1031 Exchanges: How Mom & Pop Investors Become Millionaires

What is a 1031 Exchange?

Most real estate investors are constantly looking to upgrade their investment portfolio: To add new units, to purchase bigger, more profitable buildings. Investors are looking for the kind of property management opportunities that set them up for inter-generational wealth, not just "paying the bills."

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But taxes make the process of upgrading from a smaller unit to a duplex or multi-family home much more daunting and less profitable.

That's where 1031 Exchanges become an excellent investment-building option. A 1031 exchange allows you to DEFER the massive Capital Gains tax when selling a profitable investment property.

What is Deferred Taxes Under 1031?

When you buy a property for $500K but end up selling it for $700K, you've made $200K in profit.

Generally, you'd be held liable to pay taxes on this massive profit.

However, with a 1031 exchange, you can HOLD OFF on paying this if you end up putting the funds into another property. 

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If you end up NOT buying another property, or if you sell that new property later, the original taxes from your first sale will still come due.

HOWEVER, if you end up 1031 exchanging again, you can continue to DEFER the taxes until your finally sell without buying.

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of your current investment properties.

1031 Limitations

As you can imagine, failing to buy a new property and properly 1031 exchanging can result in hundreds of thousands of dollars coming due. For this reason, the 1031 exchange must be done very diligently and deliberately. 

You should start by consulting with an experience Realtor to determine your plans for an exchange, and to identify 2-10 possible upgrade or "UPLEG" properties you'd be interested in buying.

Once you sell your current unit, you will have 45 days to finalize your decision on the properties you're interested in and 90 days to successfully CLOSE on those new purchases.

The new property should be equal or greater in value to your current one, but in some cases you can actually downsize to a property lower in value.