Bob Nelson – Tax-Deferred Scenarios

Let’s continue the discussion of tax-deferred scenarios.

Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker

Marcia Edwards: We’ve been talking about the 1031 exchange, which is Bob’s happy place frankly. The deferral basically is a strategy in real estate and investment where you can move your money to the highest return opportunity in real estate, not geographically specific or type of property specific, but invest in real estate to invest in real estate. And when you move that money, the tax event on the gain is deferred.

Bob Nelson: Exactly, that is correct. And it’s possible you would have mentioned the sale, which is normally a taxable event. As long as I’ve done the sale and followed the tax deferred exchange rules in acquiring the replacement property, I am completely deferring the tax consequence that would have occurred on the sale, and I simply use all of my equity into the next property. So, it’s a great opportunity to … the equivalency of financing, and the tax consequence is viewed as a financing event at that particular point.

Marcia Edwards: Well, let’s look at this a little bit deeper. There’s the straightforward exchange, but there’s things that you’ve done that I think really bounce and have great higher return than just the traditional format. Let’s talk about that, let’s talk about moving forward in an exchange and whether you have to move all the money from the previous investment to the new investment, do you need to leave that money in place as an equity position for infinity and beyond?

Bob Nelson: No, not at all. There are people who have properties with very large equities, even free and clear. They would have an opportunity to refinance the property they currently own, but that’s probably also sinking them in place of owning that property for quite a period of time.

Bob Nelson: What would happen if I simply sold that free and clear property, acquired another property using all of the equity forward. And then after a reasonable period of time, refinanced the replacement property to pull cash out if I needed cash?

Marcia Edwards: It’s a deferral, so in this case, once it’s been deferred, deferred, deferred and you’re going to go ahead and pay the piper at the end of this trail, are you paying on all the gain over each transaction, or how do they define that?

Bob Nelson: Kind of, because basically what happens is you have the tax consequence of the exchange, the first exchange, the second, the third, and so forth rolling forward. But ultimately when you finally have the final sale, it’s simply that sale price minus the adjusted cost basis. So, I guess you could say yeah, I’m paying on deferred gain, but at the same time you’ve used that other money tax free for such a period of time.

Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30 on KPNW for the “Real Estate Today” radio show.