How should tax deferred exchanges (Section 1031 of the IRC) be viewed by real estate investors? Here’s what I’ve learned.

Transcript:  Hi, Jeff Brown the “BawldGuy” here today. In this video we’re going to talk about what tax deferred exchanges really are, what they’re really not and why they’re not the end-all-be-all to real estate. Avoiding taxes is what everybody… it’s a holy grail, everybody wants to do it. What I’m telling you is, yeah, I’m right with you, but you want to do it in a way that moves your plan forward and does it on purpose without too much baggage that you’re going to be carrying forward. Now, here’s what I mean by baggage: you buy a piece of property in year one, you own it for awhile; it might have gone up in value, it’s eight years down the road; ten years down the road and here’s the problem. You’ve got eight or ten years of depreciation. That lowers what’s called basis. Let me just tell you the bottom line to basis: the lower the basis, the higher the taxes on your capital gains because they’re going to tell you have a bigger gain than you think in your mind because you think, you buy piece of property for two dollars, you sell it for three dollars you make a buck. What they did was, yeah you bought it for two bucks, but you took fifty cents in depreciation so now they’re going to say you bought it for a buck-fifty and you sold it for three so you doubled your money — get your checkbook ready. So what you want to try to do, is you want to try to make it so, if it’s possible, you never have to do a tax deferred exchange. Now look it: I don’t know how many tax exchanges I’ve done. I just know I stopped counting at a couple hundred and one day my Dad made fun of me and said who cares? So I said okay, I stopped counting. But here’s one thing I’ve learned: most of the time, the people who get themselves in a situation later in life when they’ve done very well with their portfolio, they’ve boxed themselves into a corner because they’ve got A, a boatload of equity, B, a double boatload of cash flow and C, no place to change any of that position without becoming a partner with Uncle Sam against their will. So here’s what I’m trying to tell you: 1031 is nothing but a tool. A hammer is a great tool; you don’t use a hammer to take a bolt off, use a hammer to pound the nail. Stop looking at that hammer as if everything in the world is a nail, it’s not. 1031 is a tool, use it to advance yourself if have no other choice, because look it, sometimes it is good to use a 1031, just understand that there’s baggage and deferring taxes isn’t always the best thing. Sometimes paying the tax is better overall in the long run and we’ll talk about that in another video. This is Jeff brown the “BawldGuy”, thanks for joining me, we’ll see you next time.