#211 Guide to Advanced 1031 Exchange Strategies Ft. Peter Kim, MD - Passive Income MD Shop

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#211 Guide to Advanced 1031 Exchange Strategies Ft. Peter Kim, MD
Episode #211

#211 Guide to Advanced 1031 Exchange Strategies Ft. Peter Kim, MD

In this episode, Dr. Peter Kim delves into advanced 1031 Exchange Strategies. Join us as we explore various kinds of 1031 exchanges and how to maximize its benefits to optimize taxes, real estate investments, and generational wealth.

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11.53 Min • May 13

Episode Highlights

Now, let’s look at what we discussed in this episode:

  • Other Kinds of 1031 Exchanges
  • Construction/Build to Suit/Improvement Exchange
  • Reverse Exchange
  • 1031 Tax Implications & Rules
  • Lazy Man’s 1031 Exchange

Here’s a breakdown of how this episode unfolds.

Episode Breakdown

[01:31]

Other Kinds of 1031 Exchanges

Peter begins with a quick recap of a previous episode about the 1031 exchange, he reminds listeners that the 1031 exchange allows for the exchange of one property for another to defer capital gains tax, particularly beneficial for real estate investments. 

He mentions various other kinds of 1031 exchanges that might be useful in certain situations,

First is partial exchanges, which involve exchanging a portion of proceeds from the sale of one property for a percentage of ownership in another property of equal or greater value, offering financial flexibility and diversification opportunities. 

Second, is the two-party or simultaneous exchange, where properties are swapped at the same time and value, offering options like direct deed exchange or involving an accommodating party. 

While challenging, it can be done without a Qualified Intermediary, but using one is safer and recommended by most tax advisers to ensure proper handling of the exchange, paperwork, and tax implications. Qualified Intermediaries play a crucial role in facilitating 1031 exchanges, holding funds securely, and managing documentation to prevent future tax issues, albeit with a fee. 

Peter advises working with a knowledgeable QI for smooth and legitimate transactions, especially when significant gains are involved. And of course, Peter reminds listeners to first consult with a CPA or strategist to determine if these strategies are suitable for your situation.

[05:42]

Construction/Build to Suit/Improvement Exchange

Peter continues with another type of exchange, called construction or improvement exchange, which allows using proceeds from a property sale for new construction or renovation on a replacement property within a 180-day period. 

If the replacement property’s value is lower, improvements can bridge the gap for full tax deferral. Peter mentions that it is best for small projects and that it requires completion within the timeframe. 

While there are additional costs like escrow fees and transfer taxes, it can be a beneficial option depending on the property type and situation.

[06:54]

Reverse Exchange

Peter talks about the reverse exchange, which involves buying the replacement property before selling the current one, following 1031 Exchange rules. 

He mentions that it’s applicable only to 1031 Exchange properties and requires financial capability to purchase the new property. Specific provisions in the tax code outline how to structure a reverse 1031 Exchange, with the same time constraints as traditional exchanges. This method allows closing on the replacement property without selling a property first, offering an alternative approach within the 1031 Exchange framework.

Again, Peter reminds listeners to first consult with a CPA or strategist to determine if these strategies are suitable for your situation.

[07:43]

1031 Tax Implications & Rules

Peter adds more detail to 1031 tax implications and rules, mentioning the three property rules, the 200% rule, and the 95% rule. 

He mentions that in a 1031 exchange, within 45 days, you can identify up to three properties (three property rule), or use the 200% rule where properties’ total value doesn’t exceed 200% of what you’re giving up. 

The 95% rule allows any number of properties as long as they amount to at least 95% of the total identified property value. While the three property rule is common, knowing these options can be advantageous. Any leftover cash (boot) is taxable in this process.

[08:56]

Lazy Man’s 1031 Exchange

Peter wrapped up by sharing about the Lazy Man’s 1031 Exchange. 

He mentions that the “lazy man’s 1031” is a strategy used in syndications to defer capital gains tax by transitioning from one investment to another within the same year. By investing in a new syndication deal that creates paper losses through depreciation or cost segregation, these losses offset the gains from the previous investment, delaying tax obligations.

This approach, also called as a syndication ladder, allows investors to continuously defer taxes on passive real estate investments by strategically moving from one deal to another. It’s a way to build wealth and generate passive income while minimizing tax liabilities.

Kinds of 1031 Exchanges_Improvement Exchange_Reverse Exchange_1031 Tax Implications & Rules_Lazy Man's 1031 ExchangeWe talk in depth about all of this and more in our course–Passive Real Estate Academy. Want to learn everything about investing in real estate with confidence? You can grab your seat right here!   

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