Tax deferred exchanges (Sec. 1031 of IRC) have always been a popular topic with real estate investors. Are you aware of all the potential results that can be engineered inside of exchanges?
Transcript: Hi this is Jeff Brown the “Bawld Guy”. On today’s video we’re going to address 1031 exchanges and the fact that it’s not an all or nothing concept. Many people think you either do a 1031 tax deferred exchange or you don’t. That’s not true. You can do a partial 1031 exchange. Here’s one of the reasons why. Somebody may want to take a partial exchange and that would get them to the point where they would involve more properties where they want to go. They would relinquish the property that they sold but they would still have, say in our case, half of the money left. What to do? They want $50,000 for their own reasons in cash. Now if they use some of our strategies mentioned before, cost segregation depreciation approach, they may have some unused depreciation on the shelf which would then offset that $50,000 cash. Let me tell you what the IRS calls that cash. They call that $50,000 boot. What it means to you is if you don’t have that extra depreciation or some other form of offsetting loss, it’s going to be added to your ordinary job income and you’ll be taxed at that ordinary job income rate. Because you do have that extra depreciation to offset it, you’re good to go. So now you’ve got $50,000 tax free. You’ve deferred a quarter million and you have $200,000 left. What to do? What you may want to do is, especially if it’s towards the end of the year, you decide that you will carry back some of the financing. The buyer’s probably going to love it. What you’re going to do is you’re going to get what’s known as installment sale treatment. This taxes the interest you get on that note you carry, that is secured by the property you’re selling, only as you receive it. The principal is treated in two different ways. That principal, every dollar of it that you receive in your payments, is going to be treated as either return of capital or return on capital. There is a formula for it. You don’t have to worry about it. It’s different for everybody. Some people pay 10 percent. Some people pay at 90 percent. It just depends. Now, what happens is you can actually carry it back in one year and then you get in to do a new calendar year in January and you can say I want a principal pay down that’s scheduled inside the terms of the note you carried back. So you carried back $200,000 and you might say in the first year, calendar new year, you will now get a $25,000 pay down. Well that’s in a new tax year so you get $25,000. You might then go three or four years and say I just want to receive my payments. But because you know you owe something four years down the road, you can say I want a $50,000 pay down because you know that after taxes that $50,000 will give you enough after taxes for that cash need and you can plan for it. Meanwhile, back at the ranch, after taxes on the payments of that note you’re getting a steady income and you’re stretching out the payment of the taxes over the years of the terms of the note until it’s paid off. We won’t go any farther than that other than to say you just learned 1031 tax deferred exchanges are all or nothing. No, it’s whatever you want to do. If you do it on purpose, do it with a plan and do it correctly. This is Jeff Brown the BawldGuy. Thanks for tuning in. We’ll catch you next time.