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This episode is a business coaching course that explains the 1031 exchange.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Lesson Nugget: A 1031 Exchange allows you to defer taxes from the profit on a sale of a real-estate investment and invest that money into another real estate investment.
  • 1031 Exchange: Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).

[MUSIC PLAYING]

-Hello, Thrive nation. This is your humble host, Clay Clark. I'm here off the coast of San Diego at the Hotel del. With Michael, there is no real estate topic too obscure or [INAUDIBLE]. Talking about this little thing called the 1031 exchange. Now before you go freaking it out, before you go, what is this? You want to make sure that you understand. I'm going to read the definition, and then he's going to explain to us what it means in layman's terms that I can get it. And if I can get it at a third grade level, I know you can get it. So here we go.

The 1031 exchange. This is a sort of a lengthy description summary. So I'm going to read it to you. Definition. Under the section 1031 of the Internal Revenue Code, like-kind of property used in a trade or business held as well as an investment can be exchanged tax deferred. Under a fully qualified section 1031 exchange, real estate is traded for other like-kind kind property.

All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is the taxation should not occur as long as the original investment remains intact in the form of like-kind real state. Like-kind refers to the real property as such, rather from the quality or quantity of property blah, blah, blah. What does this mean?

-It is a great thing, mainly found in real estate investment that allows you to defer-- not avoid, but defer the payment of taxes. So for example, you buy a building for $100,000.

CLAY CLARK: OK.

-You want to-- you sell it for $150,000. So you made $50,000.

CLAY CLARK: $50,000

-You could pay tax on that $50,000.

CLAY CLARK: Right now.

-Right now. Or if you meet the requirements, and they're very specific technical requirements, you could defer that tax and buy another building for $150,000, and keep-- avoid paying that tax at that time.

-Three odd questions I have about this. One, this allows you get some financial momentum. I mean, you buy a property for $100,000. You sell it for $150,000. If you're somebody who's watching this, and you're flipping houses. You buy one for $100,000, you sell it for $150,000. You keep the capital. You take the money now. You buy another house for $150,000. You sell it for $200,000. You just keep doing that. Right? I mean, that's the main reason why you'd want to do it, is to gain financial momentum.

-Yep. You don't avoid the tax.

-Yeah. You still pay at some--

-You're just deferring it.

-Now, the second thing is, you never want to even attempt to do this sort hoo-ha without the help of like a CPA?

-A CPA or an attorney.

-OK. An attorney or CPA would help you through this. You don't want to be just saying, well, I think I'll 1031 exchange that. You really want to have a professional that helps you here.

MICHAEL BURER: That's right.

-Third, is how common is this?

-It depends on the real estate cycle, and where you are in the real estate cycle. But it's fairly common.

-With what you guys do in the acquisition of properties, is this common in your world?

-It is. Yeah.

-So this is, I mean, you almost-- you probably want to never-- you'd almost want to do a 1031 exchange whenever possible. Right?

-Not always. There's a lot of factors that go into whether you would choose to do 1031, the source of your equity, you know. But--

-What's an example where you wouldn't do a 1031?

-Well, if you think tax rates are at a favorable time. Because you're not avoiding the taxes, you're just deferring them. So--

-If the tax rate was really low at one given time, then you might go, I'd rather-- if you-- Well, this. If you perceive the taxes-- like a lot of people right now believe the taxes in America might go up.

CLAY CLARK: Right.

-So if you're like, they're going to go up in the future, If you go ahead and pay it now, then we're tax-- Then we're good later.

-Right. Or if you're trying to create liquidity. maybe you're getting-- pulling some money out of the real estate, and you wanted the cash. Then you'd have to pay the tax.

-Liquidity meaning?

-Liquidity meaning liquid investment of cash. So real estate's not liquid. It's tied up in a building.

-You know, I want to share my appreciation for you, and I don't want to get emotional. So I fight it back. I fight back the tears. And I just read this. I mean you just-- don't cry. Don't look me in the eye. I don't want to cry. But you could end wars with how much appreciation I have for you being here today.

-Beautiful.

-Boom.

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