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Vance: This is the Real Estate Guide to Success video series. I'm Vance Poindexter and again
I'm here with Ronnie Adams. Ronnie: Yes.
Vance: Today we're going to talk about 1031 Exchanges. It might seem a little bit obscure.
You may never have heard about it before, but we actually got an e-mail from one of
our readers on the website, Rico, who asked about, "How do I take advantage of the 1031
Exchanges? Has Ronnie ever done it before? And what's the whole deal behind it?" So I'm
going to turn it over to you. Ronnie: Ten thirty one exchange, I responded
to Rico to let them know that I've never done it. But what it is, is the IRS allows you
to defer your capital gains tax from property sale to property sale if you go through a
1031 exchange. So it's almost like taking the profit that
you would have made on a property that you sold, you're putting into the exchange. You're
using that profit in a certain amount of time that I'm not sure it even changes from state
to state, that you have to purchase another property with that profit. And you are deferring
the taxes until you sell that second property. Now if you were to use that once you sold
that property, and the profit you made would have been bigger now, you can put that into
the exchange again and do it again. Vance: Oh, so you could roll it forward even
more. Ronnie: Yeah. You could do it as long as you
wanted to do it but at some point you're going to stop, then all those taxes are due at that
time. Vance: So you mentioned to me the best time
to do something like this would probably be towards the end of the year.
Ronnie: Towards the end of the year because what we're looking at is, if you were to sell
a property and we have until the 31st of December, if you sold it in say the 15th of December,
then you're going to pay taxes on that in that year for that profit.
If you were able to defer it 'till the following year -- now remember they only way that you
can defer is if you have another property ready to go. So it's not like you're going
to purchase a property, say, December 1st and get like, "Okay, I'm going to do the exchange
so I can defer my taxes," but you have to have another property ready to go for that
exchange to actually work. Now here's the only thing that we have to
look at, too: the exchange is going to give you a certain amount of time to purchase another
property. So whether it would be... I'm not sure if it changes from state to state. But
in Jersey I think it's about 60 to 90 days, somewhere around there, but if I were to purchase
the property or say I sold the property December 1st and I was still within the time period
of what the exchange allows me to purchase another property and the year passes at that
time, then they may allow you to, okay you can still defer.
Vance: I thought that you had to do the sale of the property and the purchase of the next
property in the same transaction. Ronnie: No, it's not in the same transaction.
You can sell the property but you have a certain amount of time to use that profit to purchase
another property. So it's not like that you would have to sell it and buy it the same
day, or within two days. You're going to get a certain amount of time to use that money,
but you have to... If you don't use it within the allotted time then they're going to make
you pay the taxes. Vance: So just to let the viewers understand,
it's not you that's managing keeping track of, monitoring how much money is being exchanged,
whether it's being transferred or not, you have to have I think what's called a qualified
intermediary or a lawyer to handle that for you.
Ronnie: Yeah, so you would have to have someone else who's going to set the exchange up. It's
almost like even if you have a will or something, you have somebody else set it up. And even
if, let's just say they allowed you to do it which they don't, you don't want... because
money is being transferred, you want to make sure that someone else doing it make sure
they did it right. That's what would end up having to happen.
Vance: One other thing is to make sure that, it may cost you a couple hundred dollars to
pay a lawyer to do that. How much you're going to save deferring taxes?
Ronnie: Exactly. Vance: So you might not want to do it based
on how much you're going to have to pay out... Ronnie: But remember too that you're not going
to do this because I am making $5,000 on the profit, or the capital gains of the selling
of the property. You would really have to make it 30 grand. You got to have a significant
amount because there's no sense in setting it up for one property. And to be perfectly
honest you're not going to set it up unless you have a couple of properties that you're
looking at. So I'm looking to defer taxes for a number
of properties. And here's the real beauty: once you start getting into it, and again
I never did it because I didn't have enough that I knew that I was going to keep doing.
But let's say at the end of the year I made, let's say 200 grand because I get four/five
properties that year, and I was able to defer to the following year. So now the following
year I'd know that I'm 200,000 in capital gains that I'm going to have to pay twelve
months later. Now that capital gains that I'm going to pay is going to be percentage
on whatever your taxable income is. So it may be 30% or whatever it may be.
But remember that you have twelve months now to try to work that down. So that's what you're
going to be looking at doing, is that I want my exchange to end the beginning of the following
year. Okay, I already know I'm not going to do this anymore, but I want to bring this
out to the beginning of the following year so that I can do something else to be able
to offset how much I have to pay in taxes. Vance: So you may not have been able to offset
in the current year. So being able to kind of whittle that down over a period of time
and push it forward using the exchange, reduce the taxes where you might be able to do it
and plan for it in the next year. Ronnie: Yes, most definitely. And we also
want everyone to know out there that we are giving advice. You still need to go see a
lawyer. Vance: You've got to have a lawyer. Make sure.
This is what has worked for Ronnie. This isn't from his experience. He hasn't done this,
but he researched it. He understands how it works. We encourage everybody to have a second
opinion. I mean you don't do anything without having enough background and experience and
knowledge to understand how things work. Ronnie: Yeah, because state to state it may
change a little. So laws change a little from state to state, so you just want to check
in on everything to make sure. But the basis of what the ten thirty one is
really used for is the same everywhere. Vance: Thank you Rico, we appreciate it and
we encourage everybody to send us e-mails, post comments on the videos, post comments
on our podcast, go to our Facebook page whenever. We'll get back to you and we'll also maybe
feature you in our next video. Talk to you later.