What Happens When You Sell A 1031 Exchange Property - YouTube

So what happens when you sell  a 1031 exchange property?

We're gonna go over that right here, right now.

You're gonna learn about actual exchanges and  the certain processes that are going to happen  

in each step. I'm also going to talk about examples  of 1031 exchanges that may apply to you and lastly,  

I'm going to show you some resources that you  can go to to learn more about 1031 exchanges  

and finally and most importantly, I'm going to  talk to you about being careful on your 1031  

exchange and who you pick as an intermediary.  So, when you do a 1031 exchange you're  

trying to get as much capital or cash as  you can out of your property when you sell  

and use that cash to buy the next property. The  challenge is that if you don't do a 1031 exchange  

and you get the cash you have to pay capital  gains tax on that cash when you receive it. By not  

taking the cash and doing a 1031 exchange  you are avoiding having to pay taxes  

right then and there when you sell the  property and you're able to use the extra cash  

to get a bigger property and we'll talk about  some of the reasons you may want to do that.

But first, let me show you what actually happens when  you do a 1031 exchange. Like any other real estate  

transaction you're going to end up selling your  property but in your contract you're going to put  

that the buyer agrees to cooperate with the  seller at a 1031 tax deferred exchange at no  

cost or delay to buyer okay. That's typically what  we put in the contract there needs to be some  

language in your agreement that you're cooperating  in an exchange. So I sell this house that I bought  

for let's say I purchase price pp means purchase  price for 250,000. Let's say I had it for like  

four or five years and today it's worth 400,000 and I sell it for 400,000.  

I'm going to leave out the cost of sale, real estate fees, and those other things  

for the simplicity of explanation. But in this  particular case my gain from 250 to 400 is how  

much? it's 150,000 right?  So, I had a $150,000 gain.

A $150,000 gain. But I also have another gain and that gain  

is depreciation. Depreciation let's say for  our example is 50,000. So I'm going  

to add another 50,000 in depreciation.  Okay, so my gain is 200,000 on this sale.  

Why 200,000? I bought it for 250 I sold it for 500. So, 400 my 250 is 150 and I've got the depreciation  

these are paper losses that I took which I  talked about in other videos. Where I depreciate  

the value of the property as it decreases in  value over time because it's getting older.  

That 50,000 now has to be included in  my exchange. I have a tax basis, right.  

A tax basis and I have what I paid for it when I  sell it for and then I have what my basis is for  

taxes. That sometimes confuses people but all that  means is that the what the value of the property  

is for my taxes is decreasing and I'm taking  tax breaks for that or tax expenses for that  

legally and I have to recapture that when I sell it. I have to include that when I sell it. 

I don't that just doesn't go away. So, as I sell  the property but now I buy a $600,000

property. So maybe I got four units here.  So I sell this property like I always  

sell something that's my down leg and this is my  upline, right. So the up leg is property of mine.  

Now, here's what happens. Normally when you sell  a property you get a check or a wire from escrow  

and it goes right into your bank account. In this  case that doesn't happen. The cash from the sale  

goes into an intermediary. An intermediate  a person in the middle. So, here's the  

cash from the sale, okay. It doesn't go to you.  Does not go to you, okay. It goes to a third  

party called a qualified intermediary which  is a licensed person who takes that cash  

and then uses that cash as your down payment to  buy your next property. Alright, you buy your  

next property just like you bought just like  any property. You go to the bank, you get a loan.

But you use the proceeds from the sale. In this  case whatever it is depends on how much debt you  

have on the property, right. You take your proceeds  from the sale and use those proceeds to buy the  

next property. Now, why would you do that? You do  that because it allows you to have more cash  

to buy the next property, right. There's two things  going on here. One is what you pay for the property  

and what you sell for that's one calculation.  I paid 250 and it sold for 400 so I made 150.  

But I also have to recapture my depreciation. So, for tax basis my tax basis is not 250 it's  

actually 200 now. You see how it went down because  of the depreciation. So now, that 200 is what I  

would normally pay taxes on the difference between  the 200 and the 400. I would pay taxes on 200,000  

even though you think well I paid 250 and I sold  it for 400, right. So I made 150, you made 150.  

Plus the 50 you have to recapture depreciation  and that's an important calculation to remember  

and this is why you want to subscribe. Because  these are the input. These are the details of...  

These are the details that you need to know  when you're doing 1031 exchanges or you're  

investing in real estate. All these little things  are what help you to get the extra dollars and be  

successful, okay. So, once you sell your property  again like we talked about you have 45 days.

45 days to id three properties that you're gonna  buy. 45 days to id three properties and how long  

do you have to set to close it? You have 180 days  not 181 not 185, not close enough. You have exactly  

180 days from the day that you close this deal.  Make sure you use a qualified intermediary  

and make sure that you for sure get the rules and  follow the rules so you don't end up thinking you  

didn't exchange and you did it wrong and then you  end up owing taxes with the cash you've already  

put into the other property. So recently I did  a 1031 tax-deferred exchange and I'm actually  

in the middle of it right now and something came  up just this morning which put me at risk and I  

only identified one property during the 45 day  period thinking there was going to be no issues.  

By identifying the one property I didn't have  the other two properties. I sold a fourplex in  

California for about 875,000 and I was buying an  apartment building 15 units for about 2.3 million.  

The lender just this morning did an environmental  report which said that the sellers had filed a  

licensing and permit for hazardous waste on the  property. This hazardous waste to the lenders  

like what is this? So we have to do what's called a  phase one which is to look at the ground and make  

sure everything's fine. It's all residential  I don't think there's going to be an issue.  

But had there been an issue which I don't think  there's going to be. But had there been an issue  

I may not be able to complete my exchange now  because I only identified one property. Because I  

was so certain that this was going to close. This is why you want to identify three properties  

always go shopping and at least identify those  addresses and have them with your intermediary.  

You give that information to your intermediary.  what you're gonna buy? So don't just pick one  

pick three and close one so that's important. So  we're going to talk about the next video. How many  

properties can you identify in a 1031 exchange  and why you want to do that. I'll see you there.