How Defer Taxes Forever With Real Estate through a 1031 Exchange (1)

How to Defer Taxes Forever with a 1031 Exchange

In this article, you will learn about tax-free money, how to tax-defer capital gains taxes, and how to keep rolling your profits over and over forever! A 1031 exchange allows the owner of an investment property to sell it and buy another property while deferring the capital gains tax. 

 

EARLY RETIREMENT

 

You will spend about one-third of your life working to pay for your taxes. It is by far one of your biggest expenses. By learning the tax rules, you can legally reduce your tax bill and keep more of your hard earned money! 

Over the last two centuries, 90 percent of the world’s millionaires have been created by investing in real estate. Clearly, if you want to attain financial freedom real estate needs to be part of your portfolio. Your investment strategy should include a diverse set of investment vehicles which will create a wealth strategy that can weather any storm.

 

A Quick Definition of a 1031 Exchange:

 

1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code. It allows you to avoid paying capital gains taxes when you sell an investment property. The proceeds from the sale must be immediately reinvested into another property or properties of like-kind and equal or greater value.

 

What does that mean?:

 

As long as one property is being exchanged for another real estate holding, it doesn’t matter whether you are selling a home to buy a duplex, an apartment, a piece of land, or a 4 plex. You can even sell one rental home and split the proceeds to purchase two rental homes!

In fact, you can defer taxes on the portion that is being rolled over or the entire gain. The point is that you can defer taxes as long as that money is being immediately reinvested into another piece of property.

Should you decide to purchase a smaller property, resulting in a leftover gain, you will need to pay taxes on that amount. Remember to consult your tax accountant.

If you own a property for a long time, then you will need to recapture the depreciation, which can affect how much you need to pay in taxes. 

If a property sells for more than its depreciated value, you will likely have to recapture the depreciation. That means the amount of depreciation will be included in your taxable income from the sale of the property.

As long as you continue to roll the invested amount into another property, you can defer the taxes on the gain until the last sale.

 

Tax-Free Money Tip: 

 

Properties that have gone through a like-kind exchange are particularly well suited for inheritance gifts.

When you die, your heirs won’t have to pay ANY income tax should they decide to sell the property shortly after your death. This is because the property receives a step-up in value, and the gain goes away upon the death of the owner. 

What is a step-up in value you ask?

A step-up is the readjustment of the value of an appreciated asset for tax purposes (upon inheritance). The new value is the market value of the asset at the time of inheritance. Thus, the asset receives a step-up in basis so that the beneficiary’s (i.e. the receiver’s) capital gains tax is minimized.

So if you died, and your heirs sold the property upon your death, the property would receive a step-up cost basis (market value). Therefore, your heirs would not have to pay the deferred taxes on the increase in value.

I love Tax-Free Money!!! 

 

 

The 1031 Exchange Timeline: 

 

 

(Photo credit: cwscapital.com)

 

 

A Qualified Intermediary:

 

To qualify for a 1031 exchange, you must use a qualified intermediary. This means that all proceeds from the sale must be transferred to an unrelated party to the transaction.

Typically, an escrow company is used to hold the funds from the sale, while you find and purchase a new (replacement) property.

 

What if I Need Cash?

 

If you own an investment property and need to pull out cash, you can always refinance or pull a home equity line of credit (HELOC). Instead of selling your investment property, you can use it as collateral for a loan. 

Moreover, the money you receive when you refinance or pull out a HELOC is that it is tax-free! If you were to sell the property, then you would owe taxes on the proceeds of the sale! 

Even if you refinance, you can always perform a 1031 exchange at a later date and tax-defer the gains. Just remember to keep the original invested amount in the real estate holding and within the rollover.

The 10,000 Foot Overview:

 

Through a like-kind exchange, you can keep buying more and more properties as your properties go up in value (all without paying taxes).

You can continue to reinvest the principal amount while benefiting from the monthly rental income (cash flow). The rental income is reduced by the depreciation of the property and is only taxed at capital gains rate

Real estate really is a miracle investment vehicle!

Make sure to talk to your tax advisor before engaging in a 1031 exchange. This will allow them to guide you through one because the 1031 exchange guidelines are very specific. Additionally, talk to an escrow agent who has experience with 1031 exchanges to get the specific time guidelines.

Tax-free exchanges have very detailed rules that need to be followed to the letter. 

 

Learn the Rules of the Game:

 

 

Knowing the tax law and wealth-building concepts are critical to navigating your way through the game of finance.

There are many ways to diversify your portfolio, and it is important to use of as many tax-advantaged strategies e.g. the 1031 exchange, Roth IRA, 529 plan, etc. as possible.

Like what you see? Stay a while!

 

If you have learned anything new here, please remember to share so that I can continue to provide you with more content!

Feedback is always welcome! Do you know any tax-free tips that you use or want to share? Please comment below!

 

Tax Free Money

Tax-Free Money: The Secret of Buying Gold Inside of a Roth IRA

Who doesn’t love tax-free money? One of the benefits of using a Roth IRA is that all of the growth inside of this tax-advantaged account can be pulled out tax-free! In this article, I am going to share how you can grow your retirement account through the investment of commodities and skip paying the 28% capital gains tax legally!

Tax Free Money

 

Roth IRA vs. Regular IRA:

 

The difference between a Roth versus a regular IRA is “when” you pay taxes on the money. With a regular IRA, you take the tax deduction now but have to pay taxes on the amount you withdraw later.

The downside is that when you elect to pay taxes later, you have to pay taxes on the interest AND the gains that your money has made over your lifetime of saving and investing.

Moreover, you won’t know which tax bracket your future you will be in. Not to mention, tax rates are always fluctuating and the government keeps passing spending bills.

I love a sure thing, which is why I really like the Roth versions of 401ks and IRAs. I know that when I look at my account, every penny is MINE!

In a Roth IRA, your money grows and so does the compound interest. These two parts grow tax-free because you funded the account with post-tax dollars.

Another benefit that comes with a Roth IRA is that since you have already paid taxes on the money in the account, there is no RDM (required minimum distribution). Meaning that you can decide to withdraw at any time after age 59.5. 

With a traditional IRA, you are required by the government to start pulling a minimum distribution from your retirement account at age 70.5. This is because the government want’s it’s cut (taxes). Here is an easy RDM calculator by Schwab.

The goal of this blog is to show you how you can save money by going green and then reinvesting that money to gain your financial freedom! A Roth IRA is just one of the financial vehicles you should use to make sure you are ready for a worry-free retirement. 

So how much do you need to retire? Well, that depends on what kind of lifestyle you plan on living when you are retired. Let’s take care of the bare minimum, and then work on using other investment vehicles to cultivate play-money!

 

How to Take Care of the Bare Minimum with a Roth IRA:

 

If you spend $40,000 per year during retirement, you will need around $1,000,000 to reach financial freedom based on the 4% rule. The 4% rule basically states that you can consistently withdraw $40,000 every year without touching the principle.

The result is that you can live off of the interest and appreciation of your portfolio. You are pretty much guaranteed to be able to live off your investments for 30+ years by following this rule. This is especially the case if you hold 75% stocks and 25% bonds.

In a prior post, I show you how you can fully fund a Roth IRA and become a millionaire by saving $15 a day!

In case you missed it, here is a quick summary.

 

How to Fully Fund A Roth IRA:

 

The maximum that the US government allows you to contribute to a Roth IRA is $5,500 or $15 a day ($458 per month). If you do this, you will end up with over $1.2 million in the bank.

Bang! You are a millionaire and are guaranteed to retire!

With the 4% rule, you will be able to retire at the age of 65. That is if you started investing when you were 25 (or over any 40 year period).

To learn more about the benefits of a Roth IRA you can read Roth IRA: How to Become a Millionaire by the Time You Retire! Can’t find $15 a day to save? Read “8 Ways to Save for a Down Payment on a Home and a Roth IRA“.

The image below shows the math, but if you want to play with the numbers yourself you can head over to Bankrate.com.

bank rate Roth IRA

 

 

The Secret of Owning Gold and Silver:

 

Tip 1:

Diversification is critical to lowering your risk while owning enough of the market to maximize your gain. Should you decide to own commodities in paper form (stock), you should trade them within your Roth IRA.

By owning paper gold and silver (stock) in a Roth IRA, you won’t have to pay taxes on the increase in the value of the gold and silver!

The capital gains rate tax on gold and silver is 28%, which is almost twice as high as the normal capital gains rate (15% for most).

If you were to trade gold and silver in your regular brokerage account, you would owe 28% of the gains in taxes. Say you made $100 in profit, well you owe Uncle Sam $28.

 

Chart provided by TLBJ a CPA firm.

The benefit of trading gold and silver commodities within your Roth IRA is that you don’t own ANY taxes on the gain! Meaning that you get to keep all of your profit! 

This is because you pay your taxes on the money you put into the Roth IRA before it goes into the tax-advantaged account. When you decide to pull the money out, you can do so without paying taxes on the withdraw, which includes the interest and gains!!

I love TAX-FREE MONEY!

 

Tip 2:

Should you invest in gold and silver bullion (meaning that you actually take possession of coins or bricks), the dealer is only required to report to the IRS if you buy/sell more than $10,000 in a year.

Be sure to keep your receipt so you know how much you paid for the bullion (your cost basis). When you sell the bullion you need to report any gains or losses to the IRS. Should you have made money, you will owe a 28% capital gains tax on the increase. The increase is the amount you made above your cost basis.

**Gold and silver is a favorite of many investors due to the privacy it provides its owners.**

Remember, the goal is to get as much of your money from passive and investment income streams as possible. This is because they are taxed at a lower rate than regular income, and your money works for you while you sleep.

Here is a quick video that explains the IRS regulations on buying and selling bullion by SDBullion.com

 

 

 

How Much You Should Have Saved at Every Age:

 

 

Chart source: Fidelity

The chart above shows how much you should have put away in savings for your age.

The formula is based on the assumption that a person saves 15% of their income annually beginning at age 25, invests more than 50% of their savings in stocks over their lifetime, retires at age 67, and plans to maintain their pre-retirement lifestyle in retirement.

 

Here’s the breakdown of Fidelity’s “How Much to Have Saved at Each Age” formula:

30: Have the equivalent of your starting salary saved
35: Have two times your salary saved
40: Have three times your salary saved
45: Have four times your salary saved
50: Have six times your salary saved
55: Have seven times your salary saved
60: Have eight times your salary saved
67: Have 10 times your salary saved

 

Being a Life-Long Learner: 

 

I complete a book every week and a half because I know that knowledge is the key to success. Oftentimes authors spend years writing a book that contains all of the secrets that they have learned over decades of experience.

Where did I learn about Gold Tip #1?  From an awesome book called Tax-Free Wealth by Tom Wheelwright CPA. I can’t say enough about this book and highly recommend reading it! You can get it on Audibles by clicking the photo below.

 

 

 

Like what you see? Stay a while!

 

If you have learned anything new here, please remember to share so that I can continue to provide you with more content!

Feedback is always welcome! Do you know any tax-free tips that you use or want to share? Please comment below!

 

New Year’s Resolutions to Create a Sustainable 2019

Happy New Year’s! I am so grateful for all of the amazing things that happened in 2018 and am so excited for all that is to come in 2019. January is usually the time when we look out into the future and set a few goals to improve our lives. Striving toward a more sustainable lifestyle is one goal that has budget, environment, and health benefits.

The goal of Eco Economics is to show you how to save thousands of dollars by going green and how to reinvest those savings into financial vehicles that will help you gain your financial freedom.

Living a sustainable lifestyle has wide sweeping impacts on:
  • Our children’s future
  • You and your parent’s respiratory health
  • Quality of the food you eat
  • The environment that you live in
  • The planet’s biodiversity

 

UN scientists have released a warning stating that the world has less than 15 years to reduce the carbon output to nearly 0 or else face serious climate change consequences. 

What is really scary to think about is that three-quarters of the world’s mega-cities are by the sea. Moreover, imagine the level of geopolitical instability that would occur should billions of people need to relocate due to rising sea levels.

According to the UN, 2.4 billion people (40% of the world’s population) live within 60 miles of the coast. To give you a comparison, the recent instability in Syria has displaced 13 million people. Now, just imagine the level of crisis that would occur should 1 billion people need to find new homes. I am not an alarmist. I just want you to know the facts.

 

This infographic, provided by the Union of Concerned Scientists, does a fantastic job of showing you how much water levels could rise over the next 100 years.

 

 

I urge you to join me by taking the Sustainability Pledge and promising to be the change that the world, our children, and the future needs. Start by educating yourself and investing in a sustainable lifestyle.

7 New Year’s Resolutions to Create a Sustainable 2019:

 

If you are reading this article, it is because you are actively looking for ways to reduce your waste, increase your energy efficiency, cut down on spending, and live a healthier lifestyle.

With that in mind, I am sure that some of you are even looking to go a step further. Know this, eco-friendly, zero-waste, and minimalism are not all-or-nothing concepts. It’s about becoming conscious of your actions and starting small. Taking many small steps can result in a major social movement. As a consequence of your actions today, social movements can change the course of history.

The more you act and buy green, the easier it becomes. Soon, you won’t even have to think about it…It will just become “the way things are done”.

So, let’s get straight to it! Here are a few New Year’s resolutions that you can make to live a more sustainable lifestyle in 2019.

 

1. Plant a Carbon Sequestering Garden:

Reduce how much you spend at the grocery store each week by starting an organic carbon-sequestering garden!

Planting an edible garden is one way you can make a huge difference by helping sequester carbon from the atmosphere!

Want to know what you need to start a carbon-sequestering garden? Click here to learn about the benefits and how to get started!

2. Create a Habitat for Mason Bees:

 

In recent years, the decline of bees has become a cause for major concern for everyone.

Bees help farmers pollinate the crops that we rely on for food.  You can help our environment and eat better tasting  (bigger fruits and vegetables) by starting your very own Mason Bee garden.

Mason bees are 10x more productive than the common honey bee. This is because they are more efficient at pollinating flowers. What’s more is that they don’t travel as far to collect pollen so they are less likely to be exposed to diseases. Mason Bees cannot create their own hives, which is how you can help them by providing them a place to live!

Here is a quick video by TED that explains why our bee populations are in such great decline.

 

Starting your own bee garden is super simple and cheap!

 

3. Purchase a Zero-Waste Kit:

 

Making the switch over to a zero-waste or minimalist lifestyle has a relatively small start-up cost. One of the benefits of switching over to a sustainable lifestyle is that these products that will save you money over the long run!

One useful tip is to have a “to-go zero-waste car kit” that always stays in your car. I always keep reusable bags, to-go containers, a clean coffee mug, a full reusable water bottle, and a utensil kit in the back seat of my car. This way the kit is always on me where ever I go and whenever I need it.

Your zero-waste home kit should contain the following items at the very least:

4. Avoid Single-Use Items:

 

Bring your own or just decline the following items:

  • Cups
  • Balloons
  • Straws
  • To-go doggy bags
  • Fast food waste
  • Paper towels
  • Aluminum foil (use a silicone baking mat instead)

 

 

5. Water Conservation:

 

In total, humans can only use 1% of all the water resources on earth. The EPA website states that the U.S. population has doubled over the past 50 years, while our thirst for water has nearly tripled!!!

The US government estimates that at least 40 states anticipate having water shortages by 2024. Clearly, the need to conserve water is critical.

What you can do:

 

6. Increase Your Home’s Energy Efficiency:

 

Insulating your home will increase its energy efficiency, reduce your energy usage, and save you tons of money! The more air-tight your home is, the more money you can save. This is because heat won’t escape during the winter and the cool air will stay in your home during the summer. 

What you can do:

You can find additional insulation solutions on Eco Economic’s Sustainability Shop page.

The shop includes energy efficiency and water conservation conversion kits, solar products, zero-waste, and minimally packaged home goods.

 

7. Learn Online:

 

Take full advantage of the library system. You can listen to and read books online for free through an app called OverDrive which is connected to your local library. Subscribe to online versions of the news. Read informative sustainable books and watch documentaries to learn about what the mass media isn’t covering.

Become a life-long student and invest in yourself. Sustainability and personal finance are two topics that are not taught in schools, yet they impact every person’s life on this planet. Master your personal finances and learn how to live a more sustainable lifestyle.

 

Articles that may interest you:

 

Did you know that it only takes 25% of a population to start a major social movement?

Become a Sustainability Hero by helping me spread the world! Please re-pin and share, so that I can continue to provide you with free content.