All Forum Posts by: Robert Andrade

@Robert Andrade, Thank you for the compliment but it ain't thorough or eloquent unless understanding is achieved :)  What @Joel Owens said.  There are so many options to defer and then eliminate the tax.  And the consequences for not doing so are financially disastrous.

1. You can sell one property and then buy one property.  As long as you buy at least as much as you sell you pay no tax.  Yes you would only own one property at a time but..

     a. The replacement property could be bigger by using the deferred tax as additional down payment.

     b. you could refinance the replacement property at any time and use the cash out to buy another property.  Now you own 2.

     c. You could change the geography or type of investment property into something with more profit potential or cash flow.  Sell single family in MI and buy commercial in NY.  Sell duplex in TX and buy commercial in GA.  Sell an office building in FL and buy vacation rentals in NV.  It all works.

2. You could sell one and 1031 and buy more than one.  All the IRS cares about from a valuation perspective is that in order to avoid all tax you buy at least as much as you sell and you use all the proceeds from the sale in the next purchase.  You can split those proceeds into more than one property if you choose.  This is a diversification exchange. Now your portfolio is bigger.

3. At some point in time you may wish to start simplifying.  So sell several and 1031 into one larger property that ffers more passive management and better cash flow.  Now  you are consolidating.

4.  Sell actively managed properties into passively partial ownership products like Tenants In Common or Delaware Statutory Trust products.  Ground leases for national chains, etc.

5. Sell real estate and reposition completely into 1031 qualifying oil and gas or mineral interests.

6. Throughout all of the above occasionally convert investment properties into your primary residence and create the mechanism to siphon off part of the deferred tax using the primary residence tax free exclusion of sec 121.

7. Never Sell - Never pay the tax.  Always 1031 -Never pay the tax.  Die and your heirs get the properties readjusted in value to eliminate the tax entirely.  It's that simple (in concept only of course.  You'll want a good team around you through those years.)

@Robert Andrade, It's as simple as asking yourself if you can make income in real estate if given an interest free loan from the government for life.  The 1031 exchange allows you to use the tax dollars to purchase more real estate.  

If you make 100K on a property you're likely to have a 25 - 30K tax bill given all the sneak in taxes the fed and states like to add.  If you were given 30K to go invest to make money what would you do?  Many would say buy a 150K property with 20% down.  Can you make that 150K property pay a 6% return on asset?  If so then you just made an annual income of 9,000.  The govt doesn't charge you interest on your down payment.  The tenants pay the mortgage principle and interest.  Multiply that over multiple properties and multiple years and that is the power of tax deferred growth.

I would say the biggest snare is buying wrong with insufficient cash flow or over leveraging so that in down turns with rent rate deterioration you have to sell instead of being able to ride out the cycle.  If you can avoid those and stay patient and focused on the cash flow you'll do well.

If you are buying the right properties, you will have positive cash flow.  When you start calculating the depreciation recapture (25% of depreciation taken), the federal capital gains on profits, the Medicare tax, and a potential state capital gains tax, it could significantly shrink the amount of money you put in your pocket.  I worked on a deal last year, where the seller was cashing out 1.5 million, but would have had a 1.65 million tax bill.  That person had no real choice but to exchange.  The problem most sellers have is finding an acceptable property to exchange into.

Mark