Hey guys, Clint Coons here.
And in this video,
I'm going to teach you how to take out tax free money with a 1031 exchange.
Okay, let's get started.
All right. So here's the deal. When it comes to 1031s.
So all right, if you ever
watch one of my videos on them, you read up on 1031 exchanges.
The way they work is that you have a piece of property.
Let's say we bought this property for $1 million.
Correct.
And now it's appreciate in value and it's worth $2 million.
And we want to sell it, but we don't want to pay tax on that sale.
If you went to a CPA or you go to a qualified intermediary
to engage in a 1031 tax free exchange, they would tell you this.
You sell the property. So I sell this property.
The money will be held by a qualified intermediary.
I will go out and identify up to three replacement properties.
So let's say you find three or you don't have to find three.
Let's say I just find one that I want to buy.
And this property here has to be
at least the value of the property you're relinquishing.
So it has to be at least $2 million.
Many times when people sell, though, they want to pull cash out of the deal.
Your CPA will tell you if you go out there
and you find this piece of property, it's 1.5 million.
That means you're going to receive $500,000 cash out of your 1031 exchange.
It's called boot, and that's going to be taxable to you.
So they'll encourage you then to gross this up to the full 2 million
or more to avoid any income tax recognition on a 1031 exchange.
So people then tend not to pull cash out on their 1031 deals
because they don't want to pay tax on it. Right.
I don't blame you. Kind of defeats the purpose.
Well, here's a different way to look at how you're doing an exchange.
See, the deal here is that when you take out cash,
the key question should be, is it taxable to me?
Right. By pulling that cash out?
Is it going to be taxable?
And if
we could make it nontaxable, then that's tax free money, right?
Okay.
So here's what we got to do that there's two strategies for them to share with you.
One has to do with property.
Let's say this property is pre 2070.
All right.
So let's say I bought this house here, this asset in 2016.
I bought this property.
It's gone up to $1,000,000 and I want to pull out
$500,000 on the sale of that asset.
But I know I'm going to have to pay tax on it.
So what I'm going to do is I'm going to find $1.5 million in replacement property.
I'm going to buy that replacement property.
So I'm going to I'm going to close on this deal.
And then at closing, I'm going to get $500,000 in cash, which is taxable.
But this pre 2017 property, the thing about it
is that it did not qualify for bonus depreciation.
So now what I'm going to do
with the replacement property that I bought, here it is 2022.
I'm going to turn around and I'm going to perform a cost seg study
on that property by performing the cost seg study.
Watch my other videos. I'll put them in the in the, in the links.
If you're not familiar with cost saving strategies, I've got a few videos on it.
I'm going to accelerate the depreciation.
Now, since this property was purchased in 2022, it's
eligible for 100% bonus depreciation.
So if I break all the parts down in this building
that I can cost out and it's typically on a 1.5,
you're going to get close to $500,000 in tax deductions.
I'm going to cost it with my bonus and I'm going to take the $500,000
and use it to offset the $500,000 in income that was paid to me as BU.
That's how you get there and you make it tax free.
Now, you might be wondering, well, Clint,
this was pre 2017 property.
You're talking about what happens if I have purchased property since then?
What do I do in that scenario?
Well, you do the exact same thing, but we just we just tweak it
a little bit here.
So now what I would do in a scenario like this
is I would do take the exact same property.
You bought it for $1 million instead.
We bought it in 2020.
And now that property has gone up in value and it's worth 1.8 million.
So you want to pull out $400,000 cash
out of this deal and you don't want to pay taxes on it.
So what you need to do now is you need to figure out,
you know, how much depreciation you burn up with this property.
Maybe you didn't do a cost segue already then. Then it's wide open.
You can use the last strategy
I shared with you, but maybe you did cost seg some of that property already.
So you've depreciated it down.
So what we do on the next deal is we'll take this $1 million, 1.8.
We're going to receive work with our Q II here.
We're going to go out.
We're going to find some replacement property.
Maybe you find two replacement properties, but this time we're going have to go up.
All right.
So let's assume that if I want to pull $400,000 out of this deal in cash,
that I want to put in my bank account, that means I have 1.4 left to invest.
So I'm going to want to find a lender that's going to loan me, let's say,
1.5 to 2 to $2 million.
So now I need to look for properties that are, you know,
in the range of three mil right here.
So I'm going to fund this with debt to go in and buy these replacement properties.
And the reason why I'm doing this is because I'm going to increase my basis
in the properties.
So I can do again what I had already done possibly with this property
or in the strategy I just showed you, because if you took this property,
you depreciated all of its short term
assets here on the depreciation
schedule, and you already took out of this deal $400,000.
You can't turn around and do it again with your replacement property
unless you add value.
So the way we add value is we buy more expensive
replacement property and we fund it through debt.
So now I'm making sure that when I do this, I get the $400,000 cash out,
but I gross the value up to 3 million.
So I raise my tax basis in the property.
So I'll come back in and get into a cost seg study on here.
I'll figure out how much of that I can deduct.
That'll probably get me close to $400,000 in new assets
that I can take in offset that $400,000 in cash.
That's called boot that I pulled out of the deal when I did the 1031 exchange.
So what this comes down to is numbers.
What you need to do is work with someone who understands how the tax side, the cost
seg and the 1031 work in conjunction
so that when you go out there and you're selling a property,
you don't have to roll all the gains in for fear that if you don't,
you're going to pay taxes on the boot that you receive on the exchange.
I hope you got a lot out of this if you're considering doing a 1031 exchange.
2022 is a great year to do that or any assets.
If you acquired since 2018, the 2022
will still be eligible for the bonus depreciation going forward.
So you've got a lot of planning there that you should be considering
if you want to do these types of deals to make sure you're eliminating your taxes
and getting tax free cash at the same time.
Be like like the video guys hit the like button.
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Take care.