How to Double and Quadruple Real Estate Positive Cash Flow and Defer Taxes Using IRS 1031 Exchange

What does a great investor have in common with Albert Einstein and Warren Buffet?

 Real estate investors often sell existing assets and trade up to bigger and better property. In that process, the goal is to take the highest possible profits off the table.

However, up to almost 40% of the profits will go to city, local, state, and various federal taxes at the time of the sale, depending on the city and state. Thankfully there is a solution that can defer this tax consequence and compound your wealth. 

Like The Jeffersons' 1993 “Movin' on Up” theme song, there is a way to increase your cash flow substantially so you too can “Move on Up.”

Would you Prefer to Leave a Real Estate Closing Table with Only 60% of your Profit or with 100% of your Profit?

It’s not a trick question. The answer should be a no-brainer. But every day, real estate professionals leave up to 40% of their hard earned profits on the closing table.

Warren Buffett, the world’s richest investor wrote "My wealth has come from a combination of living in America, some lucky genes, and compound interest."

Albert Einstein the most brilliant scientist of the modern age wrote, “compound interest is the eighth natural wonder of the world and the most powerful thing I have encountered. He who understands it, earns it ... he who doesn't ... pays it.”

As a real estate investor and broker, I am passionate about making the most of real estate income. I think that the bricks should work for the owner and not the other way around. Real estate should be a 24 hour a day cash flow income generator even while the owner is sleeping. Every investor's dream is to enjoy a better standard of living in peace and harmony.

 “Movin' on Up;” Here is How You Can Do It

Under the IRS tax code, a seller can use a 1031 facilitator to act as an escrow agent to hold the sale proceeds to complete the exchange purchase of “like kind" real estate investment property. 

The same ownership entity that sold the first property buys the new property.  The seller can defer 100% of the capital gains by exchanging the first property for ownership of the newly purchased property. As a result, the seller can use all the profits to buy a new property without paying taxes to the government.

Sellers looking to exit active, hands on management enjoy this process most of all. Investors can exchange their properties for passive real estate investment, triple net leased property or professionally managed property and receive higher positive cash flow. 

Here is a conservative example of a typical real estate sale and exchange that a seller can achieve:

A $5 million commercial real estate property at 4% cap rate producing $200,000 annual net income prior to sale can be exchanged for a 5% cap rate purchase that will produce $250,000 annual positive net income after the sale. The result is an immediate 125% increase from presale net income.

In the past, I helped one real estate owner to sell New York City property at a cap rate of 4% and buy real estate outside New York City at around 8% cap rate. The result immediately was a 200% increase in net cash flow after the sale and exchange. 7 years later, the current positive cash flow is 400% higher. This investor quadrupled his presale cash flow due to rental increases.