Rich Dad Poor Dad, Delaying Taxes?

Question

Hello everyone! Im currently reading Rich Dad Poor Dad, and there is a sentence that I need a bit of clarification on.

"On the other hand, my real estate strategy is to start small and keep trading up for bigger properties and, therefore, delay paying taxes on the gain."

What exactly does the author mean? How does one delay paying taxes by trading up for bigger properties?

Thanks everyone!

Russ B. · Answer

He's probably talking about a 1031 exchange. This is where you sell a property and buy another with the proceeds shortly after, and get to skip the capital gains tax on it. It is definitely something you'd want to do if you were "trading up".

That said, while that is a great book to help get you thinking like an investor (at least the parts of I that I read were), I'm not sure I'd rely on it for anything beyond the most high level info on how to actually proceed. From what I have read, many of the stories in it are fiction.

There are much more detailed (and more current) books that are specific to whatever type of investing you want to do.

Dave Foster · Answer

@James Marin, the funny thing is that sec 1031 has existed long before Rich Dad.  It was one of the original parts of the tax code from 1921-22.  Pretty powerful part of the code.  And it's really only seen two major overhauls.  The first was over a 20 year period of lawsuit that led to the modern delayed exchange  (the Starker exchange as it's known)- you sell your investment property and purchase new investment property following a process and get to defer the tax - very much in your favor!!!

The second was with the overhaul of the tax code in 2018,  1031 used to be real estate for real estate and personal property for personal property that was very similar - like a certain class of heavy equipment for similar heavy equipment.  Alas that part of the provision was removed and it's now just for real estate.  But for real estate investors it's the mack daddy of tools to let you grow your portfolio.

Michael Skoczylas · Answer

@James Marin- @Russ B. nailed it. A 1031 exchange allows you to trade up in value of properties and defer (sometimes permanently) the taxes on that sale. The theory is that you have never exited your investment and therefore there is no recognition event. Its a strategy used by many real estate investors. Cost Segregation (call @Yonah Weiss) is also a great way to lower your taxes (give you more cash to use today) while you are growing your business.

Jesus Ramirez · Answer

@Dave Foster thank you for the information. With my research and asking questions with my accountant, I came to the same conclusion.

Dave Foster · Answer

@Jesus Ramirez Unfortunately the qualified intermediary who handles the 1031 must be in place prior to the closing of the sale.  You cannot touch the proceeds or it eliminates the 1031 opportunity.

If that property was an nvestment property it would have been possible to defer the tax with a 1031 but not once you’ve closed without a QI in place.

If that property was your primary residence  you may not have to pay any tax if you’ve lived in it for 2 out of the last 5 years and the gain is less than $250k (500k if married)

James Marin · Answer

@Michael Skoczylas is a 1031 exchange strictly for real estate investments? Or assets in general?

Rich Dad Poor Dad, Delaying Taxes?

Most Popular Reply