What is a 1031 Exchange? Should YOU use them? - YouTube

All right, hey, everyone, today I've got an exciting topic for

you all, we're going to talk about 1031 exchanges.

You probably already know, but one of the greatest

benefits of real estate other than generating wealth

is the tax advantages that it offers, and 1031 is actually

the number of the code section that this benefit comes from.

But, you know, unlike the rest of the code, it seems like

every real estate investor has heard this at one point.

The one code that everyone can recite.

So today we're going to talk about exactly what advantages it offers and

some of the basics on how you can achieve the positive tax results from this.

So first, I'm just going to talk about

an example to kind of illustrate how this works in real life.

So let's just assume that you purchase something for $100,000

and for that purchase,

you're able to get an 80% loan to value.

So you're putting down 20,000

and you're taking on a loan of 80,000.

And now the market has been good.

It hasn't lost any value.

It's actually increased.

And you've decided that either

you don't want to own

this type of property before, you don't want to own this specific property

or you're just ready to go on to the next bigger asset class.

Whatever the reason may be, you're now looking at the property

has increased in value, and let's say it's

increased to 200,000, which in today's market,

if you've held it for long

enough, is not totally out of the realm of possibilities.

So then you've identified another property

that you would like to acquire, and let's say the cost of this property

is 500,000.

So you're selling something that's now worth 200,000.

And just as a quick note,

in case you haven't seen it before, FMV is fair market value.

We'll probably use that as we kind of continue through the video.

So keep that in mind.

So let's look at some of the quick numbers here.

Relinquished another important term to talk about.

This refers to the property you already own

and you're selling the one that you want to upgrade.

So we've already discussed the fair market value is now 200,000.

Let's just keep it simple, and let's assume you have not pay down

the debt or you've refinanced.

But essentially,

whatever the reason, the debt amount is still that original 80,000 for simplicity.

So now you have equity of 120,000 in this property

if you were to sell this property and let's kind of go through that

so we can kind of see why we're working so hard here

to get a 1010, 31 accomplished.

So if you were to sell this property

for the 200,000, it's worth well, nor selling costs.

We're keeping it simple and you paid

100,000.

Well, then

again, we're ignoring depreciation in some other tax benefits.

But on a very surface level, look,

you've got a gain here

of 100,000 if you sell.

Typically, the tax rate, as it stands

now, is a potential 20% capital gains rate.

So this means as soon as you sell 20,000,

it's gone right off the top.

It's no longer yours.

So if you think about what is happening here

now, your net, you only have 80,000 to invest in a new property.

So let's go back and let's look at if we do a 1031 exchange.

So again, selling Flynn for 200,000.

We have debt of 80 and we have an equity of 120,000.

We've identified a replacement property for 500,000.

And we know after going to the bank, we can get a loan of 380

on this one, a little less than 80% loan to value.

Well, it just turns out that we need equity of 120, which is exactly

what we have sitting over here in the property we're trying to sell.

So if we can take all of this?

And put it right back into

this property without paying tax.

Then we've essentially been able to acquire

a larger property and we may have otherwise been able to do

because if you'll remember on the last slide that we had,

there's a tax of 20,000 if we were to sell this property.

So if that were the case, you only have 100 to invest.

That means you've got to come up with that somewhere here.

You either have to increase your debt, which obviously would change your cash

flow on the property, put you a little more leverage

or you have to come up with the cash somewhere else.

So the 1031 allows you to essentially defer that tax,

defer being different than really, you know, avoiding it forever.

So eventually, most of the time that'll come due.

But in the meantime, it allows you to grow your assets and your wealth

without having to pay that tax.

The government allows you to keep reinvesting that and putting it to work.

So that's the main advantage of using a 1031 exchange.

And now the question really becomes How do you actually execute it?

What are the rules behind the 1031?

So real simply put, there's two big requirements.

one Yeah.

45 days to identify

the property that you're going to use as a replacement.

And the 45 days starts counting once you've sold the asset

so you sell the property that you own.

Currently, you have 45 days to identify the next one.

The next big deadline is 180 days

and very important.

Don't confuse us with six months.

A lot of people say six months in their head.

It's not six months, it's 180 days.

A lot of people have missed exchanges by a day or two

just because of thinking about it that way.

But essentially you have 180 days

to close on your replacement property.

And if you're able to do that and you put all of your equity

in from the relinquished property into the replacement, you'll be able

to receive some of the tax advantages that are associated with a 1031.

So thanks for watching.

I hope you got something out of this.

If you have something in the works right now, you're thinking of upgrading.

Contact your CPA or advisor and do it sooner rather than later.

You don't want to find out after

you've already started the process that something was missed.

Go to the advisor page.

Check out the

links and thanks again for watching, and I'll see y'all in the next video.