House Hacking: Scaling Through The 1031 Exchange

The 1031 exchange is a tax-deferral strategy that allows real estate investors to sell a property and reinvest the proceeds into another property of equal or greater value, deferring capital gains taxes. To qualify for a 1031 exchange, the properties involved must be of the same nature, replacement properties must be identified within 45 days of the sale, and the total value of the replacement property must be equal to or greater than the net sales price of the relinquished property.

Before I dive into the three scenarios from earlier this week on the examples of what your house hack properties could be worth after 10, 20 and 30 years, let me make this clear - this is not financial advice and I'm not a lawyer or have the legal background to advise on this. Contact an attorney or lawyer who specializes in 1031 exchanges and real estate law. This is just for example purposes and dummied down to simple numbers to help understand how this works, there are other specific requirements and qualifications.


Example of Scenario 1: 10-Year Investment with 1031 Exchange

If you remember, on our 200,000 property - a 2% per year appreciation rate after 10 years, was around $244,000, and your loan balance was around $152,000. So when you sell, your equity would be around $92,000 ($244,036 - $152,158).

So with that $92,000, Instead of just pocketing the money and getting taxed on the capital gain there, we 1031.

Following the 1031 guidelines, In this example, in order to properly defer the gains, you would need to find an investment property valued at $244,000 or higher within 45 days of the sale, and close on it with 180 days from there using that $92,000.

To be clear, you are now scaling your house hack properties into a traditional investment property. So we are not able to use owner-occupied financing, it will now be investment financing on these 5 purchases. With that, you typically need 20% down on this. With your $92,000 (as a down payment), in theory each of these next properties essentially can have a purchase price as high as $460,000 (92,000 divided by 20% down needed)

Here are a few crazy stats: in this exact example if you bought a $460,000 property after each 10 year time frame with those 5 properties, you just bought $2.3million worth of real estate..

Don't forget, this is all sourced from those initial $10,000 down payments.


Scenario 2: 20-Year

Our home value after 20 years was around $298,000 and our loan balance was close to $79,000, so our equity after 20 years on our 200,000 property was around $220,000.

Following suit, you would need to find an investment property valued at $298000 or higher within 45 days of the sale, and close on it with 180 days from there using that $220,000.

With your $220,000 equity (as a down payment), in theory each of these next 5 properties essentially can have a purchase price as high as $1.1million (220,000 divided by 20% down needed)

In this example if you bought a $1.1m property after each 20 year time frame with those 5 properties, you just bought $5.5million worth of real estate..

Yep, you guessed it, from your initial $50,000 in down payments over those 5 years.


Scenario 3: 30-Year Investment

Our home value after 30 years was around $363,000 and we now own it out-right. No more loan!

So your $363,000 equity from these 5 properties can have a purchase price on the next 5 at a little over $1.8million (363,000 divided by 20% down needed)

Once you've sold each property and purchased 5 1.8 million dollar investment properties, you just bought a touch over $9million worth of real estate

You might be thinking there is no way this is legal.. But it is... in fact, the IRS encourages it! The government wants people to invest in America and this is one of their incentives - tax deferrals for purchasing assets that benefit the economy more than the single tax you would otherwise pay if you didn't defer the gains. I could go down a rabbit hole on this so I'm going to end the video here with this:

This is one of the 100's if not thousands of ways, not only house hacking can catapult your wealth but real estate in general. There is no other investment vehicle that can do this, which is why so many find success and wealth through real estate.








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