You know the saying, “You can’t take it with you”?
Well, in the U.S. tax system, you actually can. You just have to put it in commercial real estate and never stop reinvesting.
This week, we explore one of the oldest and most generous loopholes in the Internal Revenue Code: the 1031 like-kind exchange. A strategy that says:
“You don’t owe taxes on a gain if you never admit that you actually made it.”
What Is a 1031 Exchange?
Section 1031 of the Internal Revenue Code allows you to defer capital gains tax when you sell real property — as long as you use the proceeds to buy another “like-kind” property.
So if you:
- Sell a $3M office building,
- Reinvest the proceeds in a $3M strip mall (or warehouse, or trailer park, or parking lot),
- You owe $0 in capital gains tax.
The taxes don’t disappear — they’re just deferred. But here’s the fun part:
If you keep doing it until you die… they disappear anyway.
Rinse and Repeat: The 1031 Lifestyle
Here’s how the game works:
- Buy a property.
- Wait until it appreciates.
- Sell it.
- Reinvest into another property (using a Qualified Intermediary, of course).
- Repeat until you die or are too rich to care.
Each time, the tax basis rolls forward. Your gain builds up — on paper — but you never recognize it. Like a savings account that earns interest you never plan to report. Or touch.
Real-World Example
Let’s say:
- You bought a building for $2 million.
- Sold it five years later for $5 million.
- Gain = $3 million (normally taxable)
Instead of paying 20% capital gains tax ($600K), you do a 1031 exchange:
- Buy a new building for $5 million.
- Roll over your basis (still $2M).
- Defer the tax entirely.
Now let that building appreciate too. And when it does?
Sell again. Reinvest again. Pay nothing — again.
💀 The Final Twist: The Step-Up in Basis
Here’s the punchline:
If you die still holding the property, your heirs get a step-up in basis to fair market value.
Meaning:
- All those deferred gains? Ghosted. The IRS? Left on read. Your estate? Quietly celebrates never paying a cent..
🧠 Who Uses This?
- Real estate developers
- Commercial landlords
- Wealthy families with “legacy holdings”
- Real estate investment trusts (REITs)
- The real estate developer turned President - (just saying the quiet part out loud)
“Like-Kind” — Looser Than You Think
Despite sounding strict, “like-kind” doesn’t mean “nearly identical.”
You can exchange:
- A warehouse for a vacation rental
- A strip mall for undeveloped farmland
- A rental duplex in Michigan for a self-storage facility in Arizona
As long as it’s business or investment real estate, it qualifies.
Note: As of 2018, personal property no longer qualifies — so no more swapping airplanes or artwork under 1031. Congress finally drew a line. But not a very bold one.
💸 What’s the Real Benefit?
- Leverage: Sell, defer tax, reinvest, borrow — rinse and repeat.
- Tax-free growth: Let capital compound without friction.
- Estate planning: Let your heirs step into the gains with zero liability.
- Cash flow without liquidation: Refinance your new building after each exchange and pull equity tax-free.
This is how generational wealth stays generational.
What’s the Downside?
For the taxpayer? Honestly, not much.
For the tax system?
- Billions in uncollected capital gains
- Massive wealth preservation for the already-wealthy
- An entire industry of intermediaries, lawyers, and “exchange experts” helping clients legally ghost the IRS
This isn’t “small business” territory — this is dynastic wealth strategy 101.
Coming Up: Bonus Entry Before Part 8…
Before we get to stock-based compensation (our grand finale), we’re taking a detour to talk about something important:
Most of these tax strategies are technically available to small businesses and self-employed people — but they rarely use them.
We’ll explore why that is, and what it says about how the system rewards knowledge, access, and scale far more than it rewards effort.
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