Tax Hack Like The One Percent: The Little-Known 1031 Exchange Way to Build Wealth

According to Forbes, 10% of all billionaire’s fortunes were built in real estate. Additionally, one of the ways the uber-rich built their fortunes is by knowing tax loopholes.

As of 2018, capital gains taxes fly as high as 37%. To get around that, just like the big real estate ballers, investors use the capital gains loophole to actually defer taxes.

However, many Americans fail to take advantage of these same tax hacks that could lower their tax bills dramatically. Here’s one of the most popular tax hacks used by the 1%.

The 1031 Exchange

One of the secrets to real estate investment is a little-known (outside of real estate) trick; the “1031 Exchange,” which allows you to defer all your capital gains taxes on your recent real estate score.

These exchanges are named after section 1031 of the Internal Revenue Code. By taking advantage of this loophole, investors can reap big breaks on appreciated real estate assets.

5 Fast Facts about the 1031 Exchange: 

-The 1031 exchange allows investors to defer capital gains taxes when selling a property

-You have to have held the property for at least a year (so you can’t use this when flipping properties)

-The investor gets to defer the tax bill as long as the money from the sale is used to reinvest in a “replacement property” of equal or greater value

-You have 45 days to identify a replacement property and another 135 days to close. The process can be repeated over and over again

How Investors Use 1031 Exchanges

“Astute investors use 1031 exchanges to diversify their portfolios, exchanging one high priced property for several smaller properties,” tax expert and EVP of Madison 1031 Michael Brady told me a few years ago, “or investing their money in regions where bargains are easier to find.”

Use of these exchanges has been increasing among professional real estate buyers. Annual real estate transaction volume ranges anywhere from $ 400 billion and $ 500 billion—and according to Forbes, 30% of that comes from 1031 exchanges.

Let’s assume you bought a property for $ 1 million three years ago. You fixed it up, pushed up the rents, and now decide you want to sell for $ 3 million, with only $ 800,000 in debt on it.

You found a buyer close for $ 2.85 million—close to the $ 3 million price tag you were looking for. Boom. You’re ready to cash out. But you still have to pay taxes on your substantial capital gains. Which, in this case, comes out to $ 2 million– $ 2.85 million minus the $ 850,000 mortgage.

However, you want to continue to invest and compound this equity, tax-free. You can take advantage of a 1031 exchange to pick up the “replacement property.”

When you sell a property, you have to meet certain requirements. The most important one being that you have to buy a property of the same $ 2.85 million or higher. In other words, you can’t just put the $ 850,000 portion of the proceeds toward a smaller deal, pocket $ 1.15 million tax-free and go ball out in the Bahamas. You still have to go find the “replacement property.”

Outside of that one limitation, the 1031 exchange has tons of flexibility. For one, you don’t have to match the debt amount on the last mortgage; that’s irrelevant.

Secondly, you’re not required to structure the equity (down payment) in any sort of way. You just have to buy something at a price tag at, or higher than, what you sold it at.

You can even split the $ 2 million into one or more replacement properties—worth the same or more—than where you want to defer the money to. From there, the taxes from the profits made from the first property can be “deferred” and used for your next real estate deal.

Here’s the coolest thing: This process can be repeated as much as you want, as many times as you want, until you either die, or decide you don’t want to invest anymore.

 

—Disclaimer: The opinions and financial advice expressed in this article are solely those of the contributor’s and not Black Enterprise’s. 

The post Tax Hack Like The One Percent: The Little-Known 1031 Exchange Way to Build Wealth appeared first on Black Enterprise.

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Exchange Your Presents for Presence

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We teach this shift to the professionals in our leadership class. The December sessions focus on connecting with the humanity of others — others whose wants and needs may differ from your own. We work on the gifts of presence: listening, storytelling, and paying it forward.

As families gather this season, shifting focus to the gift of presence can enrich the conversation and bring back the spirit of joy. It begins and ends with listening. Instead of repeating the same old mundane travel stories or complaints about relatives who are not in the room, how about laser-focusing on one another in a loving and positive way? We use the following strategies in class to gift presence to one another, and they are easily adapted to the dinner table.

2014-12-17-Presencedadandchild.jpg

1. Shining the Spotlight: In class, members of a team take turns shining the spotlight on each other with undivided attention and specific positive feedback. Starting with one person, everyone around the table takes turn sharing what they admire about that person, what they have learned from them, or how they have been helped by them. Then the attention moves to the next person, and then the next. It’s a bit awkward at first, but quickly the conversation warms up as group members rivet on one another’s strengths. The givers and the receiver are enriched in this exchange, and the shared joy warms the room.

2. Storytelling: Storytelling animates the room and creates the ties that bind us. We do a variety of exercises in class designed to help people share their stories. At the dinner table, ask each person (this works for all ages) to share a story that made them smile or touched their hearts. This bonding experience opens our hearts and eyes to the goodness we experience around us. Everyone has a tale to contribute.

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3. Pay It Forward: Each year, we give our class members one actual present: a $ 20 bill. The only stipulation is that they must pay the $ 20 forward to someone, without expecting anything in return. This requires that people pay attention to the wants and needs of strangers around them, and step up to help them. I’ve made a tradition of giving my children Pay It Forward $ 20 bills as stocking stuffers, so that they continue this practice. They have helped street musicians, mailmen, and mothers in the grocery line with this unexpected generosity and presence.

4. Legacy: As the new year approaches, we often take time to reflect on what we’ve done in the past year and what we hope to do in the coming year. In class, we ask our students to take this a step further and consider their legacy 40 years from now. How do they want to be remembered by their family, colleagues, friends, and community? In the end, what will they have done that mattered? What will they do to make this world a better place? How will they contribute to the goodness that this world needs so desperately? By listening inwardly to discern what calls to them, they gain insight into what to start doing right now.

This can feel like the best of seasons — filled with love, joy, and possibilities — or the worst, filled with the frustration of buying presents, being bombarded with advertisements for things we do not need or cannot afford, and national news stories of tragedy and grief. What we do need and can afford is to demonstrate leadership in conversations with family and friends and take action to increase our presence and that of those around us. Exchange presents for presence to experience and spread the joy that we all hope for at this time of year.
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