1031 Exchange - Why Bother You'll have to pay taxes eventually right? - Biggest Myth

[Mike Auerbach]

There is a lot of false information out there regarding 1031 exchanges and one of them is that you'll have to pay taxes eventually. That's a myth!

If you keep rolling one 1031 exchange into another until your time on Earth is up, you will not only have deferred taxes on your gains each time, but you will have accomplished the seemingly impossible: avoiding taxes altogether. How is this? Because when your properties pass to your kin, they get a step-up in basis, effectively making a lifetime worth of gains invisible to the US Government.

[David Krulac]

I have done many 1031s over many years, there are a couple or three points that I would like to include:

1.  The time frames of 45 days for identification of replacement(s) and the 180 days to close are hard and fast. And I've seen people say the later is 6 months, not true because some 6 month periods have more than 180 days. You have to follow all the IRS rules or leave yourself open to disallowing.

2. The time flies by when you are under the time requirements.  Often times you're selling a good deal but can't find a replacement that is as good as the property you're relinquishing.  I've seen deals where investors accept a deal that's not so hot just to comply with the time frames.  One of the things we do to circumvent this problem is to start earlier.  The clock starts when you settle on the first property, but you can start looking for a replacement before you settle and before the clock starts.  You can even start looking for the replacement before you decide to sell the relinquished property.

3.  And as I talked about in Bigger Pockets Podcast #82, imho capital gains tax should be indexed to inflation. Particularly if you owned the property for a long time, much of the capital gain is due to inflation and should not be taxes.

David Krulac

Bigger Pockets Podcast #82