Episode 46: Investing: Using Taxes to Grow Your Portfolio Using the 1031 Exchange with Dave Foster
The Question: How can you use taxes for investing?
Nobody likes paying taxes. Did you know there is a way to transition from one investment property to another without paying a penny in taxes? Dave Foster, the 1031 Exchange Expert and Qualified Intermediary, is going to teach us a strategy to grow your legacy faster—using your own tax dollars.
What is the 1031 Exchange?
The 1031 Exchange
The 1031 Exchange is an investment strategy that swaps one investment property for another and allows the capital gains taxes to be deferred.
The name 1031 Exchange stems from the Internal Revenue Services (IRS) code Section 1031.
Dave explains, “The 1031 exchange is what allows you to sell that real estate. And go by your new real estate, while I am definitely deferring the tax on that, that you normally have to pay. […] Its compound interest that Albert Einstein called the 8th Wonder of the world. So the 1031 exchange acts for the investor, exactly like your IRA or your 401k does, but it does it outside of your 401k. It gives you the same power of making money on that differed tax as long as you live.”
Do it over and over again.
When used properly, you can use the 1031 Exchange as many times as you want and as frequently as you want.
One strategy is purchasing a vacation home and then turning it over into your next residence.
“As long as anytime you change the use of the property into a vacation rental, you use them into your primary residence into a passive commercial property, you will never pay the tax.”
It also has great benefits for leaving your legacy behind to your heirs/family.
“If you died, holding a piece of property, your errors, get that property and what is called a stepped-up basis, which means they inherited as if they paid market value for it. […] But the beautiful thing is if you simply hold on to it till you die if they could decide to sell it the next day and they won’t pay any tax,” continued Dave Foster.
Be sure to check with your local state tax professional to understand the process and legalities.
A few key points to note about the 1031 Exchange process:
1) A Qualified Intermediary is required by the government to perform this transaction.
2) You have 45 days after the day of the sale to find a replacement property
Please consult your service vendor or Qualified Intermediary to speak about what strategies work for you. Please verify any and all information with the professional of your choice.
Learn More
To learn more check out the 1031 Exchange educational portal that teaches you everything you need to know about the 1031 Exchange from calculators to explainer YouTube videos.
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Disclaimer: Please verify all information with the licensed professional of your choice.