Two ways to legally defer ALL of your taxes

Today I’m going to give you two ways you can defer ALL of your taxes on a couple of investments you may have made. 

The first I’m sure you may have heard of, but I bet you haven’t heard of the second one. 

The first is called the 1031 exchange…what I like to call “real life monopoly”. Remember that ultimate power move in Monopoly where you take four houses and convert them into a hotel? Well that’s what this exchange is and today I’ll talk you through it.

The second is called the 1035 exchange and is used on life insurance. Do you still have that old life insurance policy that some guy sold you on years ago that was supposed to make it so you could “be your own bank” or would grow with no risk and tax free? How are they working out for you? If you’re like most people, they aren’t working out. This little known rule in the tax code lets you legally ditch those policies without the tax implications.

So, whether you're a real estate investor looking to upgrade your property or a life insurance policyholder exploring new options, you could be sitting on a golden opportunity to save big on taxes.

Let’s break down these two exchange types, how they work, and how they can benefit you.

What Are 1031 and 1035 Exchanges?

Let’s start with the basics.

1031 Exchange (Like-Kind Exchange for Real Estate)

A 1031 exchange is a tax strategy that allows you to sell one property and use the proceeds to buy another similar property without paying taxes on the sale. The key here is the property has to be like-kind, meaning it must be real estate (no swapping real estate for gold or stocks or personal assets like your car, primary residence, or a vacation home).

For example, let’s say you sell a rental property and use the money to buy another rental property. As long as you follow the rules, you can defer paying capital gains taxes on the profits from the sale.

1035 Exchange (Like-Kind Exchange for Life Insurance)

The 1035 exchange works similarly, but instead of real estate, it applies to life insurance policies. If you have a life insurance policy that you no longer need or want, you can exchange it for a new policy without triggering taxes on any gains in the old policy.

For instance, if you’ve outgrown your current life insurance policy or found a better option, you can exchange it for a new one, and as long as you follow the rules, you won’t owe taxes on the gains from the old policy.

Tax Savings and Benefits of 1031 and 1035 Exchanges

Both exchanges are powerful tools that can help you save a lot on taxes. Here's how:

Tax Savings with a 1031 Exchange

When you use a 1031 exchange, you defer the capital gains taxes you would normally owe when you sell a property. This means you don’t have to pay taxes right away. Instead, the taxes are “deferred” until you sell the replacement property, and even then, there are ways to extend the deferral further by doing another 1031 exchange.

The biggest benefit? You can keep more of your money working for you, reinvest it into new properties, and potentially increase your wealth without the immediate tax burden.

Tax Savings with a 1035 Exchange

With a 1035 exchange, the main tax benefit is that you can exchange your old life insurance policy for a new one without paying taxes on any gains. This gives you the flexibility to switch policies if you need different coverage or want to pay less in annual fees, without the concern of a big tax bill.

Rules to Follow for 1031 and 1035 Exchanges

Both exchanges have strict rules that you need to follow to qualify for the tax benefits. Let’s go over them:

Rules for 1031 Exchanges

• Like-Kind Property: The property you sell and the property you buy must be similar in nature, though they don’t have to be exactly the same. For example, you can exchange an apartment building for a shopping center. 

• Qualified Intermediary: You can’t take possession of the funds from the sale of your property. You must work with a qualified intermediary who holds the funds until they are used to buy the replacement property.

• Time Limits: You have 45 days from the sale of your property to identify a new property you want to buy, and you must close on the replacement property within 180 days.

• Equal or Greater Value: The replacement property must be of equal or greater value than the property you sold. If you don’t meet this requirement, you may have to pay taxes on the difference (known as “boot”).

Rules for 1035 Exchanges

• Like-Kind Policies: You can only exchange a life insurance policy for another life insurance policy, a life insurance policy for an annuity, or an annuity for another annuity.

• No Cashing Out: If you take the cash from your old policy, it will trigger taxes on any gains, so you need to make sure it’s a true exchange.

• Timing and Documentation: While 1035 exchanges don’t have as strict timing rules as 1031 exchanges, you still need to follow certain steps and document everything properly to avoid tax issues.

When to Use 1031 and 1035 Exchanges

Now that we understand the basics, let’s talk about when you’d use these exchanges—and when you wouldn’t.

When to Use a 1031 Exchange

You’d use a 1031 exchange when:

• You’ve sold a property and want to reinvest in another property (as long as the new property is like-kind).

• You want to defer taxes to grow your wealth through real estate.

• You’re looking to upgrade or diversify your real estate portfolio.

You wouldn’t use a 1031 exchange if:

• The property you’re selling is not real estate (for example, stocks or bonds).

• You’re looking to sell your property and actually want to cash out and pay taxes.

• You don’t plan to follow the strict timeframes for completing the exchange.

When to Use a 1035 Exchange

You’d use a 1035 exchange when:

• You want to exchange one life insurance policy for another without paying taxes on any gain.

• You need to update your life insurance coverage—whether it’s for more coverage or to get a better policy.

• You want to preserve the tax-deferred growth in your life insurance.

You wouldn’t use a 1035 exchange if:

• You want to cancel your old policy and take the cash (which would trigger taxes on the gain).

• You don’t want or need a new life insurance policy.

• The new policy doesn’t meet the “like-kind” requirements.

Conclusion

For elite sales professionals like you, maximizing your wealth means keeping more of your money in your pocket, and tax strategies like 1031 and 1035 exchanges can help you do just that. Whether you’re looking to grow your real estate portfolio or exchange an old life insurance policy, these exchanges offer powerful ways to defer taxes and protect your financial future.

Remember: While both of these exchanges are great ways to save on taxes, they come with rules. Make sure you understand the ins and outs of each exchange to take full advantage of the tax benefits. And if you’re unsure, always work with a professional who can guide you through the process.

Now go ahead and use these tools to make your wealth work harder for you!

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.