If you run a small business, invest in real estate, or are interested in tax deferment or tax credits, you need to be checking out my episodes with Mitch Baldridge.
The first topic we cover in the second part of this two-part conversation is the 1031 exchange, which has been an absolute nirvana for real estate investors focused on long-term sustainable cash flow. Some real estate investors never want to sell, but that doesn’t always work in practice. For people focused on holding properties for a long time, there’s a strategy to selling properties when the time comes. The 1031 exchange allows you to sell a property, buy a property to replace it, and then roll forward your basis from the property you sold.
For 1031 exchanges you have 45 days after the sale to nominate a replacement property in the same class, and then 180 days to acquire it. You obviously don’t want to do a bad deal just to avoid tax, but it’s a great way to minimize your tax liability if you’re edged into selling a property for one reason or another. But the rules are strict and deep, so it’s best to talk to a professional about these exchanges.
But what if you buy and never sell, ever? One of the strongest tax advantages in real estate is ownership transfer to your children by death. The basis of the property will step up to the property’s fair market value, and your children can either start depreciating it again all over or sell it with no capital gains. You can gift or pass down up to $26M in your estate without it being taxed.
Another attractive investment opportunity for some is Qualified Opportunity Zones. The government decides on areas that they want to encourage investment in, and they are generally lower-income communities. If you buy property in these QOZs, invest substantially in improvements, and hold it for 10 years, you can sell the asset with deferred capital gains.
There are tons of different real estate credits that incentivize people to lever up and buy, build, or improve property. That’s because the government wants people to go in and buy, build, or improve real estate because that drives stronger infrastructure. It’s your job to learn about these advantages and connect with professionals who can help you understand and take advantage of these opportunities. Because if you put the groundwork in, building wealth through real estate can be a massive tax-efficient snowball.
For small businesses, there are tons of codes that allow you to operate in a tax-efficient manner. You have 179D credits, 45L tax credits, employment retention credits, and others that all deserve their own research and consideration. But my favorite micro-business hack for tax efficiency is the mileage per diem; I like driving an old vehicle for my businesses, I drove a 2009 Toyota Camry for 10 years, and even before that had an older car. But it got over 30 miles per gallon and was virtually free to operate, all-in costing me just about 30 cents a mile. But I’m able to deduct 55 cents a mile! And when you drive over 30,000 miles a year for the business, that adds up and acts as over a $10K deduction for my taxes.
Mitch Baldridge is a wealth of knowledge about real estate and small business, and I’m fortunate to have picked up a decent chunk of knowledge through him over the years. As you grow as an entrepreneur and an investor, a huge focus point of yours needs to be on tax efficiency.
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