Depreciation and the 1031 exchange. How to grow your portfolio of USD income-producing assets with your money and the IRS’s.
The 1,2 of holding onto your money and growing your wealth with the IRS’s help and consent.
1 - Tax free cashflow in USD through depreciation, accelerated depreciation, bonus depreciation and cost-basis management. Keeping the money we create working for us can massively accelerate wealth growth through real estate investing in the USA, and if your primary business is real estate, there are even more benefits.
Depreciation is effectively an allowable paper expense on the accounting records of the property,
Three factors determine the amount of depreciation you can deduct each year: your basis in the property, the recovery period and the depreciation method used. Any residential rental property placed in service after 1986 is depreciated using the Modified Accelerated Cost Recovery System (MACRS), an accounting technique that spreads costs (and depreciation deductions) over 27.5 years, the amount of time the IRS considers to be the “useful life” of a residential rental property (multifamily, although recognised as a commercial asset class in the US also benefits from the 27.5 year depreciation period). Commercial properties like medical offices or retail are depreciated over 39 years.
By creating this paper expense to deduct against real cash flow, we can often run projects at a loss on the accounting records while they actually produce real cash income that we can distribute to all the partners.
2 - Tax deferred capital growth in USD. Upon sale, an investor would be subject to capital gains and depreciation recapture. Thus, the 1031 exchange effectively enables an investor to defer these taxes.
Did you know that it is possible to save up to 40% in taxes upon the sale of your real estate asset? Educated real estate investors in the US have the 1031 exchange strategy as a key component to creating wealth in USD. This enables the selling of a property and deferring the capital gains taxes from the profit by reinvesting in a like-kind asset. The IRS recognizes that selling one property and replacing it with another investment property will allow for the deferral of taxes indefinitely – as long as the capital is reinvested in real estate that is not considered as your place of residence.
The usage of the 1031 exchange clause will not only save you on those federal capital gains liabilities but also on depreciation recapture tax, the Affordable Care Act Surtax, and state capital gains tax. These taxes can accumulate to well over 40%, and the deferral of such taxes is a tremendous investment bonus.
This is using the IRS’s money to continue to grow your own wealth on exit of a project.
Infiniti Investment Solutions Inc. does give tax or legal advice, therefore you should review any planned financial transactions that may have tax or legal implications with your personal tax or legal representatives or advisors. We have used these strategies in the USA in conjunction with licensed CPA’s giving us advice. We are sharing with you a very light introduction into this space. Please ensure you get independent 3rd party advice on tax and legal structures before making any decisions on investing in real estate, or anything for that matter.
“Once you understand depreciation and 1031 exchanges, you can never invest in anything else again”
You’ve worked hard for your money. If you’re investing after-tax capital in real estate, it’s time to start learning how the super-wealthy invest with extremely low tax exposure so you can benefit from the same strategies they use. Depreciation and the 1031 exchange are two incredible tools in your wealth toolbox. Use them wisely.
— Brendon Brown, Co-founder Infiniti.
“I’m allergic to high taxes. If you can legally pay less, you can grow more.”
Tax is the greatest economic leakage in any wealth creation and preservation strategy. Learn to legally mitigate it to shorten the timespan it takes you to become financially free or to create far more wealth in a give period of time than you’d otherwise take if you didn’t know these strategies.
— Jarod Kolman, Co-founder Infiniti.
“A growth mindset will shorten the time to create the desired USD income you need to be free”
The depreciation and 1031 strategy forces you to have a growth mindset while still being able to enjoy the cashflow your portfolio produces while you are holding it. To comply with the 1031 rules, you have to reinvest and not touch the profits. This is fantastic incentive to create the right growth mindset. If you want to extricate profits, just pay the tax price and it’s back in your hand.
— Kevin Harris, Co-founder Infiniti.