Do you want to grow your wealth but worry about tax liability and the need to pay taxes? A 1031 Exchange is an option. Real estate has made more millionaires than any other asset class because of a significant advantage: tax deferment benefits.
In this week's episode of the Not Your Average Investor Show, Claudia Kiernan, the Senior VP of IPX Exchange, shared using one of THE most powerful tools for wealth generation through tax deferment — the 1031 Exchange.
She taught our group of real estate investors about:
- What a 1031 exchange is, and how it can save you tens of thousands of dollars in taxes
- Why do investors in California, New York, and other high priced real estate markets use a 1031 exchange to diversity their real estate portfolio and increase their rates of return
- The do's and don'ts for executing a 1031 exchange
A 1031 Exchange is the one topic you HAVE TO educate yourself on if you want to shave years off your retirement goals.
Claudia Kiernan gets to work with JWB all of the time, and we've created a great online community that loves to learn about real estate investing.
She is the Senior Vice President of IPX Exchange, who lives in St. Augustine. She started as an attorney, and when she went to law school, she wasn't sure what she would do with her law degree. She did some real estate closings and learned about 1031 Exchanges. The ones using 1031 Exchanges grew the wealth of real estate investors so much faster, so that's where she decided to focus.
She's been working with JWB for a long time. It's a great partnership working together. Why? Because JWB holds a solid inventory of turnkey rental properties that will allow exchangers to fit within the tight timelines to follow 1031 Exchange rules.
1031 Exchange is a wealth creation strategy that must be done correctly to follow the IRS rules. So, you need to work with a team that knows how to dot the i's and cross the t's. You can save tens and hundreds of thousands of dollars when you do a 1031 Exchange correctly.
JWB wants to create a peace-of-mind experience for real estate investors, and that is why we invited Claudia to be on the show with us because she's a great resource. A 1031 Exchange is tricky and needs to be handled by experts.
How Does A 1031 Exchange Work?
The 1031 Exchange has been around for 100 years. It allows the owner to sell a property and reinvest in another property for business use with the help of a qualified intermediary. We are creating the exchange of properties without incurring capital gains tax.
If you sell a commercial property or get into single-family rentals of equal value, you can do that with a 1031 Exchange. It's a tax deferral strategy.
What Is A Tangible Example Of How To Use A 1031 Exchange?
If you want to keep $100000 going to the IRS, you keep all the proceeds from that sale to go out and buy more real estate. It gives a better return on investment. We can grow our real estate portfolio by reinvesting through a 1031 Exchange.
Let's say you sell a property that has appreciated. You take the money from that sale, and you use a qualified intermediary to quarterback the deal that allows you not to pay the taxes on the capital gains and invest that money into more real estate.
In essence, a 1031 Exchange allows an investor to “defer” paying any capital gains taxes on the property after selling it, as long as another like-kind property is purchased using the profit received.
In California, you have the highest estate tax level, and many investors in CA can take their profits and buy new rentals in other states like Florida. 1031 Exchange is a tool that is encouraged and a significant economic stimulus.
Will The Biden Administration Alter 1031 Exchanges To Collect More Taxes?
An administration change can affect the tax codes. There was talk of a repeal, but it did not fully happen for real estate. It did happen for exchanging airplanes and livestock, but not real estate.
The 1031 Exchange is an economic stimulus. There is a lot of education for Congresspeople to see that this is a beneficial tool that affects many businesses and transactions. The 1031 Exchange is suitable for long-term investments. If money isn't changing hands, it stifles the economy.
Is There A Risk Of A Cap?
We should know in the Fall of 2021 if the United States government will cap it at $500K per person ($1M for a married couple) per year. We need to wait and see what happens.
Is There Anything With 1031 Exchange That's Not Going Favorably In Our Direction?
The masses do not know 1031 Exchanges. Savvy investors use it, and those investors are making more money and therefore vilified. Most exchangers have a few single-family rentals or are farmers. If we lose the 1031 Exchange, it could affect many real estate investors who are not considered rich but are average folks.
How Soon Do You Need To Meet With A Qualified Intermediary For A 1031 Exchange?
As soon as possible so they can create all of the exchange documents. We typically charge a flat fee, but there is no fee for a consultation. Claudia is a licensed attorney who wants to start working with you BEFORE you close on a property. Start the process early so you can take full advantage of this powerful tax deferment tool.
If you wait too long, delays or not following the strict rules could severely change your plan. If you don't call Claudia early enough, you may have to pay taxes and lower your expectations of buying more rental properties.
When you do the 1031 Exchange, you will likely hold onto that property for several years and call Claudia's team to do another 1031 Exchange for the next sale. It's the deferral option for your tax strategy, and it helps you grow your real estate portfolio. If you build it effectively, you pay a lot fewer taxes that can help build generational wealth.
The market is tight, and the closing timelines are short, so you want to get ahead of the game. Contact IPX Exchange or a similar group that will help you dot the i's and cross the t's. There are many challenges with 1031, but that is why Claudia's team is so helpful.
What Is The 45-day Rule?
In a 1031 Exchange, the IRS wants you to work quickly. You have settlement or closing on one day, and when that day starts, it's Day Zero. You have 45 days to identify an exchange property to buy next and 180 Days to close on that exchange property. If you subtract 45 days from 180, you only have 135 days to close escrow on the new property.
We can't just take the MLS listing and run with it. You have to pick a specific property.
What Is The 200% Rule?
What if you sell an expensive property in California and buy four single-property rentals in Jacksonville? You may have to look at the 200% rule if the exchange property you want to buy in Florida exceeds the value of that California property you sold by 200%.
Then there's the 95% rule, which allows you to identify as many properties as you like as long as you acquire properties valued at 95% of their total or more. If you're confused, don't worry. Claudia's team will walk you through the process to ensure you don't get into unwanted challenges with your 1031 Exchange.
You have to follow the rules, and Claudia's team will help investors understand what route to take and not break any rules. Real estate investors find a big difference between buying a turnkey property and a traditional means of buying rentals. Purchasing a turnkey rental should be easier, but the inventory is so low that other groups outside of JWB can help.
The timeline is so tight that you need to work fast to fit within the timelines of the 1031 Exchange rules! Fortunately, JWB has your back on this process because we have inventory, and we have this partnership to make the 1031 Exchange work relatively smoothly.
If You Do A 1031 Exchange And Reinvest In 5 New Properties, How Does That Help The Investor?
Sell the property, and the tax deferment allows you to find five replacements. When you go to sell, we can choose when we want to sell those five properties….they don't need to be sold simultaneously. The tax moves up and down, but you have flexibility in paying the taxes on those five properties.
Does IPX Exchange Charge a Percentage or a Flat Fee?
On most types of transactions, it's a flat fee. However, there are specific projects where we charge a percentage. It's usually starting at $1200 for one property purchase at this time, and it's money well spent.
If you receive the funds when you sell a property, you cannot do a 1031 Exchange. The net proceeds need to go to IPX Exchange, so the money doesn't go into your hands and get taxed. That is another reason the funds with IPX Exchange are well spent because it keeps investors from getting caught breaking the rules.
How do we contact Claudia Kiernan at IPX Exchange?
Call 877-494-1031 or visit www.ipx1031.com. If you go into the website, you'll find everything you need to bring the 1031 Exchange process.
How Can A 1031 Exchange Go Sideways?
It's the 45th day, and the property hasn't been identified yet. The exchanger only listed one property and felt nothing could go wrong. Sadly, the deal fell apart, and the 1031 Exchange didn't go through because the investor who was doing the exchange didn't identify enough backup properties.
To be fully deferred, you need to buy equal or greater valued properties with the next purchase. If you don't buy enough, you could risk losing out on the full benefits of 1031 Exchange.
If The Tax We Defer Now Through 1031 Exchange, What Tax Rate Will We Be Taxed On When We Sell The Property?
That depends. It'll be whatever the tax rates are later on when you decide to sell the property. It's variable. It could be a 15 – 20% tax rate if you sell within or above certain thresholds.
Real estate investors should know that there are many hidden taxes people don't know about, and Claudia's team will help navigate those taxes through the entire 1031 Exchange process.
If Your Property Is In A Trust, Does This Alter Your Taxes In Any Way?
Whatever you have, you can do a 1031 Exchange. The catch is that it needs to be the same taxpayers listed within the trust.
What Does It Mean To Identify A Property?
The IRS requires the property to be site-specific, it has to be received by midnight of the 45th day, and you cannot revoke or reidentify after the 45th day?
If We Inherit Property And The Siblings Split The Proceeds, Can The Proceeds From This Property Split Qualify For A 1031 Exchange?
It depends. If you inherit a property, you need to be listed as tenants in common, so all siblings have equal shares. Once that's done, it can be used for 1031 Exchange, but contact Claudia for a consultation to make sure your situation fits.
How Do I Find Out More About Investing With JWB?
Contact the JWB team to begin the discussion. If you want to invest in Jacksonville real estate, now is a great time to jump in. Go to www.ChatWithJWB.com and find out how we can help you reach your financial goals.
If you want to become part of the JWB online community, join us in the JWB Facebook Group at https://www.facebook.com/CashFlowProperties.
You can also go to www.JWBInventory.com to see what properties are currently available. We encourage you to contact the JWB team for a consultation to determine how our turnkey rental properties can deliver positive passive cash flow.
We hope you enjoyed learning how 1031 Exchange can defer taxes and help you take the capital gains to invest in more properties. If you are a real estate investor who wants to apply this powerful tool to your portfolio, we invite you to reach out to Claudia Kiernan and the IPX Exchange team. The Jacksonville real estate market continues to grow, and JWB is excited to help many investors grow their wealth through single-family home rentals.
To Your Success,