1031 Tax Savings Strategies You Probably Don't Know About

0:00If you discovered 1031 exchanges you decided to buy and hold it sounds like what type of Investments were you investing in well we we did all sorts of different types but typically we initially stayed with single family rentals small multif family rles and then when we ended up in Florida it was like such a ripe ground for vacation rentless so we got in at a time where we could buy single family rentals on the water with a boat dock in the back for people are going to gag when they hear this $250 $300,000 and we would rent the houses on weekly rentals and then we would also rent the boats so we were generating basically double income off of every house and

0:48This was so early well they call themselves verbo now but back in the day it was VRBO and we were their initial client in Southwest Florida our pictures were on the front page of that listing area for that reasion so we hired a manager who managed them for us because obviously we were not going to be geographically bound but once the purchase was completed you got a manager You' got your trades people cleaners Carpenters boat captains you can run these things pretty smoothly from a distance and manage the manager and that cut her effort down quite a bit but what was cool is that what the 1031 exchange allowed

1:37Us to do was to first of all get from Colorado where there ain't no ocean front as a matter of fact that was kind of the funniest thing was my wife's from Minnesota there's no ocean there I'm from a Kansas farm boy there's no ocean there we met in Colorado there's no ocean there where did this come from yeah we tried to think of the cheap way we could live without having to be bound by a bunch of expenses and we a sail boat that's got to be free yeah let's go there buy a sailboat without knowing anything about it but the 1031 exchange allowed us to while we were in Colorado we would buy we would hold we would sell every time we sold we would do a 1031 exchange so

2:25All of the profit and the tax stayed with us and then as we got ready to move to water we did 1031 exchanges and moved all of our portfolio to Connecticut to get to water where we can get the boat well because you're always buying at least as much as you sell and because you're not just using the profit but the profit plus the tax plus the tax that you deferred on the last sale it becomes kind of of a composite of compounding interest so that pretty soon you're making on money you're making money the rest of your life off of money that you actually owe to the government and

3:14So that was the transition that we made with one huge bonus and that is I are you familiar with the primary residents exception yes you get 121 says that if you buy a house live in it for two years you sell it then as a married couple you get to take the first $500,000 of profit taxfree taxfree wow if I could tell anybody to do one thing that's going to make your life absolutely the best in 30 years it's go by a house live it it and when you're ready to move sell it and take the money taxfree do that by yourself 8 to 10 times is how many

4:02Times you'll typically move and that could be anywhere from five from from a$2 to3 million of profit taxfree now if you make 10% off of your Investments and you've got $2 million of taxfree money over the course of 30 years doesn't that mean that you're retiring on $200,000 a year without doing anything other than just living in the property now results differ for different people I get it but that's the promise now the way that we used it you can convert investment property from investment into your primary residence so

4:50When we did the 10 ear changes to Connecticut one of the houses that we bought with our 1031 exchange we ended up confirming burning into our next primary residence and then once we' lived in it long enough then again now this is part of 2008 back then you could get all the profit taxfree so back then all that money became taxfree when we sold it well that money went into the buy the boat Kitty and the rest of the 1031 exchanges went to building the portfolio to live off the rentals by the time we had done those conversions four or five times we had enough to buy the boat with taxfree dollars wow and then the vacation rentals provided our living expenses wow so

5:39You just pick the property then like in Connecticut that was the most probable to have the biggest appreciation possible so that you could then tap into which I know is a concern for a lot of people they like well I can't tap into the money then or get access to the money because I'm keep rolling it over into new Investments but you could actually liquidate a big chunk of that taxfree money then yeah that's exactly right and that has actually become the retirement plan for a number of my investors so they do what I call the up and flow of the 1031 when you're young and energetic you grow grow grow grow grow so you sell one you buy two you sell two you buy four you can change geographies so you can sell in California which is usually going

6:27To be a high-priced asset go byy in Kansas City where you can get a large number of properties for that same price so you're building a building ability but then you reach a point where you start to get a little tired and you start to consolidate so you sell two and go buy one but that one is going to be easier to manage or you sell several buy a multif family property without site management convert turn one into your primary residence take a portion of that taxfree those are all different ways of doing it I have one client who has who used his to in exchange to buy three identical beachfront condos on St b

7:16Beach same floor and everything they're basically just about right next door to each other so this is his retirement plan Kirby his bits genius he's the one that came up with it first by the way I didn't have to tell even so he move he convert converted the first one moved into it now it's his primary residence when he had owned it for five years and had lived in at for two out of those five he could sell it and he did and he took two fifs or 40% of the profit became taxfree I said well you're still going to pay a little bit of tax right he goes yep I am but Dave if I was going to have to deliver pizzas or B crochets I'm

8:04Paying tax on that money too so I'd rather pay tax on money where I'm just sitting on my back porch drinking coffee now where do you think he booed Kirby next door yeah they're planning on living in that one for8 years because they'll have owned it 410 and they're going to living it for eight out of 10 so they will get that 80% of the gain taxfree and then they'll move into the third one what a retirement yeah so that's what the 1031 exchange can allow you to do throughout your life you get to live off the rental income

8:53You get to live up more rental income because you're buying bigger and you're getting to live off rental income that is being subsidized by the federal and state government because instead of paying the tax they're letting you keep it for your benefit so instead of paying Uncle Sam Uncle Sam's paying me yeah that's great yeah and I think a lot of people that I talk to have heard about this 1031 exchange thing and they're like well you know it's just a way to kind of defer taxes and they don't understand that there's actually strategies that you can employ depending on what your goal is and get real specific with these different strategies to you know to use this tool to

9:42To really like you said I mean leverage Way Beyond what you could if you were paying taxes every time you you sold the property so yeah what what so if somebody's sitting on a property and they've got a whole bunch of equity in it and they're trying to decide should I sell it into do a 1031 and something else or Should I refinance it and tap into that Equity how how do you help walk them through what decision makes the most sense for them that is a great question K because that's kind of that's the real Crux of the whole matter and what I do is I simply steer people back to that property don't ever look at a gadget that you want to use look at the performance of what you've got

10:31And then say how do I need to tweak what I've got so I don't I don't go buy you know a coola radio for my car when it needs a muffler yeah so I don't want to use a 1031 exchange if that's what's not needed but the best way to do it is to go back and look at that property and first of all say is it performing well for me well if it's performing well then I've got to take the next step and say okay what if I refinance how is it going to perform because a good performer now is not necessarily a good performer if you owe three times as much money at seven or eight% so you've got to really stress test that

11:21And then you've got to look and say okay if I refinance I'm not going to get 100% of the money anyways I'm going have to leave 25% in is there something that I could do with that additional 25% because that's what the 1031 exchange allows you to do is to take all of the equity into your new property so I'll have people many times who who will decide I think our refinance is best but then I have a lot of people especially now who are saying no given that interest rates are doing what they're doing I kind of I think I'm better off doing a 31 because there's another cool little tactic that they can use and it's what I call recession proofing your portfolio so let's say I've got a

12:09Property that I could sell for 500,000 and it's got $300,000 in debt my responsibility if I want to defer all tax is I must purchase $500,000 of real estate using all of my Pro it's $200,000 or let's say it was $ 250,000 well I could go buy one property for 200,000 cash now when I do that I don't have to worry about debt I'm not about interest rates and if anything goes bad all I've got to do is keep the lights on and that property is safe I then take my proceeds the

12:58Other 50,000 use that as a down payment so I'm still getting the additional Arbitrage of Interest I bought as much as I sold I used all the proceeds I completed my 1031 exchange the tenants are still paying the amortization of the loan what's not to like about that and that's an example of using the sale of one to go buy several w