Tax Mitigation Playbook: What is a 1031 Exchange?

Financial Planning Dentist

1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. It allows the owner of a property to exchange one asset for another. Our clients uses this strategy to:

  1. Scale Up – by increasing the size of their real estate portfolio – by swapping a smaller asset for a larger asset and adding leverage or cash to increase their total investment.
  2. Combine assets – by selling several small properties to own a single large asset.
  3. Relocate – Assets like property are stationary, life is not. If you own a property you cannot easily see you expose yourself to risks you can easily avoid.
  4. Diversify – by selling a single asset to take a stake in a DST or more diversified real estate partnership. 
  5. Scale Down – by selling their rental property and replacing it with a stake in a partnership with lower personal management requirements.
  6. Scale Out – by swapping an asset for a stake in a partnership that will allow them to sell smaller parts at their desired pace

A 1031 exchange, also called a like-kind exchange, abbreviated in some cases as LKE, is the result of a landmark legal decision of T.J. Starker v. U.S., 602 F. 2d 1341 (9th Cir. 1979).

Starker v. U.S. is a significant development of the 1031 tax exchange rules. It was in this case that, the Ninth Circuit Court held that non-simultaneous 1031 exchanges were permissible and set the precedent for the current 180 day non-simultaneous, delayed tax-deferred like-kind exchange transactions. Also referred to as a Starker Exchange.

Starker Trust, or tax-deferred exchange, was first authorized in 1921 when Congress recognized the importance of encouraging reinvestment in business assets.

Today, taxpayers use 1031 exchanges to increase cash flow by deferring taxes on gains realized through the sale of real estate, as long as they reinvest those gains in the replacement property. In practical terms, a taxpayer sells a property used for business or investment to exchange for another property also for use in business or investment. When transacting an exchange, the taxpayer never receives nor controls the funds from the sale of their relinquished property. The funds are directly used to purchase the replacement property.

This is Key:

Because the taxpayer never actually gains the proceeds from the sale, they may defer the tax they would pay if they simply sold a property and kept the money.

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Peter Locke

Focusing on the Health in Healthcare Cost

Healthcare Cost hasn’t gotten any cheaper so what are we doing to help clients reduce its expense? InSight was founded on the belief that there is more to financial happiness than being wealthy. People that want to enjoy their lives after their employment years or even during need to be healthy and it starts with how you’re treating your body now. Growing up I was the proud son of a Personal Trainer, my mother. So for me, living a healthy life was always the focus.  But throughout my career of working with individuals and their families, I got to work with some where health wasn’t a big focus and it was in those interactions I learned the importance of health and wellness.   There is a stark contrast between those that exercise daily, eat well and take care of their mental wellness to those who don’t.  Although being in Boulder, CO makes it easy for most of us it doesn’t mean we all can’t improve.  When clients choose to focus on their wellness the results are incredible.  First and foremost, they go to the doctor typically just to get their annual checkups which saves them money, time and over all Healthcare Cost. They get to spend more time with their friends, spouses, kids and grandkids leading to stronger relationships which results in a longer life expectancy.  When they reach the age of 75 they’re thriving instead of deteriorating. They’re playing golf, tennis, hiking, biking, rafting, and exploring this incredibly beautiful state without worrying about if they can do it because it seems difficult.  My grand-father in law is 89 years old and gets up and down from the ground after playing with his great grandkids with pure finesse. Everyday he is exercising for a couple of hours, whether it’s jiu jitsu, walking, or riding his bike he is always moving.  He also focuses on what he puts in his body for every meal as he knows what you put in has an immediate effect on what you get out of it. I worked with a client for about 7 years that played tennis every single day and yet every time he came into the office he had a tootsie roll or ten because that gave him joy.  He wasn’t living a life full of restrictions and rules but a life of joy and gratitude. At InSight, it’s our primary objective to help our clients and their families live a fulfilling life.  We do this by focusing on the two areas that give clients the most difficulty, finance and health.  We want our clients as we like to say, to be Fiscally Fit. When we do this clients reframe their mindset to what is truly important.  They break away from the distractions like shiny objects and erosive behaviors and begin focusing on the more fundamental aspect of happiness.   One of the best series of questions I’ve read about comes from George Kinder and goes like this: I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours. This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it? This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done?  [Did I miss anything]? It is here where my co-founder and I have devoted our attention to help support our clients through different events in order to build a stronger community.  From events like cooking classes in order to create healthy eating and drinking habits that are sustainable and fun, group fitness classes or events, trail maintenance with friends and family, yoga and meditation, walks, golfing, planting and gardening, and whatever else we want to do. Healthcare Cost are manageable in our daily lives.  Click on our community events section of our website to join us for our next event! We can’t wait to have you there. 

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