It’s getting close to that time of the year when you have to file your taxes while crossing your fingers in hope that you’ll get anything at all in your tax return.
Why should you pay the government so much money from all the hard-earned cash you made last year? You should be stuffing your pockets with cash, not theirs!
I’ve been using this simple little loophole for decades now and it’s made me millions of dollars. It’s so simple, it’s all about where you put your money so the tax man can’t skim his unearned share.
You may be thinking, “I’m not experienced enough to use tax loopholes.” I’m handing you a lifetime of experience. Just follow my lead…
This tax loophole I’m about to expose you to has so many benefits that I’m going to have to spread it across two Real Estate Riches articles.
Don’t worry, the way I’m separating it means you can make a healthy profit from this article alone before you get the next one, there’ll just be extra opportunities following (e.g. learn how to buy now and pay later).
The first part of the loophole is something I came across a little while back. I was lucky enough to learn about it early on in my real estate investment career, but this type of information isn’t posted on billboards or social media.
That’s because the people who are in on it don’t want you to know about it.
If everyone knew how to use this loophole, then it wouldn’t be much of a loophole at all. But I’m here to share it with you because you were hungry enough to look for it.
You might be put off by all the real estate lingo you hear at the bar or at work. It’s almost as if it’s a foreign language, and it might as well be.
The tax loophole that real estate investors don’t want you to know about involves something called a 1031 exchange. You might have heard this term, but I’m sure you haven’t delved into the “complexities” of it.
I’m going to unravel any “complexities” for you so you can see that they’re not quite as complex as they’re made out to be.
These 1031 exchanges have a few simple stipulations, but they’re very broad. Basically, you can’t use them for personal property—we’re here for investments anyway, so this doesn’t apply to us—and you must use them for “like-kind” properties; meaning: no properties outside of the U.S.
So, let’s put it into context:
You’re a savvy investor and you’ve just accrued a $400,000 capital gain from selling a property. This $400,000 looks real nice until the tax man comes along and shaves off his approximate $140,000.
When selling an investment property, you should be mindful of three possible taxes: federal capital gains tax, state capital gains tax, and depreciation recapture tax based on the depreciation taken on the property since the initial investment.
Now you only have $260,000 of that gain to invest in your new property.
If you haven’t seen by now, the system sets you up for failure. This system in particular drains your profits time after time until you’ve got nothing left to invest.
But of course, there’s a loophole. There’s always a loophole!
Enter: 1031 Exchange.
If you used a 1031 exchange for that same $400,000 capital gain, guess how much of that money you’d have to invest in your next property…
Very close to all of it.
A 1031 exchange is a tool used by many successful investors to defer taxes on property sold.
You must invest that gain into a property of equal or greater value for the 1031 exchange to work, but as an investor you should be doing that anyway.
But don’t worry if you think that a single property that’s worth more than the one you’re selling might be a scary prospect; you can use a 1031 exchange to buy multiple properties with the tax-deferred gains made from your previous property.
You also don’t have to buy your new property immediately. It used to be this way, but thanks to the 1031 Starker exchange, you have 6 months to finalize a new investment.
You can also include acquisition costs like inspection and broker fees in the sum of the new property.
A 1031 exchange is a very useful tool for investors who know how and when to use it. Luckily for you it’s really that simple.
Keep an eye out for the second part of this article where I’ll be revealing another loophole within the 1031 exchange that’ll allow you to buy first and pay later.