1031 Exchange Wealth Building Tips

In this article, we will offer a few tips for building your wealth over time with a 1031 exchange.

Real Estate as a Wealth Building Vehicle

Real estate is a preferred vehicle for wealth building because you can defer your gains and continue to compound and build your wealth over time.

For example, let's say that we start off by purchasing a single-family rental. We're good stewards and managers of that property, and guess what? It goes up in value after a few years and we've acquired quite a bit of equity in that property.

Single Family to Multi-Family Property

Now, we're not complacent so we're not going to stay in that single family rental property. Instead we're going to defer the gains on its sale and acquire a fourplex or four unit multi-family property. We're going to take all of our proceeds from that single family rental, roll them tax-free into the new apartment building. Again, we're going to be good stewards and that property will continue to go up in value. After a few years of managing that property, it will have increased our equity position again.

Fourplex to 16-Unit Apartment Complex

Now, we're not complacent and we're going to continue to compound and build our wealth so we're going to dispose of the fourplex using a tax-deferred 1031 exchange and buy a 16 unit apartment complex. Again we're going to compound and build our wealth tax free over time. We're going to be good stewards and operators of that apartment complex and over time again we're going to build equity.

Parlay Your Investment Over Time

We're always going to be buying a bigger, better, more expensive property. Over the course of time we're going to parlay our initial investment from a single-family rental property into perhaps a hundred plus units. The reason that we’re able to do that is twofold:

1. We’re using a very tax-efficient strategy where we’re able to keep our wealth building and compounding for us

2. We’re using other people's money (OPM) to finance the bulk of our acquisitions. With only a little bit down (say 20%) we can take down a much more expensive property. The interest that we pay to the bank is tax deductible. Who really ends up paying the debt service anyway? It's our tenants. The tenants are paying the rent and we're using the rent to pay the debt service.

By building wealth through real estate we’re able to amass so much wealth tax-deferred so much more quickly than we could if we were burdened with laborious taxes.

• Start Your Exchange: If you have questions about building your wealth with 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Working With Your Qualified Intermediary

What are some tips for working with a qualified intermediary during your 1031 exchange? The qualified intermediary has a difficult job in that oftentimes they get pulled into a transaction late in the process and have to work quickly to gather the information and details needed to draft the 1031 documents and closing instructions.

Start Your Exchange Early

The first step is to start early to engage your qualified intermediary at about the same time that you're signing the sale agreement for the sale of your relinquished property. Sometimes people want to sit on the sidelines and not engage their intermediary until they know the buyer is going to preform and close. They may say “I'm going to wait until the inspection period is over, or I’m going to wait until the buyer waives all their contingencies.”

But the problem with waiting until the eleventh hour is it can be a real fire drill to gather all the information and details necessary for the intermediary to properly draft and tailor make the 1031 documents specific to your situation.

What to Provide Your Intermediary

Tip one is to start early and to provide the intermediary with the particulars for the taxpayer such as:

• Their address

• Their tax ID number or social security number

• The name and contact information of the title closer or escrow company

• The specifics about the property that's being sold such as the address, legal description, and how you’re vested in title

By teeing up the exchange early you give the intermediary time to prepare and coordinate with the title company or escrow company that’s closing the transaction. If you wait until the last minute you may not get the best product or service and it can be very upsetting and stressful to the other parties in the transaction that may have to change their documentation or respond to this unforeseen change in the plan and that can be stressful for everyone.

• Start Your Exchange: If you have questions about keeping your exchange funds secure, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved