In the short term rental riches will discuss investing in real estate with a specific focus on short term rentals quick action items to wire. Scale your portfolio I’m your host Tim Hubbard.

Welcome back everyone to the short term rental riches podcast excited to talk about 1 of my favorite things in real state today 1 of the biggest wealth creators that helps us save on our taxes and that’s at 1031 exchange such a powerful powerful tool and just for real estate investors said before we get in however if you have been enjoying this podcast I would really appreciate it if you could head on over to iTunes or stitcher or Spotify or wherever you’re listening just leave us a little like leave us a comment and if you find something helpful in this episode or any of the episodes we’ve done before if you could just share it with whoever you think might find a little value in that it would be much appreciated so let’s talk about 1031 exchanges away to defer your taxes on your capital gains from your investment properties 4 and we’re forever isn’t that amazing. So we’ll talk about the basic rules some things I’ve learned from a couple of changes that I’ve done recently a couple things to look out for and hopefully just provide you a good foundation so if you haven’t done 1 already you know what they are how they work and you have a couple tips to help you along the way but before you jump into 1 make sure that you consult with your tax professional or your accountant or your intermediary which I’ll talk about here in a second just because I am not an accountant and I am not a tax professional so while I think my advice will help quite a bit just double check with a professional before jumping into anything so what is a 1031 exchange well it is a piece in our U. S. tax code and again this is just for the people in the U. S. so if you’re outside of the US always check with your tax code maybe have something similar so 1031 exchange is essentially it’s a swap from 1 investment property to another that allows all of your capital gains to be deferred so capital gains is again if let’s say we buy a property for 100000 and we sell it for 150000 because it’s appreciated that 50000 is our capital gains so we can take that money and we can roll it right into a nother property and not paying any tax on that so there’s certain properties that the IRS will allow you to transfer these into so it has to be a like kind property this can’t be for a personal use and there are limits on vacation rental properties so check with your tax professional on that 1 but in general a like kind property that’s held. For business or investment purposes and there’s no limit to how many of these 1031 exchanges you can do or how frequently you can do them but there are limits on the amount of time you have for the different steps in the process so the first step just break this down for you as simple as as I can that the first step is you gotta have a property with capital gains second step you’re gonna need to identify an acquisition property. You have 45 days to do this it has to be in writing so 45 days from the close of the sale on your former property so one little tips I can throw in there is that if you are considering selling a property it’s best to have some potential properties lined up before you even sell that property one of the issues that a lot of people run into is that they sell property they scramble to find a good one maybe they don’t find a good one so they just end up buying one that doesn’t really make as much sense and I wouldn’t I wouldn’t recommend that we always want to buy properties that make sense from day one so it’s tough is it could be to have to pay tax on that capital gains don’t buy a property that doesn’t make sense if you can identify some properties before you’ve even soldier property maybe it’s off the market deal and you’ve talked with the owner or you can get something in contract and then sell your other property that’s ideal so you can take all the rush out of it otherwise. You’ve got that 45 days identify a property and you can identify 3 properties and now in this whole process you’re gonna have to use what they call 1031 exchange intermediary I’ll give you the link in the show notes to the 1 that I’ve used that’s all that they do so they can clarify any of the details instructions and they’ll go over the whole process with you but essentially you sell your property that has capital gains the funds go into an escrow account with the exchange intermediary and they will hold those funds until you purchase your new properties she can identify 3 properties you could purchase 1 of them all of them or none of them in which case you would go back to paying capital gains tax 1 of the ones that I did recently I’ve sold 1 property and I bought 2 multi family properties she can buy multiple properties from 1 sale and check with your intermediary because if you’re doing a huge sale it’s possible that you could acquire even more than the 3 but you do need to identify the 3 and a has to be in writing and once you’ve identified those 3 properties you have 180 days to close on the next property this is a strict rule so if you have any doubts that you’re not compelled to close in the 80 days 1 of the things you can try to do is delay your sale now in a hot market where they have lots of buyers and lots of options they’re probably not gonna like that if you’re trying to delay the sale but it’s definitely worth trying and something you could try to try to work out to give yourself a little more time to both identify the new properties and then also close on them so you got to make sure you fall into that 80 day rule. But aside from that that’s about it so you sell property of capital gains you find like kind properties investments so could be one real estate investment to another and that type of real estate investment doesn’t vary as much but again you want check with your tax professional so long as it’s a like kind investment you fall within the time guidelines and you will save yourself all of that tax. Is that amazing and you can continue doing that forever essentially 1 of the cool things I found out about last year when I was completing a couple these exchanges you know I was considering that I might not be able to find good properties to exchange into and that I’d have to pay the capital gains tax and I discovered that you can actually do a reverse exchange so if you’ve already bought a property and investment property you can sell another property afterwards and take those capital gains and roll it back into what you spent on that other purchase hopefully that makes sense it’s a little complicated but it’s called reverse 1031 exchange and again you want to double check with your exchange intermediary to see if you fall within those guidelines so check that out if if that might apply to you and how much does it cost to do this we could be saving tens of hundreds of thousands of millions of dollars in taxes there’s no limit to the amount that you can save and to actually do the transaction to do a 1031 exchange is not that expensive either and this will vary from company to company but I think ball park you know maybe around 700 to $1000 per transaction and the most companies let’s say you’re relinquishing 1 property so you’re selling 1 property capital gains in your buying 3 most companies going to charge you per property that you acquire so also 1 sort of set up fee to do the intermediary and then a smaller fee per property if you’re doing more than 1 that’s just what I’ve found in my experience it’s a simple process all share the link in the show notes for the company that I used they’re going to be the ones to go to if this is something you’re considering but as long as you know about it then you can plan ahead and save those taxes and death. Only something else that you may run into is let’s say you sell a property relinquish one property and you have $500000 in capital gains for example and let’s say you only use 400000 of that to buy your new properties through the exchange so you have 100000 left over that didn’t get used up well you’re simply just gonna pay your capital gains tax on that portion so not the end of the world at the end of the world at all really because because you’re made huge capital gains you’re finding good properties the one thing I want to stress is that you don’t force yourself into a property just to try to save those taxes don’t force yourself into a property that doesn’t make sense and we can calculate what properties make sense pretty easily we’ve talked about that in prior episodes you know we’re essentially just taken our rental income minus your expenses so if you’re selling one investment property that has a 10 percent return for example and you’re buying one that has a far less return just speak cognizant of that and you know and just double check that it’s actually making sense the exchange that you’re doing. 1 other note and this is something your agent or your broker that’s helping with the transactions will point out and make sure that you guys get it right but you do have to disclose that you’re doing a 1031 exchange so that will be in your contract and unfortunately sometimes you lose a little bit leverage in the negotiations when the seller of the property that you’re buying knows you’re in a 1031 exchange because they know you’re in a time crunch so hopefully you can get some deals tied up before even sell or relinquish your property and that eliminates all of that loss in negotiation but just be cognizant of that as well there’s also an exchange you can do that will allow you to use some funds for renovation or construction the hard rules are the identification period and the closing period but the amount of properties you’re identifying how you use the funds and how much you use of the funds back in very slightly so check with the intermediary just make sure you understand all the rules before you jump into it and take advantage of it look through your portfolio if you got a tonic capital gains since somewhere and you either don’t want the property or you don’t want to refinance and take some of that cash back out then the 1031 exchange is going to be an awesome option for you hopefully that helps hopefully that gave you a rough idea of this amazing little section of our US tax code until next time hope you have a wonderful day. Want to get on the fast track to financial freedom through short term rentals what all searching the properties you. You want to make sure that you fired the right properties only give you my. Yes there is no charge to you for being one of our subscribers the rest methods. R. E. S. T..

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• Episode 62: Professional Tax Advice From My CPA – Part 2
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