Thinking about selling an investment property but dreading the massive tax bill? A 1031 exchange could be your financial game-changer! In this episode of Next Act Ninjas, host Rachael Van Pelt breaks down this powerful tax strategy that lets you defer capital gains taxes and reinvest 100% of your profits into another real estate property—keeping your money working for you instead of handing it over to the IRS.
Thinking about selling an investment property but dreading the massive tax bill? A 1031 exchange could be your financial game-changer! In this episode of Next Act Ninjas, host Rachael Van Pelt breaks down this powerful tax strategy that lets you defer capital gains taxes and reinvest 100% of your profits into another real estate property—keeping your money working for you instead of handing it over to the IRS.
🏡 What You’ll Learn in This Episode:
✔️What is a 1031 exchange and how does it work?
✔️Who qualifies for a 1031 exchange? (Hint: You don’t have to be a pro investor!)
✔️The key rules & deadlines to avoid costly mistakes
✔️How to use a 1031 exchange for vacation homes & inherited properties
✔️Why smart investors call this strategy “swap ‘til you drop”
If you own a rental property, second home, or inherited real estate, this episode is a must-listen to learn how you can maximize your wealth and minimize taxes.
📅 Thinking about a 1031 exchange? Let’s talk! Schedule a consultation via the link below
🔥 Loved this episode? Share it with a friend who’s considering selling a property!
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Chapters
00:00 1031 Exchange: The Tax Loophole You Should Know About
02:00 Understanding the Basics of 1031 Exchange
04:32 1031 Exchange Myths
05:05 Rules and Guidelines for 1031 Exchange
08:41 Utilizing 1031 Exchange to Restructure Your Retirement Portfolio
12:13 Don't Cash-Out, Without Considering a Trade-Up
Hey, hey, hey, welcome back to Next Act Ninjas, the number one podcast for mastering your health and wealth longevity. I'm your host, Rachael Van Pelt. Today, we're diving into a tax strategy that could save you tens of thousands of dollars when you sell a property. It's called a 1031 exchange. And let me tell you, most people have no idea that this tax loophole even exists. Or if they do, they dismiss it as too complicated to consider.
Let's say you have a second home. Maybe it's a rental property you bought years ago or a vacation home that you don't use as much anymore. Or maybe it's a property you inherited from your parents and you're just wondering, "what do I do with this now?" You find yourself thinking about selling, but you stop short because you realize that if you sell, the IRS is going to take a huge bite out of your profits. We're talking capital gains tax, 15%, 20%, maybe even more depending on your state. And suddenly that nest egg you thought you had just got a whole lot smaller, didn't it?
Well, what if I told you there's a perfectly legal way to avoid that massive tax bill? What if instead of handing a big check to the IRS, you could keep your money working for you and roll it into another investment tax free? Well, that's exactly what the 1031 exchange allows you to do. Today, I want to break it down for you so that by the end of the episode, you'll know exactly how it works and whether it's a good fit for your long game.
Before we dive in though, just a quick disclaimer. I am not a CPA, financial planner or attorney. I'm a longevity realtor and coach who's here to share tips and tricks for living well longer. You should always consult a financial professional anytime you want to make a big investment. That being said, let's dive right in because this is a financial game-changer.
We're going to start with the basics. A 1031 exchange is a tax strategy that allows you to sell an investment property and reinvest the profits into another "like-kind" property without paying capital gains taxes at the time of the sale. In other words, you're not cashing out, you're trading up.
Now I want you to picture this scenario. Let's say you bought a rental property 15 years ago for around $300,000, and today it's worth around $700,000. You're thinking about selling because it's an older building and needs more work than you want to take on, or maybe the upkeep has become too much of a hassle for you, so you want something easier to manage. But here's the problem. If you sell that property today, you don't get to keep the $400,000 you made over the last 15 years. The IRS is waiting at the finish line to take a big chunk in capital gains taxes. At a 15% federal tax rate plus state taxes, you could easily owe $60,000 or more just for selling your own property. That's $60,000 right out the window.
But what if instead of selling outright, you used a 1031 exchange. Instead of paying taxes now, you could reinvest all $700,000 of that into a different property, one that better fits your retirement needs. Maybe that's a vacation rental that gives you higher income. Maybe it's a new property that requires less maintenance. Whatever you choose, the best part is you get to defer the capital gains taxes. You don't owe a dime to the IRS because technically you're still investing in real estate. And guess what? You get to keep rolling your gains into bigger, better properties as you grow your real estate portfolio.
If you play your cards right, you can continue this strategy indefinitely. That's why some investors like to call it "swap till you drop", because you're deferring taxes for life. Better yet, if you pass that property onto your heirs, they get a new "stepped-up basis". And that means whatever they inherit is at current market value. So your capital gains are zeroed out. They don't pay taxes on those gains. Those deferred taxes basically vanish. It's great, isn't it? That's what I call smart estate planning and legacy building.
Now, of course, there are plenty of myths floating around about 1031 exchanges. I think the biggest one is that you have to be a professional investor to use a 1031 exchange, but that's not true at all. If you've owned and rented out a property, even part-time, you are eligible. I think another big myth is this idea that 1031 exchanges are too complicated. And while I know they can seem complex, we're going to break it down today. I think you're going to see that they're actually pretty straightforward. You just need to know the rules because while the 1031 exchange is an incredible tax benefit, the IRS doesn't just hand it out like candy. There are some very specific guidelines that you have to follow. If you mess them up, you do lose the tax benefits completely.
Rule number one, the new property you buy must be "like-kind" to the one you're selling. But I don't want you to too caught up on the wording here. "Like-kind" just means that it must be another investment property. So if you're selling a single-family rental, you could buy a duplex, a big apartment building, a vacation rental, even land. You could even buy multiple properties, though that does add a whole other layer of complexity to this. What you can't do is sell an investment property and use that money to buy a personal home. That new property must still be an investment property.
Rule number two, you only have 45 days to identify your replacement property. That means once you sell your current property, the clock starts ticking. You have to officially name the property or properties that you're going to buy within 45 days. And let me tell you, that can go by really fast. So if you're thinking about doing a 1031 exchange, you're going to want to start shopping for properties before you sell.
Rule number three, you must close on that new property within 180 days of selling the first property. That's roughly six months. So if you don't find a replacement property and close within that timeframe, guess what? That 1031 exchange is void and you're going to owe full taxes. So you need to be ready to move quickly. Rule number four, the property you buy must be of equal or greater value than the one you sell. Typically that means you're trading up. If you trade down and you buy something cheaper, the difference in price becomes taxable.
So if you sold for $700,000 and bought something for $600,000, you'd owe capital gains on that $100,000 difference. But hey, that can still be a great option in some cases. If we use our original example, you'd be paying $15,000 in taxes instead of $60,000 in taxes. But you'd still have an investment property, wouldn't you? And you'd free up about $85,000 in cash. So that's not too shabby.
Rule number five, the debt load has to remain the same. So if you still owed $100,000 on a mortgage when you sold, you're going to be expected to take on that same amount of mortgage for the new property.
Lastly, rule number six, you can't touch any of that money at any point of the transaction. The proceeds from the sale of your property must go directly through a Qualified Intermediary. That's just a third party that holds on to your money until you complete the purchase. If that money ever lands in your personal bank account, the 1031 exchange is null and void, you owe taxes.
I know it's a lot of rules. The biggest mistakes that people make are missing deadlines, not using that Qualified Intermediary, or trying to exchange a home that in reality is a primary residence, a personal property, right? Not an investment property. But if you stick to those simple rules, you get to keep growing your wealth through real estate tax-free for life. It's a fantastic way to legacy build.
If you're thinking about retirement, a 1031 exchange can be a wonderful tool to restructure your real estate holdings in a way that makes sense for your new lifestyle. Maybe you want a property that increases passive income, or you want one that has fewer management headaches, or you just want something in a better location. If you don't need to cash-out, trade-up instead.
Of course, you might be thinking, that sounds great, Rachael, but I don't have a portfolio of rental properties. So what does this have to do with me? Well, if you've inherited a home or you own a vacation property, you might be sitting on an untapped opportunity.
Let's talk about inherited properties first. Many people inherit a home from their parents and then they're not sure what to do with it. If you don't want to necessarily keep it and it's not a great time to sell, I would consider a 1031 exchange. Turn that property into a rental, hold onto it for a couple years, do a 1031 exchange into something that better fits your investment goals.
Or if you have a vacation home, a place that you and your family visit occasionally, but it's not getting much use otherwise. If you've thought about selling it, a 1031 exchange could let you transition that equity into a more profitable rental property, one that generates cash flow rather than sitting empty most of the year.
But here's the catch, to qualify for a 1031 exchange, a property must be considered an investment, not just a second home. That means you're going to have to rent it out for at least 14 days per year. And you're going to have to limit your personal use to no more than 14 days or 10% of the total rental days per year. To show the IRS that you're complying with this rule, make sure you keep detailed records of things like rental agreements, income received, the number of days you use it for personal use, and so on. In other words, you do have to do a little planning and record keeping, but it's totally doable.
Let's say you inherited your mom's townhouse, and it's in a city where you have no intention of living. In fact, what you really want is a nice cabin in the mountains. In that case, turn your mom's townhouse into a rental for a couple years. Use a 1031 exchange to trade-up for that dream mountain cabin. That way, your inherited asset becomes a source of income for you, and it sets you up to buy something that you love even more. Just make sure that your intent is to rent that mountain cabin out. You can't just make it your snowbird second home after you buy it.
Or maybe you and your spouse own a small condo near a ski resort, but it's not big enough to host family gatherings and you just don't ski very much anymore. Well, a 1031 exchange could let you trade-up for a bigger vacation property, one that fits your expanded family, your current lifestyle. As long as you already rent out that ski condo occasionally and you have the intent to rent out the next place when you aren't using it, 1031 is a great option.
And look, if you aren't already renting out your vacation property, you might want to seriously consider it. Go back and listen to last week's episode. There are major tax advantages when you treat your vacation property like a business. Even if you've never thought of yourself as a real estate investor, that property gives you all kinds of opportunity to reduce taxes, grow your wealth strategically, build legacy.
Bottom line, if you own any kind of investment property and you're thinking about selling, don't just cash-out without considering a 1031 exchange. I think it's one of the smartest ways to keep growing your wealth while minimizing taxes.
Thanks for joining me for another episode of Next Act Ninjas. If today's episode resonated with your situation, let's chat. You'll find the link to my calendar in the show notes. I can help you figure out your best move, whether that's selling, renting, rolling into a 1031 exchange, whatever.
And if you know someone who's thinking about selling a rental property, send them this episode. Let's help more people build lifestyle longevity.
Until next time, live well, love more, age less, my friends.