What it Takes to Buy and Sell Rental Properties Without Paying Taxes
Want personalized advice on how to use a 1031 exchange to grow your rental property portfolio?
Prefer to read rather than watch? We’ve included a transcript of the video below. Bear in mind that it is autogenerated so please ignore any typos:
Brandon – 1031’s
Bill [00:00:01] Hey folks, I’m here with Brandon Graham from RentVest. And today we’re gonna be talking about how to get the funding you need to get the next rental property. If you’re watching this you probably already have a rental or two, or some sort of real estate investment and you want to grow that portfolio to get a few more rentals. Some of you want to go 10, 20, 30 or even more. But we’re going to talk about just going from one to two or two to three. One of the tricks you can do through a 1031 exchange. We’ll talk a little bit about how to do a 1031 exchange and some of the overview steps. So why would somebody do a 1031 exchange on a property?
Brandon [00:00:41] When somebody is ready to sell a property, the number one question becomes what are you going to do with that money? So if you sell, especially if there’s been an investment property there are going to be tax implications and potentially capital gains. Again, I’m not an attorney or a CPA but the 1031 exchange is a great way to avoid any tax penalty as you just roll that into another investment. So for me, if the market is getting to a point where it’s really high and you don’t really think there’s much more potential for an increase, it might be a good idea to cash that out and then roll that into a new investment.
Brandon [00:01:18] So here’s an example, the most recent one we did was a 1031 exchange in Seattle, which is just going crazy right now. Market is through the roof. So this lady actually end up selling a two bedroom condo in Seattle. And we did a 1031 exchange here, purchased her a five bedroom home in Gilbert with a pool. So her plan is to rent that out for five to 10 years and then eventually move down here and retire in the property. So just a great way to make sure you’re maximizing your investment money.
Bill [00:01:52] So she had more purchasing power coming from a secondary market. But also because she didn’t have to pay the capital gains tax right that she was able to defer it so she can get a bigger, nicer property and earn higher rents. So get some equity building up, maybe more than she would have because the higher value in the home. Yeah exactly. And they shouldn’t have to pay the taxes until she sells it, or she does another 1031 exchange.
Bill [00:02:15] So it’s a way to build more houses you know if you do the numbers and you’re doing two or three houses, you might get a fourth or fifth. You can maybe sell one get to have those two houses working for you your tenants paying your house off for you. And you know you can just keep deferring that that tax and get all of this extra income for years and years and years that you otherwise wouldn’t have had. Maybe you would have still invested but not had the purchasing power to invest as in as many as homes.
Brandon [00:02:45] Exactly. I like that.
Bill [00:02:47] You know I was talking to Brandon about this a while ago and we’re talking about you know people when they sell they want to sell. Some investors want to sell in the markets high. You know we have these investors that go for 30 years or never sell. But there are some that kind of try to play the market a little bit and sell when it’s high. But what are you going to put that money into? You know, where is it going to go? And so these guys might sell at the top of the market here and in one area and then go into a better market and buy two properties. It’s an easy way to double your purchasing power without having to pay those taxes which can be pretty steep.
Brandon [00:03:21] The first step would be identifying and selecting a qualified intermediary to work with. So that’s somebody essentially who just works with 1031 exchanges. They have all the legal paperwork you’ll need.
Brandon [00:03:34] Here at RentVest we have preferred personnel we work with and can introduce you to.
Brandon [00:03:38] So generally it’s best to work with a CPA or somebody qualified to have them overseeing your general tax implications and financial planning. And then the qualified intermediary would very specifically focus on just the kind where you want to change process but in a nutshell from the time that the property you’re selling closes escrow, you have 45 days to identify the property or properties that you’re going to be purchasing. Those do not need to be closed on by that time.
Bill [00:04:10] But again they need to be identified and the process of having a purchase contract in place so you can identify five even if you only get to buy one. So it’s a good idea to identify several properties. That way when you’re negotiating you don’t have the other side being harder with the terms and stuff. So it’s a good idea to identify multiple property. It isn’t hard when you’re in the market like we are, you’re always in the know. The good houses and the good neighborhoods.
Brandon [00:04:38] And if you’re working with somebody like us who are experts in our area we know what markets to identify, what type of properties. So we’re going to be able to very quickly identify those types of properties and then you just get through the inspection process quickly. Because that’s the one thing that’s going to come into play…Once the property is identified during a 10 day inspection period. And as long as nothing crazy is coming up on those inspection, it seems like it’s still a solid investment with a good ROI. Then we proceed forward with that.
Brandon [00:05:05] And there’s just some some verbiage that goes into the purchase contract. Are your qualified intermediary is going to provide that. They’re there to work through the entire process with you.
Bill [00:05:17] And how much do they charge for this?
Brandon [00:05:20] It’s between $500 and $750 for the service they provide.
Bill [00:05:26] Ok. And how much did you or your client avoid paying in taxes?
Brandon [00:05:34] About 30 percent so would have been in the ballpark of ….
Brandon [00:05:42] About thirty thousand dollars!
Bill [00:05:44] Again not in accounting and stuff like that. But if you bought a property within one year and you’re flipping it, you know your taxes your capital gains are gonna be significantly higher. If you go out a couple of years and things like that. You know, especially if you’re flipping a house that has some good value. You’re gonna want to defer that and have that 30 percent working for you instead of working for the government. You know let’s highlight this again that you do need a real estate agent that does understand that they need to put it in the contract.
Brandon [00:06:11] Yes.
Bill [00:06:11] And they need to understand the time frames because you miss it by a couple of days.
Brandon [00:06:15] I mean you miss it by about one day you’re out of luck.
Bill [00:06:18] Yeah. So here’s a plug for Brandon if you’re in Phoenix, the Phoenix area East Valley West Valley, Brandon knows how to do this. He’s a property manager, so he can also assist with getting your tenants quickly. And he’s kind of a one stop shop if you’re looking to expand your rental portfolio.