Taxes, Taxes, Taxes...
The end of the year always brings up the concern of taxes. Now that we are officially in 2023, let's discuss every real estate investor's favorite tax benefit: the 1031 exchange.
Everyone loves to talk about taxes, right? Wrong. Although not the most exciting thing to discuss, it is a necessary annual membership fee, in a way, to keep our businesses running smoothly and without restriction. While you turn your focus onto the upcoming year, let’s get into….
How not to pay taxes:
Ah, now I’ve got your attention. For those of you who aren’t familiar with deferring taxes, it is the art of delaying the capital gain taxes acquired through a profitable sale of an asset towards the next year through a few ways such as a primary residence exclusion, utilizing property zones or my personal favorite, a 1031 Exchange.
But King of Flex Space, what is 1031 Exchange?
I’m glad you asked. If you’ve been wondering what is a 1031 exchange or about 1031 exchange in real estate, let me explain:
Say you purchased a flex space real estate property for $3 million and sold it for $5 million , netting $2 million in capital gains on the sale; now you are subject to capital gains tax unless you use the $5 million (that’s right, all of your proceeds) into purchasing another property that is in the same asset class as the property you’ve just sold.
Like I’ve mentioned, I never stop building– but while we’re on the topic, I also never stop investing. Basically, you are selling your developments for a profit and deferring your taxes by putting your capital gains into more investments via a 1031 exchange real estate benefit, whether they are land acquisitions or existing property acquisitions.
Here is what a lot of people tend not to understand.
The IRS is in the real estate market for the long game. If I just made $2 million and decided to invest it into another property after having the flex space property for only a year, imagine how much the IRS can tax me if I continue to acquire properties for 20 years. If one day, I decided to leave real estate, that would be the year the IRS would tax me for the largest amount. If you use this exchange properly, there is no limit to how often you can use it.
However, you need to know the rules. Within 45 days of the sale of your original property, you need to have specified and identified the property you are exchanging for. You can designate up to three properties, just as long as they are closed within 180 days after the sale of the original property.
I was once told that land is the most valuable thing to invest in as the world has no plans on making more of it. Every day that you’re not investing, you’re missing out on more opportunities to acquire land.
Get out there and get some land under contract. Once we’re out of land, we’re out.
If you are looking for ways to reduce your taxes before year’s end, not only is flex space real estate come with great tax benefits, you can join my mastermind, Flex Space Untapped, which is eligible for tax write offs.
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