive lesson I'd like to help you avoid.
As part of my newfound appreciation for the power of the IRS, I went from "knowing about 1031's" to making them a core element of my personal investing strategy and a major part of my Real Estate Brokerage. My Brokerage is called Auburn Investment Properties, and we have helped our clients do many 1031 Exchanges, both as buyers or sellers, or both. In 2018, more than half of my transactions involved a 1031 on one side or the other, moving between $1-2M of investment capital from one property to another while deferring (and possibly avoiding) the taxes on those properties. I don't know for sure that I've done more 1031 deals than anyone else in Auburn over the past few years, but it is certainly possible. I know that no other Brokerage focuses as much on serving Investors as mine does. I can speak your language because it's my language too!
Let's work together to create a plan of action that accomplishes your goals.
Chris Kearns
Auburn Investment Properties
Chris Kearns
Auburn Investment Properties