January 23, 2025 • 27 mins
William “Bill” L. Exeter is a highly respected expert in the financial services industry with over 40 years of experience, specializing in real estate tax strategies, including 1031 Exchanges, Self-Directed IRAs, and Title Holding Trusts. As the CEO, Chief Trust Officer, CFO, and Treasurer of The Exeter Group of Companies, Bill oversees operations for Exeter 1031 Exchange Services, LLC, Exeter Trust Company, and Exeter Asset Services Corporation.
A pioneer in the 1031 Exchange industry, Bill has administered over 125,000 transactions and is a founding member of the Federation of Exchange Accommodators. He is a sought-after speaker, educator, and expert witness, sharing his knowledge on investment strategies and alternative assets through seminars, podcasts, and media appearances.
Bill holds a Bachelor of Science degree in Accounting from California State University, Los Angeles, and the Certified Securities Operations Professional (CSOP) designation from the Cannon Financial Institute. He is based in San Diego, California.
In this episode:
- Key differences between Reverse Exchange vs. Forward Exchange
- Improvement (Build) Exchange Explained: Deadlines, complexities, and planning essentials.
- The role of Exchange LLCs and fund control in 1031 exchanges.
- Self-Directed IRAs and 1031 Exchanges
- Step-Up in Cost Basis: How it works and its impact on 1031 exchanges.
- Common Mistakes in 1031 Exchanges: Top pitfalls to avoid for successful transactions.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
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Narrator (00:01):
Welcome to The Norris Group real estate podcast, a
show committed to bringing youinsights from thought leaders
shaping the real estateindustry. In each episode, we'll
dive into conversations withindustry experts and local
insiders, all aimed at helpingyou thrive in an ever-changing
real estate market. continuingthe legacy that Bruce Norris
(00:24):
created, sharing valuableknowledge, and empowering you on
your real estate journey.
Whether you're a seasoned pro ora newcomer, this is your go-to
source for insider tips, markettrends and success strategies.
Here's your host, Craig Evans.
Joey Romero (00:45):
Hey, thank you for joining us again for part two of
our interview with Bill Exeterof Exeter 1031 exchange Services
LLC. Let's get to it. Okay, solet's get into what's the
reverse exchange and what's thebiggest difference between this
and the forward exchange?
Bill Exeter (00:58):
Good question.
Maybe I'll start off with therisk of a forward exchange. With
a forward exchange, you areselling first you trigger your
gain, and as long as you canidentify within the 45 days and
then actually acquire theproperty, you defer it so it's
not taxable. But if somethinghappens and you can't identify
or you can't acquire theproperty, then the forward
(01:19):
exchange becomes a taxable sale,and there's no way to go back
and fix that. So that's reallythe risk on a forward exchange.
But the forward exchanges aremuch simpler, much more
straightforward, etc. With areverse exchange, it allows you
to go out and spend all the timeyou want to find the new
property. You buy the propertyso you go into contract, you can
(01:39):
actually close on the purchaseof your new property first, then
you've got the 180 days to sellyour current property. Sounds
easy, but they're a lot morecomplicated. There's more costs
involved. So you know one way toexplain it is a pure reverse
exchange, which does not exist.
(02:02):
But a pure reverse exchangewould mean that the client could
go out, buy the new property,take title to it, own both
properties at the same time, andthen sell their current property
within six months. And the IRSdoesn't permit that, so they've
set up what they call a parkingarrangement. So in most cases,
the new property you're going tobuy, we have to acquire and
(02:23):
hold, or what the IRS callschart legal title to the
property. So the only thing thatoccurs up front in that
structure is we, we park titleto the property. The the 1031
exchange hasn't even entered thepicture yet, and then, let's
say, a few months down the road,you sell your current asset, and
at that point, it's really aconcurrent exchange. You sell,
(02:44):
you close on the sale, youconvey title to the buyer of
your property, and then wetransfer the property to you
that we've been holding on yourbehalf. So it's really kind of a
back end or exchange last asthey call it, where we swap the
properties at the back end. Soit takes a lot of the risk out
of the market because you'veclosed on your new property
(03:04):
first. It's just morecomplicated. Traditional lenders
don't like the fact that we'reholding title to the property.
So if you could do an all cashpurchase, it worked great. If
there's a lender involved, wehave to kind of go through the
process to see if the lenderwill allow it.
Joey Romero (03:20):
Now, is there a risk of accidentally triggering
a reverse exchange?
Bill Exeter (03:26):
Good question. I guess the only risk is, we've
had people who haven't talked toanyone about the reverse
exchange. They maybe read up onit in the internet, and they
don't realize that they have todo this parking arrangement. So
we'll get phone calls all thetime where they say, Well, I
bought the property. Now I wantto do a reverse exchange. And if
they got title to the property,it's too late to do the reverse.
(03:48):
So they, I guess they didn'treally accidentally the way, you
still have to plan it. You haveto plan it. Everything has to be
set in place before closing. So,yeah, it wouldn't be
accidentally triggered, but theycould accidentally buy it, not
realizing they have to carpetwith us. So that's really the
risk that we see quite a bit.
Joey Romero (04:07):
Okay. And then the third one that we're really
familiar with, especially hereat The Norris Group with our
boot camp, is the improvementexchange, or the build exchange.
Is that the most complicated ofall the processes?
Bill Exeter (04:20):
Definitely most complicated of all the processes
in the improvement exchange canbe done either with a forward
exchange structure, which Ithink most of them are done that
way, but it could also be donewith a reverse 1031, exchange
structure. I'll use the forwardbecause that's what most people
do. So you're selling yourcurrent property. First the
funds come to us at closing,then you identify the property
(04:43):
that you want to buy and buildon. So you're really
identifying, in most cases,dirt, and then you're
identifying also what you intendto complete or build out on the
property. And then it's justlike a reverse structure we take
title to the property you wantto build on. So it's the same
parking arrangement, and thenthey have the rest of the 180
day period to actually completethe capital improvements. And
(05:06):
the neat thing about the Floridaboot camps with you guys is, of
course, everything's kind oflined up in advance. So really,
you sell usually day one, you'realready starting the
construction and build out. Soyou've got the full 180 days.
You know, a lot of folks who aredoing it on their own, they
close, we're holding the cash,and they identify right around
(05:27):
the 45th day. So they've alreadylost a month and a half, and to
get permits in another, youknow, four and a half months is
almost impossible.
Joey Romero (05:35):
Yeah. So you just said something that it can a
build exchange could be done ina reverse exchange. So how, when
does that start the 180 dayslike, because you know when
you're buying something that'salready existing, okay, that's
when you bought it, you know.
Now the build cycle, you know,if you look at the last three
years, that has fluctuated fromfive months to 18 months. Some
(05:57):
people even two years tocomplete a build. So how does
that work?
Bill Exeter (06:05):
Yeah, good question. It's just like a
reverse exchange. So we wouldset up the reverse. They would
go under contract, etc. We wouldbe assigned into the contract.
So we step into these shoes asthe buyer when the closing
occurs. We actually take legaltitle to the property or park
title to it just like theregular reverse. Then the only
difference is, once we taketitle, that's when the 180 day
(06:26):
period starts. So at that pointthey could start doing the build
out right away, and the sale oftheir current property maybe
four or five months down theroad. And as long as we can wrap
all that up within that sixmonth period, then it would
certainly qualify. The beautyagain, is you buy first, you
take the risk out of you knowwhether or not you can find
replacement property. There'sjust more complexities to it.
(06:50):
And if there's a traditionallender involved, they probably
won't touch it. Now,construction financing, they
usually will take a look at it.
So it certainly a possibility.
Joey Romero (06:59):
Now, do all the same deadlines apply? 180, 45?
Bill Exeter (07:04):
Typically, yes, if you want to do a safe harbor,
which means you're following therevenue ruling that the IRS came
out with, or revenue procedure,then you would have the same 45
days. In this case, 45 days toidentify what you're going to
sell because you've alreadybought, and then you've got 180
days to do all the purchase andthen all the build out. There's
one case where they structuredthis as a 24 month process, and
(07:28):
they finished it in 17 months.
The IRS disallowed thetransaction. It's the Bartel
versus Commissioner case. Theytook it at court and they won.
So we have a case on the booksnow that says you can do that.
However, the IRS has also comeout and said, Yep, we still hate
it, so if you do it and you getaudited, you're probably going
(07:50):
to be doing that.
Joey Romero (07:53):
So, in that case, if you did it, knowing there's
precedent, there's a chance thatyou still disqualified, but then
you'd probably have to go tocourt to try to get it.
Bill Exeter (08:03):
It's exactly the same fact pattern, you might get
lucky and prevail. If it's youknow, everybody's case though,
or transaction is always alittle different. So you just
never know. It's certainly notfor the faint of heart.
Joey Romero (08:15):
Now, one of the things that happens in these
these build exchanges, is youcreate exchange LLCs. Can you
tell us a little bit about that?
Bill Exeter (08:26):
Yes. So with the improvements, or even in also
the reverses, with that parkingarrangement, there's a number of
ways of doing it, one way whichwe do not recommend, but one way
is the exchange company may haveone entity, like a C
corporation, and they'll usethat entity to acquire and hold
all client properties. Well,that could be a lot of
(08:48):
properties in the same year, andif any of those properties have
any kind of an issue, liens,judgments, toxic waste issue,
whatever it might be, it couldaffect the entity, and it could
affect all the properties in theentity. So we always set up a
brand new LLC for every singleclient. We never reuse the LLC,
(09:09):
and that way the LLC isacquiring and holding legal
title to the property. It's abrand new LLC so the client
doesn't have to worry about anyother client or any other real
estate. It protects the clientfrom liability. It also protects
us from liability. So thatentity is owned by us during
that 180 day window. And thenwith improvement exchanges, it's
(09:29):
almost always on the 180th day,we transfer that LLC to the
client. They become the owner,signer, etc, and that's how they
get ownership of the property.
Joey Romero (09:39):
Now, what if, let's say I want to, I end up like,
you know what? This is going,great. I want to do another
exchange. Can I use the same LLCto do a back to back exchange?
Bill Exeter (09:50):
Yes, if it's the same client, we could certainly
do that. Then we'd have totransfer the property out by
deed, rather than assigning theLLC. So it is possible. Well, in
most cases, because of the deedand issues like that, we usually
will transfer the LLC and thendo a brand new LLC for the next
transaction, but it is possibleto use the same one.
Joey Romero (10:11):
On build exchange.
Do you require funds control, oris there even a requirement for
funds control?
Bill Exeter (10:24):
There's no requirement for funds control.
So it really depends on thesponsor, excuse me, in the
client and what they want. Thefund control certainly protects
both the sponsor and the clientto make sure that everything is
being paid, you know, liens arebeing released, etc. There's no,
you know, in some cases, there'sall sorts of history where
(10:44):
there's been developers orwhatever, who've run off with
money. You've heard all thesestories. So fund control
protects all the parties. So,it's a great way to go, just to
protect yourself, but there's norequirement to do so,
Joey Romero (10:58):
So what happens if I'm doing a build exchange, and
we get hit with delays, and Idon't, you know, I finish in
nine months, instead of, youknow, the 180 days.
Bill Exeter (11:12):
Good question. If it's, you know, if it's going to
go for more than 180 days, thenwhat we'll do is, on the 180
day, we'll wrap up theimprovement exchange will
transfer that LLC to the client,so they become the owner, and
only the improvements that haveboth been paid for and completed
will qualify as part of theirreinvestment. So that might mean
(11:35):
that they've only gotten 60, 70,80% of their improvements
completed. So only thosecompleted would count toward
their reinvestment values. Thatmight mean that they're
exchanging short so they mighthave to some tax consequences.
In a lot of cases, clients aretrading up in value. So if
(11:55):
that's the case, it might stillbe okay. It'll just depend on
the numbers.
Joey Romero (12:00):
So what happens on that 20%? Well, that's what we
call it's called boot?
Bill Exeter (12:05):
It's called boot, yep, funny name for that, isn't
it? So yes, boot, if the 20%that's not completed means that
they've traded down in value,then it's taxable. Boot, it
doesn't hurt the rest of theexchange, but they will pay tax
on the portion that was notreinvested.
Joey Romero (12:24):
Now, I can't just like, buy, like stuff and have
it sit in the garage, right?
You're saying it has to beinstalled and completed, right?
Bill Exeter (12:33):
Yes. A perfect example would be a client that
says, Okay, could you cut acheck for $100,000 to pay the
lumber yard, and the lumber yarddumps the lumber on the
property. At that point, itstill doesn't count, because
it's not real estate, it's justpersonal property, meaning non
real estate, it's just sittingon the dirt. But once you put it
together, it becomes a frame andyou attach it to the foundation.
(12:55):
Now it's part of the realestate, it would count.
Joey Romero (12:59):
Okay. So one of, one of the things too, is that
complicates. Thing is whenthere's a mortgage or leverage
on the relinquished property.
Now, can you talk about what hasto happen on the other side of
that?
Bill Exeter (13:13):
Sure. So as an example, let's say you're
selling property today, andyou've got a million dollar sale
price, you've got $400,000 ofequity, you've got $600,000 of
debt or bank financing. If yousell that, the requirement, as
we talked about before, is you,after closing costs, you're
going to have a net sale priceof about 950-ish or so. So
(13:36):
that's what you have toreinvest. So you're typically
going to go over and if it's astraight across the board
exchange. You're not exchangingup in value. You're probably
going to buy something for abouta million dollars. In that case,
the $400,000 of equity movesover, so you reinvest your
equity on the new property, andthe difference will be new debt
of $600,000 so most people getanother loan for the 600,000 you
(13:59):
could replace that loan withcash. So some people say, I just
don't want any more mortgage,and I'm going to put $600,000
out of my pocket into closing.
And that certainly qualifies,because you've still reinvested
the full million, and you'vereplaced the debt with cash out
of your pocket. So that wouldcount too.
Joey Romero (14:16):
And then you said that the clearly that the full
amount, because you can't justsay, 'Well, I'm just gonna buy a
house with the equity.' You'restill gonna have to pay taxes on
on the side that paid off themortgage, right?
Bill Exeter (14:28):
Absolutely. So in that example, if they bought a
house for 400,000 they put the400,000 of equity there, they've
actually traded down by 600,000that's taxable, and if they
don't prorate your cost basis,so that 600,000 would be 100%
taxable. In that example, itprobably would trigger the
entire amount of taxable gain,unless they've got a green and
(14:49):
low cost basis.
Joey Romero (14:51):
Wow. So how often do these 1030, ones get
disqualified, and what triggersaudits?
Bill Exeter (14:59):
Good question. You know, most of the audit usually,
when there's an audit, we get anotification, because they go, I
need documents. I can't find mydocuments. And so we don't see
very many audits. You know,contrary to what people say out
there, the audit ratio is fairlylow for these things. You know,
nationwide, all tax returns, thelast statistic I saw is total
(15:20):
audits were like .6 or .7% ofall tax returns. So audits are
very low anyways. 1031, I wouldguess, are even lower, unless
you're in states likeCalifornia, that California
targets 1031 exchanges. So it'sprobably higher in California,
but it's a very low audit riskthere. Most of the ones I've
(15:41):
been involved with, too, weren'tnecessarily triggered because of
the 1031 exchange. Maybe theyhad a 1099 and they didn't
report it and it didn't match upon the IRS computer system or
something like that. So it getskicked out for an audit. They
audit the entire return.
California does tend to pullreturns for an audit because of
the 1031 exchange, but usuallyit's larger transactions. You
(16:03):
know, they never tell you whatthe audit threshold is. I think
it's somewhere around 5 millionor above, because anything over
5 million seems to have a muchhigher audit risk than if it's
under 5 million. Mosttransactions are under 5
million, so.
Joey Romero (16:20):
Now, so that's the audit side of that. But how
often do they get disqualified?
And what do you see the most? Iguess, what triggers those
disqualifications more than
Bill Exeter (16:30):
anything? I'm just kind of noodling here. Most of
the ones I've been involved within terms of audit, they're not
disallowed. They'll find thingslike, well, I guess perfect
example would be on your closingstatement. There's really three
buckets. There's your routineselling expenses, which we
(16:51):
talked about before yourbrokers, commission, title,
escrow, documentary, transfertax, those are permissible.
There's two other buckets. Oneis any lender related items. So
interest expense, demand,statement fees, things like
that. And your third bucketwould be operating expenses. So
proratedrents, prorated HOAfees, prorated property taxes,
(17:12):
the second and third bucket arenot permissible. Most people pay
those through closing anyways,and it doesn't hurt the 1031,
but it does mean those itemsthat are paid are, you're using
exchange proceeds to pay foroperating expenses instead of
buying replacement property. Sothat triggers a tax consequence,
(17:33):
not a huge one, but it triggersa tax consequence. Most people
don't know that, and a lot oftax advisors don't know that, so
they report it as 100% taxdeferred, they get audited, and
all those little things getadded back and triggers an
issue. But then you get somepeople who don't identify, or if
they do identify, it's after the45 day deadline. Occasionally
(17:54):
you'll get somebody who closeson the purchase on the 100 knee
first day. So those arecertainly disallowed. They'll
find something like thatqualified use as an issue. Maybe
they moved into the property dayone. You can't do it. That's
personal use. It doesn't happenvery often, but, you know, some
people try to play the game anddoesn't work. So usually, those
(18:17):
are types of things we see.
Joey Romero (18:19):
Let's say, if I hold properties in my self
directed IRA. Can I exchangethose?
Bill Exeter (18:25):
Great question, you know, the self directed IRA,
it's either a traditional IRA orRoth IRA, in most cases, they're
either tax deferred or tax freealready. So if you own real
estate in that, you couldcertainly do that. We're an IRA
custodian as well. So you cancertainly do that, that's our
sweet spot. So if you're sellingreal estate, it typically is not
(18:45):
going to need a 1031 exchange.
But in some cases, if you areconsidered to be a non passive
investor, because investments inthe IRA are supposed to be
passive. If you've invested insomething that's an operating
business, it might triggerunrelated business, taxable
income or UBTI, or if you'veleveraged the real estate, it
(19:06):
could be unrelated debt, financeincome or UDFI. Nope. So that
means when you sell the realestate, you trigger a taxable
event. And the IRA actually mayhave to file a tax return at
990-T, but if you do a 1031exchange at that point inside
the IRA, then you don'trecognize any gain, and
therefore you don't have toworry about UBTI or UDFI. You
(19:28):
don't have to file a 990-T so ifyou're going to, you know when,
anytime you invest in realestate or any kind of an
operating business, talk to yourtax advisor, find out whether
it's going to trigger unrelatedbusiness taxable income or UDFI,
and if it is, then talk to themabout doing a 1031 before you
actually sell.
Joey Romero (19:50):
And if they don't know, get another CPA.
Bill Exeter (19:53):
Exactly. Yeah. And what I said, they'd probably
just glazed over, because that'scomplicated stuff.
Joey Romero (19:59):
Yeah. Now, what does it mean when it's a step up
in cost basis?
Bill Exeter (20:04):
Good question. So kind of a simple answer would
be, let's say you bought realestate years ago for 100,000.
Today, it's worth a million andyou pass on. You're going to
leave that property to, youknow, kids or grandkids or
friends or, you know, whateverit might be. The fact that the
value of that $1 millionproperty is included in your
(20:25):
estate for estate taxcomputation means that they
can't double tax you, so itcannot be counted as part of
your capital gain computation.
So when you pass the valuesincluded in your estate, whoever
inherits the property gets astep up, which means the cost
basis in the property isincreased from that $100,000
that you bought it for up to thefair market value at the date of
(20:49):
death. So your kids orgrandkids, or whomever, their
cost basis gets stepped up to 1million they could sell it the
next day, literally, for $1million and pay zero taxes.
Joey Romero (21:00):
Wow, that's a...
Wow, that's interesting. What'sthe biggest mistake you've seen
in the in your 40 years of doing1031, exchanges? What's the
biggest mistake you've seen?
Bill Exeter (21:16):
Biggest mistake number one, not paying attention
to the requirements. And I knowit's tough, because you get all
sorts of documents, reams andreams of paper when you're doing
real estate, and nobody readsit, and that's part of the
problem. So we've talked abouttrading down in value, not
reinvesting things,identification and all of those
things. And it's amazing howmany times people either don't
(21:38):
identify or they think they canidentify anything, and then
acquire something else, allsorts of just kind of crazy
ideas, and then they're reallyupset when they find out their
exchange is disallowed becauseit they didn't follow the rules.
The rules are documentedeverywhere. I mean, they're on
marketing brochures, they're onwebsites or all the legal
documents. So read what's outthere, read what's provided to
(22:02):
you, so you know what you'reexpected to do. And then it's a
piece of cake, really, but it'sjust, you know, people are busy.
They just don't read anything.
They sign it, and that's it. Andthen all of a sudden they get
surprised. The biggest mistakeis not paying attention to the
details, not reading, not doingyour homework.
Joey Romero (22:19):
We had an investor that, you know, we, we do it at
the boot camp, and then it'savailable on video so they can
go back to it. And we alwaystell them, if you're going to do
a 1031 we're going to need sometime to set some things up. You
know, give us at least two weeksprior to your closing date. We
(22:40):
explain that. And I, you know,inevitably, I got one of our
investors. Now we've taken 175investors to Florida. And 'Joey,
Hey, I just sold my property. Weclosed yesterday. Man, I'm ready
to exchange.' And I was like,'man,' I was like, 'we've been
talking about this for the lastsix months leading up to it that
(23:00):
I said, Hey, before you sell,make sure we set everything else
up'. And he's like, that's whyhe just, he just had to pay
taxes on it. So that was a...
Bill Exeter (23:08):
Yeah. And unfortunately, there's no way to
go back and unring the battle,so.
Joey Romero (23:13):
That was hurt. Now I asked you, what's the biggest
mistake, but what's the mostinteresting exchange you've ever
been a part of?
Bill Exeter (23:19):
Oh, this goes back, well, a couple of them that come
to mind. This goes back beforethey change the rules to where
it only applies to real estate.
So probably the most interestingwas an exchange of a 747, and
the attorneys said, We don'twant to deal with sales and use
tax issues, so we want to do itat international airspace. So we
all got on the plane, and ithadn't been, it hasn't gone
(23:41):
green yet, so it's still builtit hasn't been built out. None
of the seats are in there,except they put in just enough
seats for the closing gene. Andwe flew out in international
airspace, did the deal, did thewire transfer and everything,
and then flew back and and then,and they wouldn't let me fly the
plane.
Joey Romero (23:59):
Oh, man, you should've held him hostage.
Bill Exeter (24:02):
Yeah, the oddest exchange we ever done was an
exchange of meteorite. And wegot the phone call. We thought
the guy that got the phone callsaid, I think this is a crank
phone call, but, you know, he'sasking really good questions. So
I took the questions, we tookthe call, and sure enough, he
had this meteorite that he'downed for like, 10 years. He
(24:23):
basically found it years ago andput it in the museum and
reported it on his tax return asan asset held for investment,
which is shocking and out of theblue he got an offer to buy it
for a million dollars. So hesold it and said, what can I
exchange it for? And it's like,well, that's a good question
Joey Romero (24:43):
...that sets a precedent right here.
Bill Exeter (24:45):
Yeah. And I said, well, first of all, I could tell
you that the IRS has never ruledon an exchange of meteorites,
but the question is, what'slike, kind is obviously another
meteorite, and so I don't knowwho would do that. And he goes,
why?
Joey Romero (25:00):
Some other, some other nerds about it. But I
said, you know, do do mineralsqualify, or, or certain kinds of
gems, or, you know, I don'tknow. It's just hard to say. In
his case, he ended up exchangingfor a, I guess you caught a
portfolio of other meteorite. Soit was interesting. I learned a
lot on that one.
(25:20):
Well, Bill, were wrapping it uphere. Can you just tell folks
how they can get a hold of youif they're interested in other
than calling us, how can theyreach out directly to you?
Bill Exeter (25:31):
Sure, certainly, call-in you guys. We can chat,
do a conference call together ifthey want to reach out, direct
website is a good way. We got alot of the technical information
on the website. So that'sExeterco.com. So that's
E-X,-E-T,-E-R-C-O.com, and then,or if you want to call direct,
I'm out of the San Diegoheadquarters office. So our
number there is 619-239-3091, so619-239-3091.
Joey Romero (26:00):
Well, Bill, I really appreciate you jumping on
pretty short notice. I know wewere, we've been meeting ever
since we've we started the bootcamp. You know when it's
relevant. You know, we don'talways have an exchange going,
but I appreciate your time. Andyou actually doing a refresh for
our audience, because we know weget brand new investors you know
(26:21):
coming along all the time. Sothank you.
Bill Exeter (26:22):
Most welcome. My pleasure. Anytime.
Narrator (26:24):
For more information on hard money loans, trust deed
investing, and upcoming eventswith The Norris group. Check out
thenorrisgroup.com. For moreinformation on passive investing
through the DBL Capital RealEstate Investment Fund, please
visit dblapital.com.
Joey Romero (26:44):
The Norris group originates and services loans in
California and Florida underCalifornia DRE license 01219911.
Florida mortgage lender license1577 and NMLS license 1623669.
For more information on hardmoney lending go to
thenorrisgroup.com and click thehard money tab.
Welcome to The Norris Group real estate podcast, a
show committed to bringing youinsights from thought leaders
shaping the real estateindustry. In each episode, we'll
dive into conversations withindustry experts and local
insiders, all aimed at helpingyou thrive in an ever-changing
real estate market. continuingthe legacy that Bruce Norris
(00:24):
created, sharing valuableknowledge, and empowering you on
your real estate journey.
Whether you're a seasoned pro ora newcomer, this is your go-to
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Here's your host, Craig Evans.
Joey Romero (00:45):
Hey, thank you for joining us again for part two of
our interview with Bill Exeterof Exeter 1031 exchange Services
LLC. Let's get to it. Okay, solet's get into what's the
reverse exchange and what's thebiggest difference between this
and the forward exchange?
Bill Exeter (00:58):
Good question.
Maybe I'll start off with therisk of a forward exchange. With
a forward exchange, you areselling first you trigger your
gain, and as long as you canidentify within the 45 days and
then actually acquire theproperty, you defer it so it's
not taxable. But if somethinghappens and you can't identify
or you can't acquire theproperty, then the forward
(01:19):
exchange becomes a taxable sale,and there's no way to go back
and fix that. So that's reallythe risk on a forward exchange.
But the forward exchanges aremuch simpler, much more
straightforward, etc. With areverse exchange, it allows you
to go out and spend all the timeyou want to find the new
property. You buy the propertyso you go into contract, you can
(01:39):
actually close on the purchaseof your new property first, then
you've got the 180 days to sellyour current property. Sounds
easy, but they're a lot morecomplicated. There's more costs
involved. So you know one way toexplain it is a pure reverse
exchange, which does not exist.
(02:02):
But a pure reverse exchangewould mean that the client could
go out, buy the new property,take title to it, own both
properties at the same time, andthen sell their current property
within six months. And the IRSdoesn't permit that, so they've
set up what they call a parkingarrangement. So in most cases,
the new property you're going tobuy, we have to acquire and
(02:23):
hold, or what the IRS callschart legal title to the
property. So the only thing thatoccurs up front in that
structure is we, we park titleto the property. The the 1031
exchange hasn't even entered thepicture yet, and then, let's
say, a few months down the road,you sell your current asset, and
at that point, it's really aconcurrent exchange. You sell,
(02:44):
you close on the sale, youconvey title to the buyer of
your property, and then wetransfer the property to you
that we've been holding on yourbehalf. So it's really kind of a
back end or exchange last asthey call it, where we swap the
properties at the back end. Soit takes a lot of the risk out
of the market because you'veclosed on your new property
(03:04):
first. It's just morecomplicated. Traditional lenders
don't like the fact that we'reholding title to the property.
So if you could do an all cashpurchase, it worked great. If
there's a lender involved, wehave to kind of go through the
process to see if the lenderwill allow it.
Joey Romero (03:20):
Now, is there a risk of accidentally triggering
a reverse exchange?
Bill Exeter (03:26):
Good question. I guess the only risk is, we've
had people who haven't talked toanyone about the reverse
exchange. They maybe read up onit in the internet, and they
don't realize that they have todo this parking arrangement. So
we'll get phone calls all thetime where they say, Well, I
bought the property. Now I wantto do a reverse exchange. And if
they got title to the property,it's too late to do the reverse.
(03:48):
So they, I guess they didn'treally accidentally the way, you
still have to plan it. You haveto plan it. Everything has to be
set in place before closing. So,yeah, it wouldn't be
accidentally triggered, but theycould accidentally buy it, not
realizing they have to carpetwith us. So that's really the
risk that we see quite a bit.
Joey Romero (04:07):
Okay. And then the third one that we're really
familiar with, especially hereat The Norris Group with our
boot camp, is the improvementexchange, or the build exchange.
Is that the most complicated ofall the processes?
Bill Exeter (04:20):
Definitely most complicated of all the processes
in the improvement exchange canbe done either with a forward
exchange structure, which Ithink most of them are done that
way, but it could also be donewith a reverse 1031, exchange
structure. I'll use the forwardbecause that's what most people
do. So you're selling yourcurrent property. First the
funds come to us at closing,then you identify the property
(04:43):
that you want to buy and buildon. So you're really
identifying, in most cases,dirt, and then you're
identifying also what you intendto complete or build out on the
property. And then it's justlike a reverse structure we take
title to the property you wantto build on. So it's the same
parking arrangement, and thenthey have the rest of the 180
day period to actually completethe capital improvements. And
(05:06):
the neat thing about the Floridaboot camps with you guys is, of
course, everything's kind oflined up in advance. So really,
you sell usually day one, you'realready starting the
construction and build out. Soyou've got the full 180 days.
You know, a lot of folks who aredoing it on their own, they
close, we're holding the cash,and they identify right around
(05:27):
the 45th day. So they've alreadylost a month and a half, and to
get permits in another, youknow, four and a half months is
almost impossible.
Joey Romero (05:35):
Yeah. So you just said something that it can a
build exchange could be done ina reverse exchange. So how, when
does that start the 180 dayslike, because you know when
you're buying something that'salready existing, okay, that's
when you bought it, you know.
Now the build cycle, you know,if you look at the last three
years, that has fluctuated fromfive months to 18 months. Some
(05:57):
people even two years tocomplete a build. So how does
that work?
Bill Exeter (06:05):
Yeah, good question. It's just like a
reverse exchange. So we wouldset up the reverse. They would
go under contract, etc. We wouldbe assigned into the contract.
So we step into these shoes asthe buyer when the closing
occurs. We actually take legaltitle to the property or park
title to it just like theregular reverse. Then the only
difference is, once we taketitle, that's when the 180 day
(06:26):
period starts. So at that pointthey could start doing the build
out right away, and the sale oftheir current property maybe
four or five months down theroad. And as long as we can wrap
all that up within that sixmonth period, then it would
certainly qualify. The beautyagain, is you buy first, you
take the risk out of you knowwhether or not you can find
replacement property. There'sjust more complexities to it.
(06:50):
And if there's a traditionallender involved, they probably
won't touch it. Now,construction financing, they
usually will take a look at it.
So it certainly a possibility.
Joey Romero (06:59):
Now, do all the same deadlines apply? 180, 45?
Bill Exeter (07:04):
Typically, yes, if you want to do a safe harbor,
which means you're following therevenue ruling that the IRS came
out with, or revenue procedure,then you would have the same 45
days. In this case, 45 days toidentify what you're going to
sell because you've alreadybought, and then you've got 180
days to do all the purchase andthen all the build out. There's
one case where they structuredthis as a 24 month process, and
(07:28):
they finished it in 17 months.
The IRS disallowed thetransaction. It's the Bartel
versus Commissioner case. Theytook it at court and they won.
So we have a case on the booksnow that says you can do that.
However, the IRS has also comeout and said, Yep, we still hate
it, so if you do it and you getaudited, you're probably going
(07:50):
to be doing that.
Joey Romero (07:53):
So, in that case, if you did it, knowing there's
precedent, there's a chance thatyou still disqualified, but then
you'd probably have to go tocourt to try to get it.
Bill Exeter (08:03):
It's exactly the same fact pattern, you might get
lucky and prevail. If it's youknow, everybody's case though,
or transaction is always alittle different. So you just
never know. It's certainly notfor the faint of heart.
Joey Romero (08:15):
Now, one of the things that happens in these
these build exchanges, is youcreate exchange LLCs. Can you
tell us a little bit about that?
Bill Exeter (08:26):
Yes. So with the improvements, or even in also
the reverses, with that parkingarrangement, there's a number of
ways of doing it, one way whichwe do not recommend, but one way
is the exchange company may haveone entity, like a C
corporation, and they'll usethat entity to acquire and hold
all client properties. Well,that could be a lot of
(08:48):
properties in the same year, andif any of those properties have
any kind of an issue, liens,judgments, toxic waste issue,
whatever it might be, it couldaffect the entity, and it could
affect all the properties in theentity. So we always set up a
brand new LLC for every singleclient. We never reuse the LLC,
(09:09):
and that way the LLC isacquiring and holding legal
title to the property. It's abrand new LLC so the client
doesn't have to worry about anyother client or any other real
estate. It protects the clientfrom liability. It also protects
us from liability. So thatentity is owned by us during
that 180 day window. And thenwith improvement exchanges, it's
(09:29):
almost always on the 180th day,we transfer that LLC to the
client. They become the owner,signer, etc, and that's how they
get ownership of the property.
Joey Romero (09:39):
Now, what if, let's say I want to, I end up like,
you know what? This is going,great. I want to do another
exchange. Can I use the same LLCto do a back to back exchange?
Bill Exeter (09:50):
Yes, if it's the same client, we could certainly
do that. Then we'd have totransfer the property out by
deed, rather than assigning theLLC. So it is possible. Well, in
most cases, because of the deedand issues like that, we usually
will transfer the LLC and thendo a brand new LLC for the next
transaction, but it is possibleto use the same one.
Joey Romero (10:11):
On build exchange.
Do you require funds control, oris there even a requirement for
funds control?
Bill Exeter (10:24):
There's no requirement for funds control.
So it really depends on thesponsor, excuse me, in the
client and what they want. Thefund control certainly protects
both the sponsor and the clientto make sure that everything is
being paid, you know, liens arebeing released, etc. There's no,
you know, in some cases, there'sall sorts of history where
(10:44):
there's been developers orwhatever, who've run off with
money. You've heard all thesestories. So fund control
protects all the parties. So,it's a great way to go, just to
protect yourself, but there's norequirement to do so,
Joey Romero (10:58):
So what happens if I'm doing a build exchange, and
we get hit with delays, and Idon't, you know, I finish in
nine months, instead of, youknow, the 180 days.
Bill Exeter (11:12):
Good question. If it's, you know, if it's going to
go for more than 180 days, thenwhat we'll do is, on the 180
day, we'll wrap up theimprovement exchange will
transfer that LLC to the client,so they become the owner, and
only the improvements that haveboth been paid for and completed
will qualify as part of theirreinvestment. So that might mean
(11:35):
that they've only gotten 60, 70,80% of their improvements
completed. So only thosecompleted would count toward
their reinvestment values. Thatmight mean that they're
exchanging short so they mighthave to some tax consequences.
In a lot of cases, clients aretrading up in value. So if
(11:55):
that's the case, it might stillbe okay. It'll just depend on
the numbers.
Joey Romero (12:00):
So what happens on that 20%? Well, that's what we
call it's called boot?
Bill Exeter (12:05):
It's called boot, yep, funny name for that, isn't
it? So yes, boot, if the 20%that's not completed means that
they've traded down in value,then it's taxable. Boot, it
doesn't hurt the rest of theexchange, but they will pay tax
on the portion that was notreinvested.
Joey Romero (12:24):
Now, I can't just like, buy, like stuff and have
it sit in the garage, right?
You're saying it has to beinstalled and completed, right?
Bill Exeter (12:33):
Yes. A perfect example would be a client that
says, Okay, could you cut acheck for $100,000 to pay the
lumber yard, and the lumber yarddumps the lumber on the
property. At that point, itstill doesn't count, because
it's not real estate, it's justpersonal property, meaning non
real estate, it's just sittingon the dirt. But once you put it
together, it becomes a frame andyou attach it to the foundation.
(12:55):
Now it's part of the realestate, it would count.
Joey Romero (12:59):
Okay. So one of, one of the things too, is that
complicates. Thing is whenthere's a mortgage or leverage
on the relinquished property.
Now, can you talk about what hasto happen on the other side of
that?
Bill Exeter (13:13):
Sure. So as an example, let's say you're
selling property today, andyou've got a million dollar sale
price, you've got $400,000 ofequity, you've got $600,000 of
debt or bank financing. If yousell that, the requirement, as
we talked about before, is you,after closing costs, you're
going to have a net sale priceof about 950-ish or so. So
(13:36):
that's what you have toreinvest. So you're typically
going to go over and if it's astraight across the board
exchange. You're not exchangingup in value. You're probably
going to buy something for abouta million dollars. In that case,
the $400,000 of equity movesover, so you reinvest your
equity on the new property, andthe difference will be new debt
of $600,000 so most people getanother loan for the 600,000 you
(13:59):
could replace that loan withcash. So some people say, I just
don't want any more mortgage,and I'm going to put $600,000
out of my pocket into closing.
And that certainly qualifies,because you've still reinvested
the full million, and you'vereplaced the debt with cash out
of your pocket. So that wouldcount too.
Joey Romero (14:16):
And then you said that the clearly that the full
amount, because you can't justsay, 'Well, I'm just gonna buy a
house with the equity.' You'restill gonna have to pay taxes on
on the side that paid off themortgage, right?
Bill Exeter (14:28):
Absolutely. So in that example, if they bought a
house for 400,000 they put the400,000 of equity there, they've
actually traded down by 600,000that's taxable, and if they
don't prorate your cost basis,so that 600,000 would be 100%
taxable. In that example, itprobably would trigger the
entire amount of taxable gain,unless they've got a green and
(14:49):
low cost basis.
Joey Romero (14:51):
Wow. So how often do these 1030, ones get
disqualified, and what triggersaudits?
Bill Exeter (14:59):
Good question. You know, most of the audit usually,
when there's an audit, we get anotification, because they go, I
need documents. I can't find mydocuments. And so we don't see
very many audits. You know,contrary to what people say out
there, the audit ratio is fairlylow for these things. You know,
nationwide, all tax returns, thelast statistic I saw is total
(15:20):
audits were like .6 or .7% ofall tax returns. So audits are
very low anyways. 1031, I wouldguess, are even lower, unless
you're in states likeCalifornia, that California
targets 1031 exchanges. So it'sprobably higher in California,
but it's a very low audit riskthere. Most of the ones I've
(15:41):
been involved with, too, weren'tnecessarily triggered because of
the 1031 exchange. Maybe theyhad a 1099 and they didn't
report it and it didn't match upon the IRS computer system or
something like that. So it getskicked out for an audit. They
audit the entire return.
California does tend to pullreturns for an audit because of
the 1031 exchange, but usuallyit's larger transactions. You
(16:03):
know, they never tell you whatthe audit threshold is. I think
it's somewhere around 5 millionor above, because anything over
5 million seems to have a muchhigher audit risk than if it's
under 5 million. Mosttransactions are under 5
million, so.
Joey Romero (16:20):
Now, so that's the audit side of that. But how
often do they get disqualified?
And what do you see the most? Iguess, what triggers those
disqualifications more than
Bill Exeter (16:30):
anything? I'm just kind of noodling here. Most of
the ones I've been involved within terms of audit, they're not
disallowed. They'll find thingslike, well, I guess perfect
example would be on your closingstatement. There's really three
buckets. There's your routineselling expenses, which we
(16:51):
talked about before yourbrokers, commission, title,
escrow, documentary, transfertax, those are permissible.
There's two other buckets. Oneis any lender related items. So
interest expense, demand,statement fees, things like
that. And your third bucketwould be operating expenses. So
proratedrents, prorated HOAfees, prorated property taxes,
(17:12):
the second and third bucket arenot permissible. Most people pay
those through closing anyways,and it doesn't hurt the 1031,
but it does mean those itemsthat are paid are, you're using
exchange proceeds to pay foroperating expenses instead of
buying replacement property. Sothat triggers a tax consequence,
(17:33):
not a huge one, but it triggersa tax consequence. Most people
don't know that, and a lot oftax advisors don't know that, so
they report it as 100% taxdeferred, they get audited, and
all those little things getadded back and triggers an
issue. But then you get somepeople who don't identify, or if
they do identify, it's after the45 day deadline. Occasionally
(17:54):
you'll get somebody who closeson the purchase on the 100 knee
first day. So those arecertainly disallowed. They'll
find something like thatqualified use as an issue. Maybe
they moved into the property dayone. You can't do it. That's
personal use. It doesn't happenvery often, but, you know, some
people try to play the game anddoesn't work. So usually, those
(18:17):
are types of things we see.
Joey Romero (18:19):
Let's say, if I hold properties in my self
directed IRA. Can I exchangethose?
Bill Exeter (18:25):
Great question, you know, the self directed IRA,
it's either a traditional IRA orRoth IRA, in most cases, they're
either tax deferred or tax freealready. So if you own real
estate in that, you couldcertainly do that. We're an IRA
custodian as well. So you cancertainly do that, that's our
sweet spot. So if you're sellingreal estate, it typically is not
(18:45):
going to need a 1031 exchange.
But in some cases, if you areconsidered to be a non passive
investor, because investments inthe IRA are supposed to be
passive. If you've invested insomething that's an operating
business, it might triggerunrelated business, taxable
income or UBTI, or if you'veleveraged the real estate, it
(19:06):
could be unrelated debt, financeincome or UDFI. Nope. So that
means when you sell the realestate, you trigger a taxable
event. And the IRA actually mayhave to file a tax return at
990-T, but if you do a 1031exchange at that point inside
the IRA, then you don'trecognize any gain, and
therefore you don't have toworry about UBTI or UDFI. You
(19:28):
don't have to file a 990-T so ifyou're going to, you know when,
anytime you invest in realestate or any kind of an
operating business, talk to yourtax advisor, find out whether
it's going to trigger unrelatedbusiness taxable income or UDFI,
and if it is, then talk to themabout doing a 1031 before you
actually sell.
Joey Romero (19:50):
And if they don't know, get another CPA.
Bill Exeter (19:53):
Exactly. Yeah. And what I said, they'd probably
just glazed over, because that'scomplicated stuff.
Joey Romero (19:59):
Yeah. Now, what does it mean when it's a step up
in cost basis?
Bill Exeter (20:04):
Good question. So kind of a simple answer would
be, let's say you bought realestate years ago for 100,000.
Today, it's worth a million andyou pass on. You're going to
leave that property to, youknow, kids or grandkids or
friends or, you know, whateverit might be. The fact that the
value of that $1 millionproperty is included in your
(20:25):
estate for estate taxcomputation means that they
can't double tax you, so itcannot be counted as part of
your capital gain computation.
So when you pass the valuesincluded in your estate, whoever
inherits the property gets astep up, which means the cost
basis in the property isincreased from that $100,000
that you bought it for up to thefair market value at the date of
(20:49):
death. So your kids orgrandkids, or whomever, their
cost basis gets stepped up to 1million they could sell it the
next day, literally, for $1million and pay zero taxes.
Joey Romero (21:00):
Wow, that's a...
Wow, that's interesting. What'sthe biggest mistake you've seen
in the in your 40 years of doing1031, exchanges? What's the
biggest mistake you've seen?
Bill Exeter (21:16):
Biggest mistake number one, not paying attention
to the requirements. And I knowit's tough, because you get all
sorts of documents, reams andreams of paper when you're doing
real estate, and nobody readsit, and that's part of the
problem. So we've talked abouttrading down in value, not
reinvesting things,identification and all of those
things. And it's amazing howmany times people either don't
(21:38):
identify or they think they canidentify anything, and then
acquire something else, allsorts of just kind of crazy
ideas, and then they're reallyupset when they find out their
exchange is disallowed becauseit they didn't follow the rules.
The rules are documentedeverywhere. I mean, they're on
marketing brochures, they're onwebsites or all the legal
documents. So read what's outthere, read what's provided to
(22:02):
you, so you know what you'reexpected to do. And then it's a
piece of cake, really, but it'sjust, you know, people are busy.
They just don't read anything.
They sign it, and that's it. Andthen all of a sudden they get
surprised. The biggest mistakeis not paying attention to the
details, not reading, not doingyour homework.
Joey Romero (22:19):
We had an investor that, you know, we, we do it at
the boot camp, and then it'savailable on video so they can
go back to it. And we alwaystell them, if you're going to do
a 1031 we're going to need sometime to set some things up. You
know, give us at least two weeksprior to your closing date. We
(22:40):
explain that. And I, you know,inevitably, I got one of our
investors. Now we've taken 175investors to Florida. And 'Joey,
Hey, I just sold my property. Weclosed yesterday. Man, I'm ready
to exchange.' And I was like,'man,' I was like, 'we've been
talking about this for the lastsix months leading up to it that
(23:00):
I said, Hey, before you sell,make sure we set everything else
up'. And he's like, that's whyhe just, he just had to pay
taxes on it. So that was a...
Bill Exeter (23:08):
Yeah. And unfortunately, there's no way to
go back and unring the battle,so.
Joey Romero (23:13):
That was hurt. Now I asked you, what's the biggest
mistake, but what's the mostinteresting exchange you've ever
been a part of?
Bill Exeter (23:19):
Oh, this goes back, well, a couple of them that come
to mind. This goes back beforethey change the rules to where
it only applies to real estate.
So probably the most interestingwas an exchange of a 747, and
the attorneys said, We don'twant to deal with sales and use
tax issues, so we want to do itat international airspace. So we
all got on the plane, and ithadn't been, it hasn't gone
(23:41):
green yet, so it's still builtit hasn't been built out. None
of the seats are in there,except they put in just enough
seats for the closing gene. Andwe flew out in international
airspace, did the deal, did thewire transfer and everything,
and then flew back and and then,and they wouldn't let me fly the
plane.
Joey Romero (23:59):
Oh, man, you should've held him hostage.
Bill Exeter (24:02):
Yeah, the oddest exchange we ever done was an
exchange of meteorite. And wegot the phone call. We thought
the guy that got the phone callsaid, I think this is a crank
phone call, but, you know, he'sasking really good questions. So
I took the questions, we tookthe call, and sure enough, he
had this meteorite that he'downed for like, 10 years. He
(24:23):
basically found it years ago andput it in the museum and
reported it on his tax return asan asset held for investment,
which is shocking and out of theblue he got an offer to buy it
for a million dollars. So hesold it and said, what can I
exchange it for? And it's like,well, that's a good question
Joey Romero (24:43):
...that sets a precedent right here.
Bill Exeter (24:45):
Yeah. And I said, well, first of all, I could tell
you that the IRS has never ruledon an exchange of meteorites,
but the question is, what'slike, kind is obviously another
meteorite, and so I don't knowwho would do that. And he goes,
why?
Joey Romero (25:00):
Some other, some other nerds about it. But I
said, you know, do do mineralsqualify, or, or certain kinds of
gems, or, you know, I don'tknow. It's just hard to say. In
his case, he ended up exchangingfor a, I guess you caught a
portfolio of other meteorite. Soit was interesting. I learned a
lot on that one.
(25:20):
Well, Bill, were wrapping it uphere. Can you just tell folks
how they can get a hold of youif they're interested in other
than calling us, how can theyreach out directly to you?
Bill Exeter (25:31):
Sure, certainly, call-in you guys. We can chat,
do a conference call together ifthey want to reach out, direct
website is a good way. We got alot of the technical information
on the website. So that'sExeterco.com. So that's
E-X,-E-T,-E-R-C-O.com, and then,or if you want to call direct,
I'm out of the San Diegoheadquarters office. So our
number there is 619-239-3091, so619-239-3091.
Joey Romero (26:00):
Well, Bill, I really appreciate you jumping on
pretty short notice. I know wewere, we've been meeting ever
since we've we started the bootcamp. You know when it's
relevant. You know, we don'talways have an exchange going,
but I appreciate your time. Andyou actually doing a refresh for
our audience, because we know weget brand new investors you know
(26:21):
coming along all the time. Sothank you.
Bill Exeter (26:22):
Most welcome. My pleasure. Anytime.
Narrator (26:24):
For more information on hard money loans, trust deed
investing, and upcoming eventswith The Norris group. Check out
thenorrisgroup.com. For moreinformation on passive investing
through the DBL Capital RealEstate Investment Fund, please
visit dblapital.com.
Joey Romero (26:44):
The Norris group originates and services loans in
California and Florida underCalifornia DRE license 01219911.
Florida mortgage lender license1577 and NMLS license 1623669.
For more information on hardmoney lending go to
thenorrisgroup.com and click thehard money tab.
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