Now with the tax free 1031 exchange, I can take that $3 million dollars in profit. And as long as I go by another $5 million dollar piece of property or bigger. I don't pay any taxes. Sure, you must follow. Hello. All right, welcome back to episode nine of how to invest in commercial real estate. What is up guys, welcome back. So today is the super exciting episode. We are going over how you can invest in commercial real estate, make tons of money and not pay any taxes at the end of it. No way. How do you do it? I don't know Joe How you do that? Well, um, lucky for me, I've been able to do that a few times. You're in the middle one right now. We are in the middle of one right now. They are called 1031 exchange. So the basis for that is, it's a section of the tax code that says that if you sell a property that as long as you take the proceeds and you go buy another property of like kind um So similar in nature uh that you can forego or delay paying taxes on all of the game that you made from the sale.
That's awesome. Yeah. So it's not illegal, right? I mean, it's uh you said it was part of the Internal Revenue Service's Code, you know, just like this little loophole that makes investing in real estate so attractive because you don't have to pay taxes, make all this money and you don't have to pay taxes. So I don't know of any other vehicle that allows you to do that where you can sell, uh, make profit and then not pay taxes. Uh, and even indefinitely, in some cases, not pay those taxes, you certainly can't do that in the stock market, right? You can't, you can't, once you sell it, you got to pay taxes on it, there's nothing else now, real estate is, and we haven't done a show on real estate taxes, but there are so many tax advantages to investing in commercial real estate. Um, and even even if you're going to pay the taxes, if you held the asset for longer than a year, you're into long term capital gains tax, which is still way lower. Uh, then a lot of the income tax brackets. So right now, depending on your income bracket and other scenarios, you, let's say you buy a commercial real estate property for $2 million $5 million dollars now.
Um, You know, that, that's achievable. It sounds crazy that you would be able to make three million, but that's, that's doable. I've done that, uh, with some of the deals that we've done with investors. So now let's, I just want to pay the taxes. Well, now that $3 million 20-25% on that money. Yeah, you were in at this apartment complex with 3,000,003 million bucks is two million dollars million bucks. Okay and you sold it for 5 to You've got this $3 million dollars in limbo. That's right, you got $3 million dollars in profit, I can take the money Uh and I can pay long term capital gains on that which is either 20 or 25% right now. So you know if you like six or $700,000, Yeah six or 700,000. But here's the thing guys is think about a wage earner making $3 million dollars in a year. Almost half of that is gone in taxes because of the tax bracket, you're in the highest tax bracket. Uh I'm not quite sure but after you know several 100,000 of of income. And so you're gonna of the three million, you're gonna lose a million and a half Approximately. Okay.
But with real estate and with with stocks and other things that you hold for a long period of time now we're only paying, let's just say 25%. Right? So now we're only losing 750,000. Uh So we're already way ahead. You you want to make uh you don't want to make wage income, you want to make a long term capital gain income. That should be a goal of yours. But what's awesome about real estate is Now with the tax free 1031 exchange, I can take that $3 million dollars in profit. And as long as I go by another $5 million dollar piece of property or bigger, I don't pay any taxes on that three million. So what you're saying is You have to buy a property not worth the profit that you may not the three million, you've got to go buy a property that's worth five million or more, is that right? Yeah. So if you sold that $5 million $3 million $5 million dollars worth of property and another loopholes.
You don't just have to replace the cash. I mean there's there's other things you have to replace. Two. Yeah. Um so if you have, let's say how to uh $2 million three million and and I'm gonna buy a $5 million building. Uh I'll put the $3 million I gotta get another $2 million worth of debt that satisfies the exchange. We're I'm in an exchange right now where we we sold for six and a quarter, let's say six and a quarter million 11 property, One property. And um And I had a $5 million mortgage at the time that I sold. So you've got to replace 6.5 million and property value and five million in debt. That's right. And so it gets a little bit tricky because we're actually buying three properties to complete that trade. I was gonna ask that so you can do it with more so you can sell one property and you don't have to just go buy one property you can buy. Yeah, for sure. Up to three I think even more in some cases but us we're buying three smaller properties.
So three properties roughly, you know, between you know, two and and three million were buying three of those. And so and when you add up all the debt that I'm putting on those three, it's over the five million and the purchase prices over the six and a quarter million. And so that satisfies the trade. So all the gain that we had, Which uh that we had a lot of game coming out of that cause we bought that property really cheap gains profit, gains profit. Um and so 3, $4 million dollars worth of gain were alleviating all the taxes that would be owed on that. And so if you didn't alleviate all the gain, if you had some leftover, you could just hold on to that, but you have to pay taxes on it. Is that right? Yeah. So what what happens if you don't spend all of the three million, like let's say you bought two out of the three deals you spent, you know, $2 million. You you replace your $2 million dollars worth of debt. But you've just got You can actually $1 million dollars in cash. Let's say so. So uh well okay if you have a million and a half a million, you place, you know, two million, then you're just going to typically pay capital gains on that money. Now we get in a little bit more complicated if you if you'd appreciate uh the asset while you own it, which is a more complicated discussion.
You have to recapture that at 25%. Which is about what capital gains is anyway. But yeah, it's about 20 to 25%. You're going to pay on that the money that you didn't place. So it's still a good deal if you can alleviate half of the taxes uh and then pay long term capital gains tax on the rest of it, you're still way ahead. Okay, so here's one thing I don't understand. So you sell this property, you what do you do with the money? Uh You just put the money in your bank account and then the next time you sell this property it just comes out of your bank account, or is there is an intermediary or what do you how do you handle that? Yeah. I mean you you definitely have to use qualified intermediary uh Q. I. Qualified intermediary. Um Those can be title company's lawyers. Um Really common, there's people that specialize. Yeah. There's people that do it. So it's really important if you sell a property and you know you want to do a 1031 exchange and you know you want to at least try right? Because there's no disadvantage to trying if you go through the 1031 exchange process and don't do anything with it, you just pay the tax at the end. There's there's no fault for trying. Um so if you know you want to do that, you need to get it set up before closing.
Because all of the proceeds from closing have to go to that qualified intermediary. If you touch them, if they go to your account, if you have control over them, if you have access to them, it immediately blows the whole 1031 exchange and it's all taxable. Yeah. I can't uh Q. I. Qualified intermediary. Can't be your attorney. It can't be someone that you've worked with. It needs to be kind of a third party separate from you and they hold the funds. And then, you know, there's a couple things you gotta know is uh once you close on the property you want to exchange on, you have 45 days to identify your trade property. Okay? So once you sell, Yep once you once you close on the sale of that property of 45 days to identify which properties you're going to exchange those funds into and what do you do it fairly tight timeline. Yeah. So you notify the Q. I. That you've identified some. Is that what you do? That's right submit. They'll have a form and you'll submit and you'll say, hey these are the properties I've identified, you may uh identify more than one property or several properties just to make sure you you've given yourself some options, right?
And I think the biggest thing is there's no like reporting for 10 31. This this goes in a book, you sign an agreement with the Q. I. They send you a book and all the copies of the documents at the end. And it's just uh You know a supporter for your accountant when they file your taxes and if you got audited, you would be required to show them that 1031. But it's not like you just go file something online. Yeah. And then how long do you have to close either after you closed on the first property or after this? 45 days. What's that? What's that time? You have six months to get the deal closed. So 45 days to identify. And 108 180 days to close on 123. Whatever many properties you're buying. 100 eight days after the 45 or from the time you closed on that first. I believe it's from the time you close from the time you close. And it's also important that you have to replace the debt at that time too Because it's it's totally possible to go and buy these properties and replace the value that $5 million 180 days.
And if it's not, it's taxable. Okay. Okay. So I don't know if you feel like we've uh talked about everything there because I'm, I'm curious about what happens if you uh pass away and you still own this property. Yeah. Some people will be thinking like, surely you have to pay the taxes at some point. When do you pay the tax when you pay the tax? And the idea is you may never pay the tax. How? Um Well, one thing is in the irish rule is you can keep exchanging uh properties one after another. So let's say I like I'm in the middle of mine now, I'm gonna buy these three properties and let's say I sell these properties in five years, I'll have even more gain. Um So I can choose to to roll that just got a new property, just do it all again, right? Um And so you can just keep rolling uh And a lot of people do to where uh, they have a huge amount of taxable uh basis in these properties? And so they're motivated to keep doing the exchanges because the tax bill just keeps getting bigger and bigger. Yeah. Yeah, I can see you do this for years and years.
You know, you decide, okay, I'm gonna cash out, man, you cash out on 10 or 20 million, you've got a huge tax bill coming up and for, you know, a new Unsophisticated real estate investors, you know, there may be a lot of estates or people that pass away and they're leaving so much money that's going to be taxed. Uh you know, I don't know what the state taxes exactly, but I think it's over, you know, 11, 12 million right now. It is. You get taxed a crap ton of money. When you die, These 1031, you can leave to your Children and they immediately get a step up basis. They pay none of that. What's the step up basis? It means they inherit it at the market value as of your death. Fair market value at the death. Yeah. So if they, if they turn around sold it right away, they don't know taxes, nope. It's amazing. It's beautiful. And they can start depreciating it from there. They not only don't owe taxes, but they get the advantage of depreciating the asset that you left them? Yeah, that's quite an advantage. I'm gonna ask a question because I don't, I don't know the answer. So what if um what if you're leaving someone a property that's $25 million?
And let's say the basis is for just example, it's down to zero. Uh and so the person that you're you're leaving it to after your death, they get they get the step up in basis at 25 million. But is that then more than 11 or 12 million of of state tax that you can pay? And so do they end up having a tax liability of what's in our example? 14 million. So I don't think so. No. Because it's it's real estate. And if if you inherent real estate, you inherent that basis in the real estate. Yeah, that's that's really powerful. It's so powerful because like you said, you can, you can start buying this property right now. You're in the middle of 10 31 exchange, you're gonna hold that property for years, you'll you'll sell that and do 10 31 exchanges from that. You could keep this 1 10 31 exchange going. And the tax deferral from this one property you just sold in 2020 And it could be 2060 and you could still have not paid the tax on this 2020 apartment sale because you just kept deferring it back into uh more property.
And I think this is a Good, good time for a disclaimer that. Please don't take our word for it. We are not tax experts. We have effectively utilized to 1031 exchange on multiple occasions. But check with your accountant and your attorney. Uh, if you're looking into this to make sure you get the best advice available. Um, but just think about what you said. Okay, so you like my current exchange where we have three or $4 million dollars of profit that we're deferring tax on. So uh if I was an employee id lose half of that. So, and then if I was just going to pay the taxes, I'd lose a quarter of it with under real estate guidelines. So now a quarter of that, let's call it 750,000 would be the tax. Well now I don't have to pay the tax. So that's 750,000 gets invested earning 12, 15, 18% return for me. Okay. And so year after year compounding on money that that should have in theory gone to the government is now, not only am I keeping the money, but I'm also earning on the money. So you're compounding that. So just think about what that does over time having, not only keeping the money, but having it work for you.
Uh it's amazing and you know, that's what got me excited about real estate when I, when I started listening to all the mentors teaching me. Uh it's not just earning money that you need to think about it. It's how much of the money that you earn do you keep and then and then what how much can you earn on the money that you're earning and interests all of those factors play in and it really makes real estate just uh gives it a huge advantage over other types of income. Uh If you can make more money and not pay taxes and then have that tax money, earn more money uh It just really is a an avenue to grow your wealth and it sounds too good to be true. You know why why would the I. R. S. Create this loophole? Why why are they letting us do these 10 31 exchanges? Well it's really just to uh motivate people to invest in businesses and and real estate and properties to to spur the economy right. Yeah. So you know if you are having to pay that $750,000 tax bill, if if you do a 1031 exchange on average you can buy $4-$5 million dollars worth of commercial property With that 750,000 that you didn't have to pay uncle Sam.
So they're saying, hey I know you made a bunch of money. I know you owe taxes on it. But if you just defer that if you keep stimulating the economy with these purchases. If you keep buying property we'll get the tax eventually man, don't don't worry about it, you just keep doing you, you scale up, you buy as much property as you want and then if you want to pay tax before you go ahead, if you want to leave it to your kids, you can do that too. Uh you know, listening to Kiyosaki uh used to say, hey, the reason that the rules are in the in favor of the rich are because the rich wrote the rules. Uh so I think about that sometimes like some of these these tax rules, they don't make a lot of sense. It doesn't make sense that Warren buffet, you know, pays less percentage tax and the secretary as he's written in his book. Um but just because the rules aren't fair, doesn't mean that people shouldn't be taking every step to take advantage of the rules, how they're written in order to better their future, their financial situation. Well, I can guarantee that the government didn't write the rules in our favour.
They're writing the rules in their favor. So it's just like we said, they're just trying to spur the economy so they get more taxes in the future. Yeah, man. A 10 31 exchange is one of the most powerful tools, especially when it comes to the tax advantages of real estate. Um like Joel mentioned earlier, find a qualified intermediary, find uh attorney or find a real estate professional who's successfully used at 10 31 exchange. Go talk to them about it. Send us an email um comment messages will be happy to inquire and talk more about our 10 31 exchange experiences. We've got several recommendations of people you can use in Oklahoma area as well. Um but other than that, you know 1031 exchange is very important and I can't imagine investing in commercial real estate for You know 5 10 years and not having to do one, you're going to have to do it. So get comfortable with it and you know this is how to invest in commercial real estate but it also is a show about why to invest in commercial real estate and so hopefully we're going to give some of the how but also the why why is it that people should be doing it.
Why should they care about commercial real estate instead of just working their day job paying 30 40% Maybe 50% of what they earn. uh this is a way to keep 100% of it so Alright guys, well make sure to like and subscribe. So you get a notification when we upload, we upload every Tuesday and friday and be sure to check out the website how to invest in CRE dot com um for um the downloads and access that's on Spotify, apple podcasts, google podcasts uh the website youtube facebook instagram. We're everywhere brian. Anyway check it out. Thanks for coming. Mhm mm