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Exit 02: How to Build Your Wealth Faster by Deferring Capital Gains Taxes with 1031 Exchanges & QOFs

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In this episode, Brandon Hall and Thomas Castelli discuss 1031 exchanges and qualified opportunity funds and how they can help you reduce taxes when selling your rental real estate.

Qualified Opportunity Funds

A Qualified Opportunity Fund allows you to take your capital gain, excluding the depreciation recapture you invested in the Qualified Opportunity Fund. If you do that between now and the end of 2021, you'll be eligible for the 10% step-up which takes five years to hold in the fund.

However, you have to pay taxes in 2026 on the original capital gain at the rates in 2026, not the rates in the year you invested. And then if you hold your interest in the qualified Opportunity Fund, your actual gain on the qualified Opportunity Fund investment itself is exempt from taxes.

1031 Exchange

1031 exchange is a great alternative exit strategy.

If you don't have suspended passive losses, you could use the 1031 exchange in that instance, or combine that to defer part of your gain using a 1031 exchange.

One of the things you have to watch out for in a 1031 exchange is basis erosion. Each time you do a 1031 exchange, your basis in the asset is not going to be the same as the cost of that asset.

If you have a $4 million property that has a basis of $2 million, it's going to impact the depreciation expense over time, which could inhibit your ability to shelter the rental income from your assets, especially as you acquire larger and larger assets that produce greater and greater amounts of rental income.

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