{"id":165151,"date":"2024-01-24T14:18:04","date_gmt":"2024-01-24T21:18:04","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=165151"},"modified":"2024-02-19T08:35:26","modified_gmt":"2024-02-19T15:35:26","slug":"lazy-1031-exchange","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/lazy-1031-exchange","title":{"rendered":"Here\u2019s the \u201cLazy 1031 Exchange\u201d and How To Do It"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC9211396418\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Real estate offers plenty of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/store.biggerpockets.com\/products\/the-book-on-advanced-tax-strategies\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">strategies to avoid taxes<\/span><\/a><span data-preserver-spaces=\"true\">. However, many require you to jump through hoops, hire third parties to help you, and otherwise make your life harder.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This is why I use the \u201clazy 1031 exchange\u201d strategy: no hoops, no hassles, no hiring custodians.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But before explaining what a \u201clazy 1031\u201d is, let\u2019s make sure we\u2019re all on the same page about how standard&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1031 exchanges<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;work.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Refresher: 1031 Exchanges<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Section 1031 of the IRS tax code allows investors to do a \u201clike-kind exchange,\u201d swapping one similar asset for another. When you sell a rental property and use the proceeds to buy another, you defer capital gains taxes on the sold property.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Using 1031 exchanges, you can buy increasingly larger, better-cash-flowing properties without ever paying capital gains taxes on any of the profits. Actually, you have to trade up: The new property must have a greater value than the sold property.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Of course, you have to pay the piper eventually. When you sell the last property in the chain, you owe full capital gains taxes on all accrued profits. Or you could just hold it until you die and let the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.supermoney.com\/cost-basis\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cost basis reset<\/span><\/a><span data-preserver-spaces=\"true\">. But I digress.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">That all sounds great in theory, but&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange-pros-cons\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1031 exchanges come with drawbacks<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and headaches. To begin with, you have to comply with strict timelines. Within 45 days of selling the old property, you have to declare the new one you intend to buy as a replacement. And you have to actually settle on it within 180 days of selling the last property.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You also need to hire a \u201cqualified intermediary\u201d to hold your proceeds from the prior property sale. It costs hundreds of dollars, perhaps more, even if you use your&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.american-apartment-owners-association.org\/property-management\/latest-news\/using-a-bank-as-your-qualified-intermediary\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">bank as the qualified intermediary<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Don\u2019t get me wrong\u20141031 exchanges work. They help you&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-investor-journal-one\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">avoid capital gains taxes<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;when selling income properties. But they also come with red tape\u2014and in most cases, they\u2019re only practical to use with active real estate investments.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Is a Lazy 1031 Exchange?<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">When you&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/gaining-financial-freedom-using-long-and-short-term-rentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">invest passively in real estate syndications<\/span><\/a><span data-preserver-spaces=\"true\">, you get a huge tax write-off in the first few years of ownership. More on the mechanics of that shortly, but for now, just take my word for it.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You can use that on-paper loss to offset other passive income or capital gains on investments. Like, say, the profits when a past real estate investment sells.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">See where this is going?<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Imagine you invested $50,000 in a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-guide-to-real-estate-syndication\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">real estate syndication<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;deal three years ago. This year, the sponsor sells the property, and you walk away with a $30,000 profit on top of the cash flow you earned over the last three years.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You could pay capital gains taxes on that $30,000 profit. Or you could simply invest in a new real estate syndication at some point this year.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">By investing in a new group real estate deal, the upfront losses you show on paper then offset that $30,000 gain. The net result: You pay no capital gains taxes, even though you pocketed a huge profit, plus some cash flow on both properties this year.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How Accelerated Depreciation Works<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You can take advantage of fast&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-depreciation-in-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">depreciation<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;write-offs from two sources: cost segregation studies and bonus depreciation.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Cost segregation studies<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">When a syndication sponsor buys a large commercial property, such as an apartment complex, they typically hire a firm to conduct a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cost-segregation-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cost segregation study<\/span><\/a><span data-preserver-spaces=\"true\">. They use that to reclassify as much of the building as possible into other tax categories with shorter depreciation timelines.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The IRS lets investors depreciate commercial buildings over 39 years and residential buildings over 27.5 years. In other words, owners can write off 1\/39th of the building value each year for depreciation. But if the owner reclassifies parts of the building as personal property, they can depreciate them over just five or seven years. So, instead of deducting for 1\/39th of the value, they can deduct one-fifth of the value each year.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The upshot is that for the first five years or so, you can show a lot of on-paper losses on your tax return from depreciation.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Bonus depreciation<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The Tax Cuts and Jobs Act of 2017 allows investors to take even more depreciation than usual\u2014for a little while, anyway.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Known as&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/bonus-depreciation\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">bonus depreciation<\/span><\/a><span data-preserver-spaces=\"true\">, it started sunsetting in 2023 and will&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/goodegginvestments.com\/blog\/bonus-depreciation\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">phase out completely by 2027<\/span><\/a><span data-preserver-spaces=\"true\">. That is unless it\u2019s renewed by Congress between now and then, which is entirely possible.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Passive Real Estate Investments<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">By continuing to reinvest proceeds from one passive real estate investment to another, you can keep punting taxes indefinitely. You can think of it as \u201claddering\u201d your on-paper losses, even as you keep collecting cash flow distributions and profits properties sell.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In some cases, you get your initial investment capital back when the sponsor refinances. So you keep your ownership interest in the property and keep collecting cash flow from it, but you get your money back with no capital gains taxes. In this way, you can keep reinvesting the same capital repeatedly to earn&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/how-to-generate-infinite-returns-in-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">infinite returns<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">All the while, you don\u2019t have to hassle with direct mail campaigns, property renovations, managing contractors, tenants telling you \u201ccheck\u2019s in the mail,\u201d or building inspectors\u2014you get the idea.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">It\u2019s how I invest currently, and these are the kinds of investments we review together every month in SparkRental\u2019s Co-Investing Club. I don\u2019t miss being a landlord one bit.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Keep It Simple<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">When you use the lazy 1031 exchange strategy, you don\u2019t have to worry about hiring a qualified intermediary, finding a replacement property within 45 days, or closing on it within 180 days.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">All you have to do is invest in a new group real estate investment within the same calendar year.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As a dad, a busy entrepreneur, and an expat living overseas, my time is my most precious commodity. I invest in both stocks and real estate passively,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/dollar-cost-average-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">dollar-cost averaging<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;both investments.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You can keep your real estate investing side business. I like my investments and tax strategies to be simple and hassle-free.<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Dreading tax season?<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Not sure how to maximize deductions for your real estate business? In <em>The Book on Tax Strategies for the Savvy Real Estate Investor<\/em>, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year\u2014but to also prepare an ongoing strategy that will make your next tax season that much easier.<\/p>\n\n\n\n<div id=button-custom-event-block_641384b1eb1d8 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/tax-strategies-book-bundle?utm_source=blog&#038;utm_medium=blog%20banner\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Taxes Bundle&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/lazy-1031-exchange&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/04\/tax-strategies-books.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Want to defer thousands of dollars in taxes without barely lifting a finger? Well, read this article to learn how to do just that.<\/p>\n","protected":false},"author":158586,"featured_media":165154,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7359,7119],"tags":[],"class_list":["post-165151","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1031-exchanges","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/165151","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=165151"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/165151\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/165154"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=165151"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=165151"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=165151"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}