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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon, or you can go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Happy to be here. Thank you.
Mike:David's gonna be reading your questions that you've submitted, and I'll do my best to answer them. You can send those questions in right now or anytime during the week to, and save this number, 913-363-1234. That's 913363 1234, or email them at hey mike at how to retire on time. That's hey mike at how to retire on time. Let's begin.
David:Hey, Mike. Can you define what like kind means when it comes to 1031 exchanges?
Mike:Oh, yes. This is a common misconception. So 1031 exchange, for those who are unaware, is a line in the tax code that allows you to move real estate assets from one property or one asset to another and defer your taxes. Why is this important? Well, if you're not familiar with this, and maybe you are, but let's just let's just have some fun with this.
Mike:When you buy a rental property, let's just say you buy a nice single family dwelling, bought it for 500,000, right, or 400,000, maybe you bought it for 200,000 years ago, whatever the price was, you get a tax benefit of that. It's called depreciation, and you slowly get a tax break by depreciating the asset over a long term period of time. K? That helps you with the investment. It's it's delightful until you go to sell your property.
Mike:So if you depreciate your, let's say, 500,000. You paid 500,000 for a rental property, and then you're now gonna sell it for 700,000. You'd think, oh, well, I bought it for 500,000. It's 700,000, so I'm gonna pay 200,000 in capital gains and all is well. No.
Mike:That if you depreciated the asset all the way down, you're not paying 200,000 in capital gains on the $200,000 of growth. You're paying capital gains on $700,000 if you were to sell it and just do something with it.
David:Oh, that hurts.
Mike:That hurts.
David:Yeah.
Mike:And so what ends up happening is landlords become captive to their tenants or their properties because they don't wanna sell. They don't wanna pay the taxes. So 10/31 allows you to sell and move it into something else that that the IRS tax code deems as like kind and just not pay taxes.
Mike:Like kind means it is a real estate investment. Let me say that differently. It is not a company. Okay. A lot of people confuse it and think that a REIT, a real estate investment trust, would be like kind.
Mike:It is not. That is a share of a trust, which is a company. Doesn't qualify. These are 1031 like kind options because it's it doesn't have to be residential to residential. It does not be commercial to commercial.
Mike:It just has to be within this umbrella. And by the way, you can Google this. I wrote this, an article for Kiplinger about this 10:31 exchange. Do you know your like kind options? Search it and you'll find my article.
Mike:But you've you've got a couple of options here. I mean, you've got your raw land or farmland. We'll bundle those kind of together of just, you know, there's not a bunch of buildings on it. It's just it's for something, agriculturally. Great.
Mike:You've also got vacant land, which is more specifically is, like, land, there's no home on it, but it has, like, utilities, the sewer, the plumbing, all that stuff's kind of below the surface. The city's already built it out, and for whatever reason, there's just no house on top, but you could build a house on there if you wanted to. So it's an investment opportunity. You could 1031 into and buy some vacant land, a couple of properties, and then build it if you want. Probably not wanna build in retirement, but you get the idea.
Mike:Sure. It's like kind. Residential real estate, commercial real estate, industrial real estate, these are properties. Leasehold interest, so sometimes the building is separately owned than the ground below it. The leasehold interest, many times, would qualify for 10 30 1 exchange, or the land below it would qualify.
Mike:And then let's go below the surface, mineral rights. Below the surface qualifies. So it's it's about land. If you're talking about actual land, there's a good chance that they would qualify for 10 30 1 exchange. Now when you look at, like, leasehold interest or mineral rights, the more obscure ones, those are harder to come by.
Mike:Residential real estate, commercial, that's a little bit easier to transfer into. And you've got a timeline. So once you sell the property, you've gotta send the funds to a QI, a qualified intermediary. You cannot touch the funds. And then you can send the funds to either 1 or multiple places under the 10 30 one exchange, and you'd be okay.
Mike:Now there's 2 other ones that are often missed, tenants in common. So tenants in common, you you multiple people own the actual property themselves, that's the simplest explanation I can think of. And then Delaware statutory trust, which is kinda like a REIT, except for instead of owning fractional interest of a company or a trust, you own fractional ownership of the land. Okay. So just think of an Amazon warehouse.
Mike:You think that's going anywhere anytime soon? What if you owned 11,000th of the property? It wouldn't be a lot, but still Yeah. You're able to cash flow, so you'd still collect rent. It's able to appreciate in value as the value of the land increases, so does your part of it.
Mike:And then there's other things that you could do with it too. So, and this is a bit nerdy of me, but you could get more strategic with your planning and sell your property into and 1031 exchange it into a Delaware statutory trust or DST, and then that DST is structured so that in a couple of years, it follows 721 up REIT, which is part of the tax code a 721 up REIT, which would allow you to take the DST put it into the REIT, and then you're selling shares a little bit easier. Gosh. People are probably listening going, are you still speaking English? Right.
Mike:Taxes are complicated. Yeah. You've got exit strategies. If you're a landlord, you don't need to feel trapped. But it does take a lot of time and preparation and vetting your options before you want to put your property up for sale.
Mike:That's the goal. But chances are, you've got more options than you realize, but you can't get the stuff on your own. You have to go through a licensed financial professional or someone that has access to it, that has the licensing and qualifications to even do it. And then you have to work for the a practice that even allows people to talk about that. Some practices say we don't talk about that.
Mike:And it's just not even mentioned off the table. Mhmm. I mean, if you're a landlord, wouldn't you be frustrated if you went to your financial professional and say, hey. I want to sell my property. What can I do?
Mike:And they say, well, you just gotta pay the taxes. No. But I'll manage it after. Oh. And then you go to your CPA, and they say, well, you just do you wanna 1031 it into another house?
Mike:No. I wanna be done being a landlord. Okay. I guess you just gotta sell your property and and pay the taxes. That's a very disheartening conversation, especially when you're listening to something like this and realizing you could have done something different.
Mike:Yeah. I can't tell you how many people call in or go to request analysis, and they say, had I known? Yeah. It's like what what you don't know can hurt you. What you don't know can cost you a lot of money in taxes.
Mike:So if you're a landlord, if you wanna explore 10 30 one's Delaware statutory trust and other things we didn't talk about, Text landlord right now to 913-363-1234. That's landlord, keyword landlord, to 913-363-1234, or go to realestateexit.report. That's real estate exit.report. Get a report, learn more about what we're doing here, and decide what is right for you. What's the right way to proceed?
Mike:Here's the fun thing about all of this. Usually, you blend your options. Usually, you you you can exit and then do multiple things at once. You don't need to go all in on any of this.
David:So the principle of diversification sort of extends or
Mike:Diversify by objectives. Yeah. Not investment ambiguity. Don't buy a little bit of everything. Be be very deliberate.
Mike:I want this and this and this, and I want it because of x y z. If you can articulate why you're gonna have something in a certain part of your portfolio, that's a cool thing. Yeah. It brings a lot of comfort. So text landlord right now to 913-363-1234.
Mike:That's landlord to 913-363-1234, or go to real estate exit dot report. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or
David:if you're missing tax minimization opportunities that you may
Mike:not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what
David:it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com
Mike:today to learn more and get started.