How to Calculate Your Capital Gains and Depreciation Recapture? Why Not Do 1031 Exchanges?

What’s up simple, passive cashflow. How is your first month going out to the job that you may or may not like? For some of you guys came down to Hawaii, drank the Kool-Aid at a whole bunch of cool people, and I’m still coming off that hive, still wearing the same shirt that I was wearing the whole weekend.


What’s going on?  7% inflation.  Some people will say that it’s really like 15%. If you don’t count all the changes, the last couple of decades where they call it, quote and unquote Hedonic inflation. If you take all that stuff out, really all you are talking about is 15% inflation. But either way, let’s just go with what the government tells us, because Hey, what they tell us must be right.


Now to put things in perspective, junk bonds, which are  essentially what they’re called junk bonds, are garbage borrowers and right now that’s being paid at a much lower rate than the pace of inflation. Let me say it again, junk bonds are making less than inflation right now, which says you better get your equity into assets that  at least keep pace with inflation.  Hopefully, you’re getting yourself into cashflowing ones. But if you got money in your home equity or rental properties, that’s just sitting there idle. The government’s taking their money in, and this is a sad thing that this is the way the government takes money from the poor or the middle class that aren’t able to get into good investments.


It’s the rich get richer, the poor get poorer and unfortunately, a lot of you folks drive to work or hold onto dear life, staying at home as much as possible working from home. High paid working professionals are the folks that are going to be having to pay for it. Anyway, we’re going to be talking about syndication stuff, mostly the 10 31 exchange.


Hopefully it’s going to help a lot of you investors out there. And remember we’re going to be sending out a secret HUI message because some of this stuff I can’t see in the podcast, for some reasons we’re going to be rolling some stuff out that is going to change that. But for now, if you want to get a hold of this 40 minutes secret HUI message, send an email that’s before the end of the month, before we send it out, if you’re already in the club , you can join at You’ll be getting this video later on this month, but if not send  subject line secret HUI message and I will be sure to get that out to you before the end of the month.  But for now, just enjoy the show.

This common question comes up quite often where they ask, Hey, can I do a 1031 exchange into a syndication deal? The answer is, yes you can, but it’s very impractical for you to do. You need to do what’s called a tenant in common or a TIC.


Most syndicators won’t want to touch you because it requires a lot of brain damage in terms of legal maneuvering unless you’re bringing in maybe one, two, $3 million or above it, ain’t going to happen. And I would ask why would you be wanting to do that in the first place with current bonus depreciation laws?


Again, my example, in 2017, I sold seven rentals and I had a quarter million dollar capital gain. It depreciates recapture, which sounds horrible, but I had maybe a few hundred thousand dollars at least some passive losses built up from going into deals prior that I just bought over and offset it one for one.


We’ll do a couple of examples. So this guy bought a property for under 600 grand. I don’t care what the loan is, that doesn’t matter, but they’re going to sell it for about $900,000, maybe even a million dollars. So the other question I asked is when did you buy it?


So we’re going to figure out what the capital gain and depreciation recapture is.  A lot of people think that they need a CPA to do this. This is a lot easier than designing a retaining wall, in my opinion. Of course, your CPA is going to need to bless the numbers at the end of the day, but this is essentially how you do it.


And so capital gain here, I’m just going to take $900,000 minus 600 minus some commissions in there. I’m looking at about a $250,000 capital gain but we also need to know what the depreciation recapture is and that’s why I asked the question, when did you buy it? He had it in 2012, which is about a decade ago.


Most residential properties depreciate over 27 years. So I’m just assuming there’s maybe a third of the weight through that depreciation. Of the $600,000 basis, maybe half of that is, I don’t know where this property has been. I’m assuming it’s a high price land area.


So the property improvement is lower at $300,000, let’s just say that the building improvement or less. So that’s where I came up with this depreciation recapture of 50 grand but maybe I’ll just be more conservative call it 75. So we’re looking at it. We add up the capital gain and capture, and that would be the 25 here.


So the goal here is get $325,000 of passive activity losses, at least. So you can wipe that out. This guy is smart. He’ll sell this property beginning part of next year so he has all of that year to build up passive activity losses. And I know in this particular case, this investor has already been investing and they probably have maybe a headstart on that.


Maybe they already have it already. I’m not quite sure what they’ve been investing in, maybe they went into several deals and they have already done that. I think this is found on the 82 84 form, but don’t quote me on this. Let’s go to your situation sir.  Just going through the process, maybe in the same similar fashion, what did you buy the property for originally?  Thanks for being a volunteer too.


Hi lane. Yeah. So my situation is that we had actually purchased this property in 2006 for 1.47 million and we’re selling it or we’re considering selling it now at the end of 2020, and somewhere between $3.7 to $4 million. We’ve done maybe about $120,000 worth of improvement in the house over that period of time. We’re just projecting out that the gain could be somewhere around 2.3, 2.4 million. 


So I’m going to go 4 million times 95% for 3.8  just do account first and commissions and then I’m going to subtract off a hundred grand off repairs cause supposedly that’s going to lower your basis a little bit. Let’s just call it 2.7.


About depreciation recapture, you’ve had this for quite a while. Let’s just call it two thirds of its service full 27 year life. Just to be simple. This is California again, or there’s this Silicon valley. Okay. Let’s just call it 600 grand is the server for life.


I  think you depreciated maybe two thirds of it. My math that I’m gonna be using out of the sky is 600 grand times two thirds. So that’s 396,000 let’s just call it $400,000, which appreciates recapture. So 0.4 plus 3.7 is 4.1million  of capital gain. A good problem is that my friend does a good job. That’s how investors are supposed to work right.


At the time we bought it, we thought we were crazy to buy something over a million dollars. But, as it turns out that it was a good investment and traditionally in the last year seems to.


Especially with the high end, going up more right during the pandemic. So the haves and have-nots kind of binary economy out there.

Your situation may warrant it and in my opinion so what’s bad about 1031  is when you’re going into the next deal, everybody knows you’re a sucker. They’re going to abuse you. You’re probably going to overpay by 5, 10%. If you don’t know that well, you’re probably the sucker in the room that doesn’t realize it. 


What if you do a dead river, is that a better strategy? 


All that does is essentially extend your timeline because with the 10 31 exchange, the hardest thing is the 45 days to identify the next property, which isn’t going to happen unless you’re buying the lukewarm crappy deals, where you’re not overpaying. For that example one, right? That guy was looking at $325,000 capital gains, appreciate recapture, a very different story than where you’re at. In my own opinion, I’ve seen investors invest a million dollars and get half a million plus of passive losses in a year.


So it’s not out of the question that somebody can deploy that money. I’ve seen people deploy two times that and get a million, $2 million of passive losses too, at the same time. But that might be a little more extreme. So if that’s the way you want to head with it you better get started now or get moving on this plan.


Therefore, I would say if you twisted my arm where this dotted line would be, I would say one to $2 million or greater. It might makes sense to do both, go into deals, get passive losses, to offset a portion of this 4 million depreciate gains and recapture, but it might make sense to do some of these more exotic strategies where you’re monetizing installments so it is just under scrutiny. Let’s talk about the 10 31, right? Another reason why I don’t like it is you’re putting all your eggs into one basket yet again. To me, I like the idea of having no more than 5% of your net worth to any one asset.




 This is common with people with dentist practices, right? They started it with 50 grand. Now it’s worth 5 million. It’s on your scale for those people going to exit and end game monetize installments so where you push the sale 30 years into the future where the taxable burden isn’t anything, isn’t a bad way to play it.


I see. So you think some combination of maybe 1031 and also just investing in real estate where you can use the depreciation on those assets to offset the gain would be the best strategy? 


Yeah. Going back to your reverse 1031, all that does is extend your timeline out. But I think you first have to ask the question. Is this even something I want to do? Do I want to have all this liability on my hands? Do I want to take our debt out and get another property and have all my eggs in one basket? Maybe you don’t. Most people would say no. 


So if I were you would just keep the property and keep writing the appreciation? One option would be to just keep the property and then try to borrow money off of the property. 


That would be ideal in my opinion, get a heloc  or get a refinance the equity out and invest it, build up passive losses. Most people going into, on this scale would be going into a handful of deals every year at a hundred, $200,000 a piece. You’ll be passive activity losses, maybe a million, 2 million, 3 million so when you finally do sell your tax over and it’s way less.


I see, so you can build up. Basically use a heloc  build up, you hold a bunch of assets and then use the depreciation on those assets so when you finally sell this other property you can offset the gain. Okay, got it. 


Let’s just use that as strategy number one. There’s a whole bunch of combinations in the middle with a reverse or 10 31 or monetizing stock sale, or another option is a delayed sale trust, which is very similar. Where all these things are a tricky legal move where you put the asset into a trust and technically you don’t own it. You gotta do your due diligence on it but in a certain situation, it may make sense. 


Okay, got it.


Like I say, some of this stuff is like some risks for an audit and losing an audit that it may make sense to diversify yourself amongst different strategies. 


Let me ask these questions and maybe I can just outline what I would do. Do you want to own another property? 


One of the things I was thinking about doing was to diversify my real estate holdings and, right now I’m 90% invested in Silicon valley in a couple of cities and so the idea behind doing the 10 31 exchange was to see if you can take that  cash and sort of buy homes in different locations like Denver, Houston other areas that have a good combination of cashflow and appreciation. That was the strategy behind doing the 10 31 exchange. But as you point out, when you do the 10 31 you’re limited both in terms of time and in terms of  choice. That’s one of the drawbacks to doing it. 


But obviously  you acknowledged the drawbacks, but you’re a rich person. You can do what you want. You can buy a flying spaceship if you want. No one’s gonna say anything. You make your own decisions. Out of this $4 million bounty  do you want to take a million dollars to buy some real estate that you own directly by yourself? What was your vision for this $4 million boom? 


The idea was I was thinking, I have a $700,000 loan on the formula, it’s not that much. But I was thinking, take the 4 million and then buy maybe $8 million worth of real estate i n different locations, right? Diversify in all of these emerging markets. But doing that as part of a 10 31 exchange is probably very challenging because you have to know you have to have the boots on the ground.


You have to have connections in all these local markets. So that was the vision. This was to take the inherent wealth in the Bay area real estate and try to diversify it. Not knowing what’s going to happen in the future  in this local market. 


And then you become a remote landlord. It’ll work at 50%. Any idiot can cashflow it for 50% the value. Will it be a good investment? Where could you do better otherwise? Probably not, but let me be more clear. Do you have some kind of thing within you that you’re like, I want to hold on to X amount of properties by myself. I’m just trying to see where you are. 


I don’t have that particular vision. The only goal was can I pick this one property that has been great for appreciation over a 15 year cycle and really converted into a bunch of cashflow properties? 


You’re not like I want to, whether it’s a syndication in these X markets or as a passive LP partner, non managing member, or same markets, but you own a handful of properties in there. You don’t care one way or the other? 


Yeah I don’t care, Because my only goal is to achieve a cashflow vehicle. 


You mean you’re not one of these ego-driven guys that like getting off on things like owning a 16 all by themselves and like telling their friends. 


Thankfully not. 


Or maybe you learn that along the road. But I dunno if it were me, I’d kinda like to own, I see a lot of high net worth people owning like 50 units, a hundred units by themselves. But that’s a fraction of their total net worth. So just something to think about too. But that’s why I asked, I didn’t know what your vision is, like some people are like, I like the syndications. I like everything about it. What, I still want to have a quarter of my stuff in stuff I own.


Yeah, there’s some value to that in knowing that, Hey, this property has your name behind it, and you can know you can pass it on to your kids, which you could probably do with the syndication to the appropriate legal documents. But to me, I was just thinking, look, this is not my only house.


I have my primary residence and I have one other property. This particular property, how can I use it to diversify my real estate holdings throughout the country? But that may be an impractical thing to try to do in 45 days or, whatever the 10 31 exchange rule is. The other thing I was thinking about is, could you do an opportunity zone, but then at the end of that six or seven year cycle, you’re still hit with a capital gain, right?


With a little bit of a step up  and the basis.  


That’s not what I’m  not looking at. Look what you’re  doing. You’re going in as this is not your primary thing, right? You’re an amateur, no offense and you’re looking to go into these different markets and now you’re telling me you’re going to go into a crappy area that has designated opportunities. Oh, boy, this is just getting worse and worse.


An amateur in the hood now.  I’m just going to shoot him. Let me know what you think, but here’s what I would do. I would draw out the heloc  as much as I can and start investing, make a goal to invest a million the next six months to a year and sell this thing no earlier than January of next year.


That way you have that entire year to source passive losses and go into good deals, that makes sense. Now, if you’re slow, if it’s going a little bit slow, What I would do is I wouldn’t sell this property until the following year, January. So like 2023.  That way you have two entire years to build up 4 million of passive activity losses.


If you don’t get there, that’s no problem. You get to two and a half. That’s good enough. But you give yourself that long to make good sound decisions, spread out your capital so that when the deals finally do exit it’s not all hitting you at once and you’re in the same damn predicament that you’re in right now.


 I see. But if I have some liquidity now, even without the heloc , I could do some of those investments?  


Exactly. You got money all over the place under the couch cushion, but even better. In most cases, people don’t have too much money other than an equity in their rentals or their retirement funds. The more, the better. Like you gotta get moving on this, but you gotta make a decision first. 


This is really interesting. Cause I never actually ever thought  about using the passive depreciation on another property to offset the gain. I didn’t even think about that whole possibility.


 A couple of aha things that keep in mind, like in 2022 after this, the bonus depreciation kind of steps down 20%. But, I wouldn’t worry about it too much. It’s still pretty awesome even in 2024 beyond so this is all well within your window. Not all deals do a cost segregation and elect to do a hundred percent bonus appreciation cause it may not make sense all the time, but even with regular depreciation, pretty damn good. It’s going to chip away at this thing. 


That’s a really good point and I was thinking about selling this property three years ago. And at that time there was in the high twos and now the same areas towing the high threes.


And I was just like, at that time, I thought the high twos would be a lot and I was thinking about off loading it and then I thought about the transactional cost of selling it and what to do with the game from that. Then, having to go through this 1031 process. But now that it’s even higher then I was like, okay, let’s really think about doing it now, but now you’ve made me even rethink that.


What you have now is a substantial  amount of money. $2 million is nothing but four or $5 million plus of equity to be deployed elsewhere. That’s F-you money. That’s life changing money, right?  If I toss a coin and I made 500 grand, I wouldn’t care. I’d probably just keep it in there and lose it eventually. But if I made $5 million, then I’d take it out cause that changes my life significantly.  


Yeah. This is a great idea. Maybe this is something that I would consider then. Not selling it and then just taking the heloc  and trying to do the passive depreciation.


Other things to think about, not all deals are going to do cost segregation. I think I mentioned that, but trying to diversify over lots of deals. Maybe,  you just keep a million dollars back, throw in an infinite banking policy and then  you pay taxes on a million.


That’s not the end of the world in 2023, but maybe another thing to keep in mind and jot on your piece of paper is maybe you do some of these land conservation easements. Who the hell knows if it’s going to be around then.


Is that a trigger for an audit though? 


Oh yeah. That guy is but all the smart people do it. The smart people know who to work with. That’s why people  don’t pay that much taxes. Doctors who pay  less than 20% in taxes. They do, if you want to be like those people bring it on, there’s nothing wrong with it.


Just make sure that the people that you’re working with or dotting their I’s crossing their T’s, they have a healthy, legal budget. Nothing to be afraid of.  I always say like know the risk, go on eyes wide open. What you’re doing is you’re diversifying  over three strategies here, right?


You’re doing the cost segregation, that is all very legal at kosher. I really worry about that too much. The whole thing about going into one building that can beat up some, you can do a 10 31 exchange there too, but there’s risks with, going into the wrong investment and running it yourself as an amateur.


And then thirdly is like the land conservation easement, but if you’re backed into a corner with a half a million, a million dollar capital gain that you still haven’t mitigated, then, yeah, that’s the end of the world. 


These are really good. Is a family office thing that you have going on? Is it meant to help with situations like this? That’s what I was going to ask. 


Yeah. These situations are simple, right? This is the simple stuff we do all the time that you’ll learn is actually easy stuff after a while the value is with the people, right? Where do you go for those deals?  Charges change over time. But mostly, you’re at a point in your life where it’s more about the relationships with the right people. Very few people even talk about this stuff or know about it out there. I can tell already it will save you like 10 X at least what you pay for the initiation fee. 


Yeah, that’s what I was considering and, I think this has been a great discussion. 


Don’t pay it to the tax man, go and invest the money in the right places that eventually help pump the country.


Yeah absolutely. This is great food for thought and I really appreciate you helping me think through some of these strategies, because honestly for this sort of magnitude of the investment that I have had, I don’t have proportionally the right kind of advice. If you go to a financial advisor, like you go to a brokerage or a bank, real estate is like their blind spot. And they don’t know about all of these alternative investment strategies. 


They’re going to say it’s risky or it’s a scam, we’ll just say that’s because they don’t do it and that’s why they still have a job and they can’t make money off of it. 


 It’s very difficult, I think what service you’re providing is unique and it helps people that are in situations like this to think through what are the alternatives and what are the strategies. Then, I will definitely follow up with you and your associates in person, to figure out how I can be part of that family office.

Yeah, you guys are listening, go to and then apply there.