August 12, 2025 • 41 mins
Tired of paying massive capital gains taxes when selling investment properties? The 1031 exchange might be your secret weapon for building lasting wealth through real estate investing.
Lonnie Nielsen, founder of 1031 Pros and a true expert in tax-deferred exchanges, breaks down exactly how this powerful wealth-building tool works. Whether you're a small investor with a single rental property or managing a multi-million dollar real estate portfolio, you'll discover how to leverage the 1031 exchange to keep your investment dollars working for you instead of surrendering them to taxes.
We explore what qualifies as "investment property" under Section 1031 (hint: it's broader than you might think), the critical timelines you must follow, and strategic approaches for different investor profiles. Lonnie shares fascinating insights about how investors use exchanges to move capital from overheated markets to emerging opportunities across the country, and how aging investors transition from hands-on landlording to passive income streams.
You'll learn about the potentially massive estate planning advantages that come from deferring gains throughout your lifetime, allowing your heirs to receive properties with a stepped-up basis that eliminates previously deferred taxes. We also cover common pitfalls that can invalidate exchanges and how working with knowledgeable professionals helps ensure a smooth process.
Whether you're looking to upgrade your investment properties, diversify your portfolio, or transition to more passive real estate investments, this episode provides the roadmap you need. Connect with Lonnie Nielsen at 1031 Pros to explore how this strategy might transform your real estate investment approach.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Lonnie, my old friend .
This is Lonnie Nielsen.
We've done some 1031s together.
He is the king of 1031 Exchange1031 Pros.
That's your company, lonnie.
Speaker 2 (00:14):
That's correct.
Always good to converse withyou and talk about the
opportunities of the 1031Exchange.
Speaker 1 (00:22):
Oh my gosh, this is fun.
So today we're talking, we'regoing to kick off through
benefits, the rules of 1031exchange.
We'll do some horror stories,because they're always fun, what
doesn't work and who is in thisfor, as well as success stories
and then anything else we wantto talk about.
So go for it.
What are the benefits of it?
(00:43):
Larry, and he would say that,wouldn't he?
Speaker 2 (00:52):
Yeah, I think the 1031 exchange is a logical piece
to any investors, especially ifwe're starting out.
With young investors that arecalling and aren't quite
familiar with the process.
I always just tell them whetheryou're going to use it in this
transaction or not.
It's something that you need toadd to your portfolio because
(01:13):
the 1031 exchange allows you todefer the taxes that you would
pay in selling a property versususing the 1031 to reinvest in
other properties.
So for any investor, young orold, the 1031 exchange kind of
makes sense.
If you're going to reinvest inreal estate after a sale, then
the 1031 is just a no brainer.
You just want to use that.
Why give up dollars to thegovernment when you have a legal
(01:35):
maneuver to not pay taxes, tokeep those dollars in your
investment portfolio, tocontinue your investment process
and be ahead of the game, andso it's very beneficial.
I think our role is inconversing with investors is
just to kind of give them thelay of the land.
We're not their tax advisors,but we can certainly are
(01:59):
competent in deciding andhelping them decipher what their
capital gain might look like ifthey sold and knowing that
they're going to be able todefer the taxes if they use the
1031.
So it's just, it's a logicalpiece to a transaction.
When people get information, Ialways tell them if they're
informed they can make aninformed decision as to what
(02:21):
works best for them.
And we find many times the 1031exchange is you know what they
would choose to do, and it makessense.
Speaker 1 (02:30):
Let's define so for the agents looking who are like,
wait, what did he just say?
What do we mean by?
Can we define investmentproperty?
And because not just investors,is it, it's an investment
property, can be all kinds ofthings and we're talking about a
light kind of exchange.
So can we define what we meanby a investor?
Could that be an everydayperson that happens to
(02:53):
investment and define both theentity or the, the, the person,
and what we mean by aninvestment property?
Speaker 2 (03:01):
sure so.
So two questions.
So anyone can take advantage ofthe 1031 exchange.
I think you know kind of.
You know the small investorwho's selling a single family
rental for a couple hundredthousand can use the 1031 to
defer the taxes up to.
You know, it could be an LLC,could be partnership, could be
(03:21):
tenants.
In common, we work withDelaware Statutory Trust where
people own a portion of a bigbuilding.
That might be a $30 milliontransaction with 50 investors.
So it runs the gamut.
But I'm going to say you know,our bread and butter is probably
transactions that are 500,000,a million.
But anyone who is selling aninvestment property, if they
(03:45):
have enough capital gain, thenit makes sense for them to defer
the taxes.
So you could have a $50,000transaction if there's such a
thing out there.
But as long as there's acapital gain to defer, that
makes sense.
Usually, compared to our fee,which is about a thousand
dollars.
They look and see what they'regoing to pay taxes and that's
(04:05):
kind of the magic.
Do I want to pay the taxes orcan I pay a fee to a qualified
intermediary like our companyand move into a replacement
property?
Speaker 1 (04:15):
I know, when I've placed you with clients before,
they've been very happy, andthey were always kind of
somewhat pleased by the fees.
Of course, they want to do itfor nothing.
However, your fees were goodand you gave them such great
advice.
So can we dig a little deeperinto, before we go on to the
(04:36):
rules around it, what?
An investment property is, soit's not a primary home, is it?
Speaker 2 (04:41):
Right, so good question.
Yeah, we didn't get to thesecond part of your question.
So the 1031 exchange is set upand it applies to real estate
that's held for investmentpurposes.
So a primary residence is notgoing to qualify.
There's particular tax rulesthat are associated with the
exclusion of gain on yourprimary residence.
(05:03):
But the 1031 would apply tocould be a single family rental,
could be office buildings,could be land, could be
multifamily Really anything thatyou don't live in is pretty
much would qualify.
Now there's some things youkind of have to look out for.
If you're a flipper and you'renot holding the property and
(05:26):
renting it out and you'returning property over quickly, a
flipper doesn't qualify under1031 because that's a property
that's held for resale and notfor investment purposes.
So sometimes we get those andthose don't qualify.
If I'm a builder and I'mbuilding spec homes, or if I
have building a home that'sgoing to be sold as soon as I
(05:52):
complete it, those don't qualify.
And also developers don'tqualify.
The only hybrid is a second home.
Sometimes you'll find peoplewho have properties on the beach
or wherever it might be.
They might have some personaluse of the property and they
don't rent it out.
So the IRS likes to see thatyou've held it at least for two
weeks out of the year as arental property and that your
(06:16):
use is limited to two weeks outof the year.
Unless you're there maintainingthe property, those days don't
count.
So it's kind of one of thosethat you know probably worth a
conversation.
But if you have a second home,vacation home, and it's not
rented out, then you might beoutside what they call the safe
harbor guidelines of being ableto use that.
(06:37):
But any of those properties canbe mixed and matched so it
doesn't have to be a singlefamily rental.
For a single family rental.
Land can be traded for anoffice office for multifamily
and so at like kind is reallybroad.
It just has to be an investmentproperty traded for other
investment property.
Speaker 1 (06:56):
What if it's a both?
Speaker 2 (06:59):
Yes, so sometimes we have what we call a combined use
property, where I have a houseand 50 acres, for example, and
so we have to make then anallocation of you know what is
the value of the house it's myprimary residence and then what
is the value of the acreage, andthen we could take the acreage
and make the like kind ofexchange.
The dollars from the house cango to the client because they
(07:23):
have their exclusion under theprimary residence rule.
So it's a combined use propertywhere maybe some of the dollars
are allocated to the client andthen the balance of the dollars
that represent the acreagewould be moved forward into
another investment property.
So we call that a combined useproperty, part 1031 and part
primary residence.
Speaker 1 (07:41):
Wow, so by property do we mean, just to define it a
little bit more do we mean landand a home and a commercial
building, a regular old house, acondo, or can we throw
investment playthings in there,like boats and cars?
Speaker 2 (08:00):
Sure, yeah, so boats and cars are personal property,
so they don't qualify under the1031.
Going back historically sinceI've done this for a few years,
when it used to be I think itwas pre-2017, they used to allow
some personal items to beexchanged.
We used to do airplanes, we did, cows, we did I'm trying to
(08:23):
think of what else Cows, cows.
It was a few years back, butyou used to have to be cows for
cows, not cows for steers, butanyway, yeah, so the personal
property rules and they used tobe able to trade personal
property assets that had tomatch up with a certain asset
class.
They disallowed or they didaway with that.
(08:47):
I think it was 2017 or so.
So only real estate that's heldfor investment qualifies boats,
planes, cows.
Other personal property assetsdon't qualify under Section 1031
as of the last seven, eightyears.
Speaker 1 (09:02):
Got it and we were going to move on to rules.
You know me already, so let'stalk about rule breaking.
I mean, what about workaroundsto rules?
So, for example, if you live ina primary home and then you
decide to rent that home out andbuy another primary home for
two years, it could qualifycorrect.
Speaker 2 (09:23):
Yeah.
So, for example, you could moveout of the property for a year,
rent it out there's no set timeperiod that you'd have to treat
as a rental and then either usethe 1031 exchange because you
held it for a rental for a yearor, if you look back and you
lived there two out of fiveyears, you can take the primary
residence exclusion, even thoughthe last year you held for
(09:44):
investment.
So you have a choice in thatscenario to pick the best method
that gives you the best bangfor the buck.
Usually, if it makes sense toconsider it your primary
residence, I would say take themoney into your primary
residence because there's not animpetus to go reinvest the 1031
(10:05):
, we know you have to reinvestin a short time period, which is
fine, many people do so.
But if you had a choice and thenumbers made sense, you'd have
to evaluate that kind of withyour tax preparer.
But you could use either sideof that equation to your benefit
.
But usually taking the moneyfrom a primary residence sale
(10:25):
allows you then to go back intoanother primary goes back into
another investment property.
But you're not under thetimeframes that you would be if
you chose to use section 1031.
Now one other piece is if youlooked at it and you converted
it to your primary residence, ifthe gain is more than 500,000,
which is your exclusion then the1031 makes sense most time, all
(10:50):
the time, because the 1031doesn't have a limit on the
amount of gain that you coulddefer.
So sometimes people will maybelook at that, move in, move out,
convert how the property isheld from a primary to
investment property, and thenthey can use the exchange or
again use the primary residencerule.
(11:10):
So it just depends.
Speaker 1 (11:12):
If you had a $5 million home or a $3 million
home or a $2 million home andyou were married and you were
taking your $500 deduction butyou were making all you know.
Maybe you owned it free andclear and you're making, you
know, $1 million, $2 million, $3million, it might make more
sense to do because there's nolimit on the amount of gain that
(11:32):
you could defer.
Speaker 2 (11:33):
If you're going that way, now the key is, you know,
if I'm selling my $3 millionproperty and number one, you
know, am I willing to move outof it and rent it?
You know, because that might bea tough thing to swallow, and
then, if I do, I have to go outand buy investment property.
So if I'm selling my $3 millionproperty and my idea was to go
(11:55):
buy another primary, that won'tconform with the 1031 rules.
But the answer to your questionis so if you had a million
dollars of gain, the 1031 isgreat because there's no limit
on the amount of gain that youcould defer, and so the 1031
would be a nice maneuver to notpay the taxes on a property that
has more gains than $500,000.
If you had the patience, timeand ability to do that.
Speaker 1 (12:20):
How much patience do you need?
So if you moved out and livedin your other million-dollar
property or your second home orwhatever else you've got, how
long do you have to move out for?
And would just listing it forrent suffice or not?
Do you have to take an income?
Speaker 2 (12:35):
just listing it for rent suffice or not?
Do you have to take an income?
I mean, you know, if you gotdown to it and someone
questioned your motives, youknow, could you point to?
You know my intent was to rentthe property out here's.
You know my ads for renting theproperty just didn't come
together.
I think you know it's easy ifyou show rental income and take
depreciation on a tax return.
I think that establishes it ashealth for investment purposes.
(12:59):
I think there's no time periodthat you have to move out, but
typically a rule of thumb isprobably a year, so you can show
it on a tax return or maybe twotax returns.
I think that establishes it ashealth for investment.
Speaker 1 (13:14):
None of us have a crystal ball right.
We're not really sure it's agray area, so when you sorry go
ahead when you make that twomillion dollars from your house
because you've moved out intoyour other, one of your other
million dollar properties orsecond home or whatever is going
on.
When you make that million, twomillion, three million,
whatever you're making you I'mguessing you can go and buy a
(13:37):
quadplex or an eight unitbuilding at that point with the
money, you don't have to buy asingle $2 million house at that
point.
Right, you can buy whatever youwant, as long as it's
investment real estate, or arethere guidelines on that?
Can you only buy a?
Speaker 2 (13:51):
quadplex, yeah.
So the first one is yes, youhave to reinvest in real estate
that's held for investment.
But then the rules are suchthat the 1031 exchange envisions
a scenario where you'rereinvesting in property that's
equal or greater value.
You're always continuing on orup in your investments.
As long as you continue to dothat, then you'll defer the
(14:13):
taxes.
So you sold for $3 million.
You could deduct your closingcosts, but you'd need to buy
other property that's at leastequal or greater in value,
spending all your equity andreplacing debt with new debt.
So that could be made up inmultiple properties or it could
be one property.
But if you found a singlefamily rental that was a million
(14:33):
and you found a multi-familyproperty that was 2 million
combined, you would be able touse those and conform with the
rules of the 1031 exchange.
Speaker 1 (14:44):
Nice.
I would imagine quite a fewpeople do that, because if
you've got a number ofproperties that are high value,
or perhaps you've got a kidthat's gone to college in a
different state you could nowbuy a six unit building.
You know your kid could be oneof them, I'm guessing, because
he's paying rent.
Would that conform?
Speaker 2 (15:02):
yeah, that would.
That certainly would be ascenario that could work and we
see, you know, we'll see a lotof people who buy multiple
properties as replacements forthe property that they're
selling.
Speaker 1 (15:13):
So we're going to talk about some success stories
and some horror stories as well,because they're always fun.
I think for the success stories, could you give us a few
scenarios where people have soldthis and moved it into this and
give me a few differentexamples so people can
understand how you could usethis?
We just did one with kids goingto college, and a lot of people
(15:36):
do that.
They invest in a property thattheir kid's living in and then
eventually sell it.
You know, especially if they'redoing a master's or a PhD or
something and they're going tobe there longer and then that
property gets.
It might be one house.
That that's the usual scenario.
Right, it's one house and alltheir friends move in and pay
rent allegedly and, um, you know, that's often the way it plays
(15:57):
out.
But if you were doing it on alarger scale, like we talked
about, it could be numerousproperties.
You could take your million,two million, and turn it into
numerous rental propertiesanywhere in the country, right?
So you could get a midwest andbuy 250 000 properties and have
eight of them all all of asudden and have a portfolio or
Airbnbs or whatever you want todo Can you give us some more
(16:19):
scenarios, ronnie, because Iknow you really are the king of
this.
Give us some more scenarios thathave worked for people that are
different, like we wouldn'treally think of.
Speaker 2 (16:28):
I like being king for a day.
It's interesting.
So I think a lot of timespeople take a look at you know
where they've invested and youknow we've seen, honestly, we've
seen a lot of transactionswhere people are coming out of,
for example, california andgoing to other parts where they
(16:48):
can use appreciated dollars tomaybe buy multiple properties
appreciated dollars to maybe buymultiple properties.
Maybe just things have changedin that neighborhood and so they
decide, gee, we don't want tobe here anymore.
Or maybe they've held theproperty for 20 years and now we
want to go buy something that'snew.
I just was talking to aninvestor who is looking to sell
(17:11):
in Hawaii.
Their property had appreciatedin value and they said, taking a
look at the rents that theywere getting on the property
with the value of the property,they weren't getting a
commensurate rent with theamount of value that the
property's increased.
So they said I have to doexchange and get into other
properties so I can use mydollars to increase my rental
(17:34):
income, which is you, whichmakes sense, but a lot of people
don't think that way.
They had an appreciated assetbut it just wasn't getting the
return on investment that theyshould have commanded and so
they were going to exchange forother properties.
So we see a lot of people goingto different locations, newer
(17:55):
properties.
Maybe they want to change thetype of property, maybe land
which is appreciated in value.
They want to go to otherproperties that will provide
income.
We've seen people go fromproperties where they have to
manage them and they determine.
(18:17):
You know this might be more forsome older clientele but they
don't want to pay the taxes, butthey don't want to go into
another property.
They have to be involved inmanaging the property, what we
call passive investmentopportunities, dsts or triple
net leases, where they'll buy apiece of a big building or a
(18:37):
portfolio of buildings and theydon't have to be involved
day-to-day.
They get a check in the mail.
So we've seen that for some ofour clienteles that really are
clients who just don't want tomanage day-to-day.
We've also seen some too, whogo out of again management
intensive properties, go intomineral rights.
(18:58):
There's opportunities therewhere they can buy into mineral
rights which are considered tobe real property and are pretty
passive in nature, and so theyget a check in the mail.
Speaker 1 (19:10):
And you're talking about these big conglomerates
now that have put thesemanagement companies together to
portfolio of properties whereyou pay in and get a guaranteed
minimum 8% Right.
Talk a little bit more aboutthat because I'm not sure a lot
of realtors or people watchingthis know about that.
So talk a bit more about thosecompanies.
(19:30):
You're talking about,particularly boomers.
That's our biggest you know ofpeople, obviously, and you we
deal with this every day as areal estate agent.
So 60 and up, um, and you knowyou may have had a couple of
rental properties you may have.
I mean, this is one actuallywhere what we talked about
before would work.
(19:51):
You could move out of yourmillion, two million dollar home
and you might have two or threelittle rental properties.
You could move into one of yourrental properties and just suck
it up for a couple of years ora year, you said, and then sell
your million-dollar property asyour investment and then put all
of that money that could be atwo-year play or a one-year play
to put all of that money intoone of these big conglomerates
(20:13):
which is completely passive,right.
Speaker 2 (20:15):
Yeah, yeah, I mean I don't.
You know we have advisors thatwe work with that you know are
really familiar with the product.
We're a little moretransactionally oriented, but in
general you're able to takethose dollars, defer the taxes
because kind of the last thingyou want to do is take the tax
hit now Because if you make theexchange, defer the taxes in
(20:38):
whatever investment property yougo into, if, as I, pass away
and leave properties for myheirs, they get a stepped up
basis and so all the gain I'vedeferred goes away.
They could sell the propertyafter I've passed and they
wouldn't have any capital gain.
So it's kind of a shame if yousell, pay the taxes and then you
(21:03):
know, have less dollars to workwith to invest that you could
have left for your heirs.
But you know there's differentportfolios, different properties
, as far as the DSTs and triplenet leases go, and again you
know you're buying a piece of abig pie.
You know, depending on how muchyou're investing, you might
have a 1.52% interest in a $30million property.
They, you know, control theship, they manage the property.
(21:26):
And then you know we've seenwhen people will turn those
properties over and you knowwe're working with 20 different
investors who are going intoother properties maybe similar
DST or might be some other typeof property and so I'm DST.
Speaker 1 (21:41):
A lot of people listening won't know what DST is
.
Speaker 2 (21:43):
It's a Delaware statutory trust or it's a tenant
and common ownership interestin property.
So the acronym is DST Delawarestatutory trust but it really
relates to buying propertiesthat are professionally managed
and there's just all differenttypes of opportunities to get
into.
Like I said, you know more ofthe younger investor wants to
(22:05):
kind of be more hands on.
They'll probably get a littlebit better return if they're
personally involved.
But for some who you know justdon't want to pay the taxes and
want something that's a littlemore, you know that day-to-day
being involved, they don't haveto go check to see if the
electricity is, you know, stillon, or they have to replace the
toilet or whatever it might be.
(22:25):
So it certainly does work forsome of the clients and we
certainly have handledtransactions where that's made
sense for the client and it'sbeen a good opportunity for them
.
Speaker 1 (22:41):
I know from personal experiences that so many mom and
pops out there that just gettired and they might have.
It's just like short-termrentals, you know the regular
short-term rental portfolio issix and at some point you can
just get really tired of it,whether it's short-term rentals,
mid-term rentals, long-termrentals.
You thought it was a great planway back when, and now you've
(23:03):
got six of them or 12 of them,and I don't know.
You're in your 60s and like,well, I could sell all these at
the top of this market.
Another thing here, lauriethatori, that lani on that point
is that claremont juglar, 1867to 11 year economic cycle, most
places in the country now almostevery state, we're seeing a
decline and we're we crested twoyears ago in most places.
(23:26):
Yes, new jersey, I know you'restill fine, mainly in the
northeast, but for the rest ofus, you know, Nick Gurley is the
guy I really trust on thefigures ReVenture and he is
saying I mean everything I seeright now is forecast between
four and a half to 12s and 14sin South Florida.
(23:48):
Decline this year, like it's.
You know, we're on the declineand we're expecting that for two
or three years.
What does that mean for a 1031exchange other than sell it now
and put your money in a 1031?
How long have you got to waitfor those prices to come down a
little bit to reinvest it or putit in a DST or one of the
portfolio players that we'vebeen talking about?
(24:10):
How is the switch in the marketgoing to change things,
particularly those boomers whohave six properties or 12
properties like sure now already?
Speaker 2 (24:19):
I mean they do have a 45 day window after closing to
identify a property.
So you kind of have to have anidea of where you're going with
your money and then a 180 daywindow to complete your exchange
.
I have an uncle who kind of gotme into business and I would
consider him one of my mentorsand he was always saying when he
(24:40):
made his like-kind exchanges heknew where he was going, he
knew what potentially he wasgoing to make on that property.
So he always had a plan, so healways was looking to find the
replacement property because hefigured he could always come up
with the ability to sell.
But yeah, I mean, I think whatthat means is you need to look
at different markets, you needto look at different assets and
(25:03):
see where the best opportunityis going to be.
Have you kind of been in amarket that's gone up and has
kind of peaked and am I lookingat some other place where there
might be an opportunity?
I mean, because any propertyinside the United States
qualifies and so you haveopportunities to move, you know,
(25:24):
from state to state.
We get that question Can I, youknow, can I take my dollars
outside this state and goreinvest somewhere else and I
would say you know, probably 60,70 percent of our deals are are
going from one state to theother.
Speaker 1 (25:37):
So yeah, and I love it there, one that you've done.
And why?
Why is that person going fromone state to another?
What kind of reason?
Because that's what people willidentify with.
Speaker 2 (25:47):
You know what kind of cause this yeah, and again, I
mean I, I would say you know, we, we probably are a little more
west coast based and we see alot of, a lot of opportunities
or a lot of people going EastCoast based the Ohio's,
tennessee's, florida's, texas,some of the Carolinas.
Maybe you know.
(26:08):
Again, you pay me later.
No, I think again, my bootsaren't on the ground.
You know, finding investmentsfor clients.
I'm completing their exchanges.
I can tell you what my visualtrend is, just from our clients,
but I just think they're insearch of a property that's
(26:34):
going to appreciate more thanyou know where they are.
Maybe rents are better, maybedifferent types of properties we
work with.
We work with a client who hasdone a number of transactions
with, who is big intomultifamily and now they're
buying a, they're buying gasstations.
(26:56):
Now, again, I don't know allthe ins and outs, but I know
they're very smart investors andI'm sure that they have a very
good rationale for theirmovement towards that.
But so you know, I think youkind of look at, you know what
is my investment strategy.
Where can I best, you know,employ my dollars to get my best
(27:20):
return?
You know what does the marketlook like, and if New Jersey is
the place, then you know, thenmaybe that's the place to take
your dollars to and watch it goup in New Jersey and then ride
that up and then come back toanother property.
And that's the thing.
The 1031 exchange gives you thatability to change, you know,
(27:40):
from one locale to another andbetter your investment
opportunity.
And I think you got to be.
Whether you're investing inreal estate or any kind of
investment, you always got to belooking at my, at your
investment and seeing, you know,am I get the best return?
Am I invested in the rightthings?
Am I making the right decision?
Is it time to, you know, notjust put my head in the sand,
(28:05):
but is it time to go?
Okay, you know this has donewell for me, and can I take
those dollars and go into someother place that will continue
that trend versus I'm got it andI'm holding for 20 minutes or
20, 20 years by golly.
You know so, um, you know yougot to by golly.
You just I think you know thethe.
The good news is you have to toget good advisors around you to
(28:28):
take a look at what you own andum, and have a good plan as to
what your next move is.
It's gee.
I've made a you know, a goodpurchase, and now what's the
plan for this particularproperty, versus not really
being diligent about taking alook at the best path to get
your best return on yourinvestment.
Speaker 1 (28:48):
So you've done your 1031, so you've got 45 days to
identify.
But the identify could be oneof the portfolio players we're
talking about which you couldlook into and take your time
before you actually sellsomething, right, so you could
have that identified already forthe people who like that more
safety, that are a little moreconservative.
And then you've got 180 days toactually close on it, which
(29:11):
obviously in that scenariowouldn't be any problem.
So how long can you jump again?
So let's say, for example,we're looking at South Florida
right now and the prices arecoming down and we're going to
take that investment and we'regoing to sell it and we're going
to put it in for the sake ofargument.
New Jersey Because we might beable to ride it out for another
(29:31):
year before you know New Jerseyare a little bit behind us.
Are they ever going to, youknow, see the decline?
Probably, if history isanything to tell us, by, but
they're probably a year behind.
So if you flipped it into NewJersey and bought something
there, how long have you got tohold it before you can pull it
out again and do a 1031somewhere else?
Can we do this every month?
Speaker 2 (29:52):
Yeah, good question.
So they do.
There's a Form 8824, which youuse to report the 1031 exchange
to the IRS and one of thequestions on that form is how
long the property was held thatwas given up in the exchange.
Now, again, there's no set timeperiod but there is if you have
a short time period six months,three months there's a term
property held primarily forresale.
(30:13):
So if you start in and you'rereporting it, you've held the
property under a year.
I'm not sure it's an automaticfail, but it might throw up the
red flag because, again, you doreport that timeframe.
However you can, you canconstruct as many 1031 exchanges
as you desire.
There's no, there's no limit.
Like I said, we've kind ofworked with a company.
(30:37):
They've probably done 150exchanges with us in the last
five years, so you know.
So I have another client that'sprobably done 70 exchanges down
in Florida.
So you probably want to show ona tax return, rental income
depreciation.
Probably a year or two years isprobably a good time frame.
But if you pin me down, I can'tgive you an exact time frame.
Speaker 1 (30:57):
It's very clear that I understand, but we can't give
you an exact timeframe, becausethere is that I understand, but
we can say a minimum of a year.
Speaker 2 (31:04):
Yeah, I think that's a good rule of thumb because,
like I said, we know the flipside is they have overturned
transactions for the propertythat was held primarily for
resale.
It didn't hold long enough,didn't show rental income, take
depreciation, and so they deemedit really not held for
investment purposes.
Speaker 1 (31:20):
That's scary.
That's the kind of thing thatwould take a small investor down
.
So that's useful to know, whichmoved very nicely into horror
stories.
So we see how it can work for abroad amount of people small
investors, big investors, momand pop.
You know we've got six rentals,mom and pop.
We've got one rental, maybe acouple that got together and
(31:40):
they're renting.
That also very commonly happens, where they either build a
house together or they rent outone of their homes and then move
in together in the other homethat kind of thing where they've
got it as a 1031.
So now we can talk about ooh,what are the horror stories?
Where have you seen it go wrong?
Speaker 2 (31:57):
You just did one about ooh, what are the horror
stories?
Why have you seen it go wrong?
You just did one.
Yeah, I would say I mean theone that happens pretty commonly
.
I mean we market a lot toinvestors.
We get a lot of phone calls.
I'm going to say at least three, four times a month we get the
call of I just closed and I tookthe money and I'm wondering if
(32:20):
I can do the 1031.
And if, as soon as they takethe money, as soon as they close
, then it's a done deal andthere's no ability to save their
1031 exchange.
Flip side is we get calls likefrom some of our friendly title
companies or closers and they'llsay hey, I'm sitting with
so-and-so and they're looking tomake, like, an exchange.
(32:41):
They didn't know how it workedor they didn't know much about
it, but they're sitting heretelling us we want to do a 1031
exchange, can we save them?
And we'll scramble, get ourpaperwork together and we've had
a lot of success with thatwhere they hadn't closed and
taken the money.
But at least in our phone calls, at least three or four times a
month, we'll get the.
(33:01):
I'm sorry to say that we're toolate and there's nothing that I
can do to recreate yourtransaction.
The other is that it's one thattrips people up as a 45 day
identification period.
They're notified, they know,you know, they have information
that tells them when they should.
You know they have informationthat that tells them when they
should, um, you know, beidentifying property and and
(33:22):
they'll go along and and maybethey'll have a property or
properties that fall out ofescrow or they do their due
diligence and it's just not theproperty they thought it was.
They get past their 45 days andthey can't introduce any new
properties into the mix, despitetheir desire to do so.
So those ones are tough, man, Ican remember, and it seemed
(33:44):
like, uh, you know, of courseI'm getting older and some of
the details get fuzzy, but Iknow I had a transaction where
someone again took money or didsomething and they had like a $2
million tax bill that that, um,I had a conversation with them
about because they didn't planappropriately and it was not, uh
, not not nothing that we haddone, it was just they were too
(34:07):
late to the dance, so to speak,and so, um, but so we see, we
see some of those just becausethey they haven't prepared
appropriately, and I would saytoo, from a real estate agent
perspective.
You know, anytime you're workingwith an investor.
When you're working with aninvestor, you just need to give
(34:30):
them the idea that the 1031exchange is a possibility.
They should do their duediligence and make sure that
they can have a conversationwith their tax advisors so they
understand what their potentialliability would be.
But you just don't want to bein a situation where the client
ends up calling us.
(34:52):
We've had this where they'llcall and they've closed, taken
the money and they will say andwhether it's the fault of the
agent or not, but they'll tellus.
You know, we were never reallyinformed.
Now I'm not sure that an agentisn't a tax advisor, but if
they're knowledgeable and it'sjust good client help to notify
(35:13):
them or just guide them in theright direction to consider the
1031 exchange, exchange plusfrom a real estate agent.
Speaker 1 (35:20):
Right, you pick up the phone.
I mean, these guys pick up thephone, guys like I've called him
so many times and put a bunchof clients we've all been happy.
Just pick up the phone, givethem to lonnie and they can have
a, have a conversation aboutwhether it's right for them and
what the strategy looks like.
Lonnie, how long does it takeyou once somebody calls and says
(35:40):
, okay, what's going on?
Obviously you have the consult.
How long does it take you toget the paperwork in place?
I know you said you scrambledbefore and that probably takes
you a couple of days, but what'sa comfortable period of time?
Speaker 2 (35:51):
Yeah, I mean I tell investors when I talk to them
when you have an offer acceptedon a property.
I mean we can haveconversations conceptually about
how the 1031 works, thetimeframes et cetera, but once
you have an offer accepted,that's an indication to them
that they should get us involvedin the transaction.
We'll create the file.
So usually a couple of weeksprior to closing is usually
(36:16):
timely enough.
It gets everyone involved inthe transaction.
We get our instructions out toeveryone, but a couple of weeks
or once you have an offer, ifyou know you're going to move
forward on the exchange, there'sno downside in getting us
involved.
So our fee doesn't get paidunless you close.
And so if somehow a buyerdidn't come together, then we
wait with you and once you havea buyer that circles back, we'll
(36:39):
work with your transaction whenit comes back together.
So, but usually we turndocuments around 24 hours.
You know if we get informationtoday, they'll.
You know paperwork will go outtomorrow.
We understand the timeliness oftransactions.
People want to have a smoothtransaction.
When they close they want tomake sure that everything's in
place, it doesn't hold them up,and so we've done this 20,000
(37:06):
times and enough times to knowthat you know what the
expectations are, and we want tobe a good middleman and just
not notice.
We want everything to gosmoothly and that's our goal and
people come back and work withus again because we do that.
Speaker 1 (37:16):
Of course, here I am, so you know, talking about mom
and pop again or the smallertime investor that maybe doesn't
know you already.
I would, I mean, tell me if I'mwrong here.
I would say those people shouldget their clients with you from
the get-go so that you can havea conversation.
So I know you need two weeks toget the paperwork through, but
just to discuss strategy.
(37:37):
Are you willing to do that withthem?
Speaker 2 (37:39):
of course.
So we take questions all daylong, every day, um, with people
who have questions.
I call them, we walk them offthe ledge.
What is this 1031?
I know I need it.
You know what do I have to do?
How does it work?
Have I missed the time frames?
Um, so we have conversationswith investors all day long and
(38:00):
real estate agents.
I tell them you know, we havecollection of different topics
on the 1031, everything that youcould kind of imagine that's
applicable to a transaction anddifferent scenarios, and so we
can make them, the agent, lookgreat.
They can, you know, getinformation from us and feed it
(38:20):
to their client or, if they wantto, you know, do a Zoom call or
tag team and have aconversation with their client,
or we can call their clientdirectly.
So, however, it works, becausewe know successful real estate
agents, successful transactions,lead to transactions for us,
and so we're very motivated tohelp them complete transactions
(38:42):
that make sense for theirinvestor clients, and we're very
friendly.
That way it's prettyself-serving.
Speaker 1 (38:48):
I think we need to build you a mini course on the
app, actually about 1031Exchange that people can go
through.
We have free courses on therethat they can step through with
a number of scenarios, becauseobviously it's lots of different
scenarios involved.
Thank you so much, Lonnie.
You're awesome.
Is there anything?
Speaker 2 (39:04):
we missed Always.
No, it's always nice to talkwith you and thanks for inviting
us to come and participate onyour show.
And yeah, our motivation is tohelp investors save in capital
gains taxes, and we knoweveryone likes to do that.
It's not a tough sell and it'sa great maneuver.
If you're an investor in realestate, then the 1031 just has
(39:26):
to be part of your investmentconcepts and if you have any
questions about it, we're theguys that pick up the phone and
we laugh because we'll pick upthe phone over the weekend and
people will be just amazed thatwe're somehow grabbing the phone
the weekend and people will bejust, you know, amazed that
we're somehow grab the phone.
But we know usually if someone'scalling on the weekend, they
want to hear from us becausethey probably have a question
(39:47):
that needs to be answered beforeMonday, and so I've had a
number of transactions wheresomeone will call it's Saturday,
we're closing Monday.
Can we get this done?
I'm like, if you give meinformation, I'll have
everything ready for your closerMonday morning.
It'll be a scramble, but we'llget it done.
So we do.
You know we take calls.
(40:08):
I've talked to peopleidentifying property and
there'll be a midnight deadlineto identify and they'll be
calling me at 11 o'clock atnight, going.
You know how does this work.
Or can I put this one in?
Or what about this one?
You know?
So we like to be, you know,consider ourselves very
available for a client.
We might not be perfect on theweekends, but we pretty much no
(40:29):
one goes 24 hours withouthearing from us.
Speaker 1 (40:32):
So this is my good friend, lonnie Nielsen, from
1031 Pros, so just go ahead,reach out, and we're going to
have buttons below this as well,and we'll see you all soon.
Thank you so much, lonnie.
Speaker 2 (40:43):
Thank you, ruy, have a nice day and I really
appreciate your time.
Lonnie, my old friend .
This is Lonnie Nielsen.
We've done some 1031s together.
He is the king of 1031 Exchange1031 Pros.
That's your company, lonnie.
Speaker 2 (00:14):
That's correct.
Always good to converse withyou and talk about the
opportunities of the 1031Exchange.
Speaker 1 (00:22):
Oh my gosh, this is fun.
So today we're talking, we'regoing to kick off through
benefits, the rules of 1031exchange.
We'll do some horror stories,because they're always fun, what
doesn't work and who is in thisfor, as well as success stories
and then anything else we wantto talk about.
So go for it.
What are the benefits of it?
(00:43):
Larry, and he would say that,wouldn't he?
Speaker 2 (00:52):
Yeah, I think the 1031 exchange is a logical piece
to any investors, especially ifwe're starting out.
With young investors that arecalling and aren't quite
familiar with the process.
I always just tell them whetheryou're going to use it in this
transaction or not.
It's something that you need toadd to your portfolio because
(01:13):
the 1031 exchange allows you todefer the taxes that you would
pay in selling a property versususing the 1031 to reinvest in
other properties.
So for any investor, young orold, the 1031 exchange kind of
makes sense.
If you're going to reinvest inreal estate after a sale, then
the 1031 is just a no brainer.
You just want to use that.
Why give up dollars to thegovernment when you have a legal
(01:35):
maneuver to not pay taxes, tokeep those dollars in your
investment portfolio, tocontinue your investment process
and be ahead of the game, andso it's very beneficial.
I think our role is inconversing with investors is
just to kind of give them thelay of the land.
We're not their tax advisors,but we can certainly are
(01:59):
competent in deciding andhelping them decipher what their
capital gain might look like ifthey sold and knowing that
they're going to be able todefer the taxes if they use the
1031.
So it's just, it's a logicalpiece to a transaction.
When people get information, Ialways tell them if they're
informed they can make aninformed decision as to what
(02:21):
works best for them.
And we find many times the 1031exchange is you know what they
would choose to do, and it makessense.
Speaker 1 (02:30):
Let's define so for the agents looking who are like,
wait, what did he just say?
What do we mean by?
Can we define investmentproperty?
And because not just investors,is it, it's an investment
property, can be all kinds ofthings and we're talking about a
light kind of exchange.
So can we define what we meanby a investor?
Could that be an everydayperson that happens to
(02:53):
investment and define both theentity or the, the, the person,
and what we mean by aninvestment property?
Speaker 2 (03:01):
sure so.
So two questions.
So anyone can take advantage ofthe 1031 exchange.
I think you know kind of.
You know the small investorwho's selling a single family
rental for a couple hundredthousand can use the 1031 to
defer the taxes up to.
You know, it could be an LLC,could be partnership, could be
(03:21):
tenants.
In common, we work withDelaware Statutory Trust where
people own a portion of a bigbuilding.
That might be a $30 milliontransaction with 50 investors.
So it runs the gamut.
But I'm going to say you know,our bread and butter is probably
transactions that are 500,000,a million.
But anyone who is selling aninvestment property, if they
(03:45):
have enough capital gain, thenit makes sense for them to defer
the taxes.
So you could have a $50,000transaction if there's such a
thing out there.
But as long as there's acapital gain to defer, that
makes sense.
Usually, compared to our fee,which is about a thousand
dollars.
They look and see what they'regoing to pay taxes and that's
(04:05):
kind of the magic.
Do I want to pay the taxes orcan I pay a fee to a qualified
intermediary like our companyand move into a replacement
property?
Speaker 1 (04:15):
I know, when I've placed you with clients before,
they've been very happy, andthey were always kind of
somewhat pleased by the fees.
Of course, they want to do itfor nothing.
However, your fees were goodand you gave them such great
advice.
So can we dig a little deeperinto, before we go on to the
(04:36):
rules around it, what?
An investment property is, soit's not a primary home, is it?
Speaker 2 (04:41):
Right, so good question.
Yeah, we didn't get to thesecond part of your question.
So the 1031 exchange is set upand it applies to real estate
that's held for investmentpurposes.
So a primary residence is notgoing to qualify.
There's particular tax rulesthat are associated with the
exclusion of gain on yourprimary residence.
(05:03):
But the 1031 would apply tocould be a single family rental,
could be office buildings,could be land, could be
multifamily Really anything thatyou don't live in is pretty
much would qualify.
Now there's some things youkind of have to look out for.
If you're a flipper and you'renot holding the property and
(05:26):
renting it out and you'returning property over quickly, a
flipper doesn't qualify under1031 because that's a property
that's held for resale and notfor investment purposes.
So sometimes we get those andthose don't qualify.
If I'm a builder and I'mbuilding spec homes, or if I
have building a home that'sgoing to be sold as soon as I
(05:52):
complete it, those don't qualify.
And also developers don'tqualify.
The only hybrid is a second home.
Sometimes you'll find peoplewho have properties on the beach
or wherever it might be.
They might have some personaluse of the property and they
don't rent it out.
So the IRS likes to see thatyou've held it at least for two
weeks out of the year as arental property and that your
(06:16):
use is limited to two weeks outof the year.
Unless you're there maintainingthe property, those days don't
count.
So it's kind of one of thosethat you know probably worth a
conversation.
But if you have a second home,vacation home, and it's not
rented out, then you might beoutside what they call the safe
harbor guidelines of being ableto use that.
(06:37):
But any of those properties canbe mixed and matched so it
doesn't have to be a singlefamily rental.
For a single family rental.
Land can be traded for anoffice office for multifamily
and so at like kind is reallybroad.
It just has to be an investmentproperty traded for other
investment property.
Speaker 1 (06:56):
What if it's a both?
Speaker 2 (06:59):
Yes, so sometimes we have what we call a combined use
property, where I have a houseand 50 acres, for example, and
so we have to make then anallocation of you know what is
the value of the house it's myprimary residence and then what
is the value of the acreage, andthen we could take the acreage
and make the like kind ofexchange.
The dollars from the house cango to the client because they
(07:23):
have their exclusion under theprimary residence rule.
So it's a combined use propertywhere maybe some of the dollars
are allocated to the client andthen the balance of the dollars
that represent the acreagewould be moved forward into
another investment property.
So we call that a combined useproperty, part 1031 and part
primary residence.
Speaker 1 (07:41):
Wow, so by property do we mean, just to define it a
little bit more do we mean landand a home and a commercial
building, a regular old house, acondo, or can we throw
investment playthings in there,like boats and cars?
Speaker 2 (08:00):
Sure, yeah, so boats and cars are personal property,
so they don't qualify under the1031.
Going back historically sinceI've done this for a few years,
when it used to be I think itwas pre-2017, they used to allow
some personal items to beexchanged.
We used to do airplanes, we did, cows, we did I'm trying to
(08:23):
think of what else Cows, cows.
It was a few years back, butyou used to have to be cows for
cows, not cows for steers, butanyway, yeah, so the personal
property rules and they used tobe able to trade personal
property assets that had tomatch up with a certain asset
class.
They disallowed or they didaway with that.
(08:47):
I think it was 2017 or so.
So only real estate that's heldfor investment qualifies boats,
planes, cows.
Other personal property assetsdon't qualify under Section 1031
as of the last seven, eightyears.
Speaker 1 (09:02):
Got it and we were going to move on to rules.
You know me already, so let'stalk about rule breaking.
I mean, what about workaroundsto rules?
So, for example, if you live ina primary home and then you
decide to rent that home out andbuy another primary home for
two years, it could qualifycorrect.
Speaker 2 (09:23):
Yeah.
So, for example, you could moveout of the property for a year,
rent it out there's no set timeperiod that you'd have to treat
as a rental and then either usethe 1031 exchange because you
held it for a rental for a yearor, if you look back and you
lived there two out of fiveyears, you can take the primary
residence exclusion, even thoughthe last year you held for
(09:44):
investment.
So you have a choice in thatscenario to pick the best method
that gives you the best bangfor the buck.
Usually, if it makes sense toconsider it your primary
residence, I would say take themoney into your primary
residence because there's not animpetus to go reinvest the 1031
(10:05):
, we know you have to reinvestin a short time period, which is
fine, many people do so.
But if you had a choice and thenumbers made sense, you'd have
to evaluate that kind of withyour tax preparer.
But you could use either sideof that equation to your benefit
.
But usually taking the moneyfrom a primary residence sale
(10:25):
allows you then to go back intoanother primary goes back into
another investment property.
But you're not under thetimeframes that you would be if
you chose to use section 1031.
Now one other piece is if youlooked at it and you converted
it to your primary residence, ifthe gain is more than 500,000,
which is your exclusion then the1031 makes sense most time, all
(10:50):
the time, because the 1031doesn't have a limit on the
amount of gain that you coulddefer.
So sometimes people will maybelook at that, move in, move out,
convert how the property isheld from a primary to
investment property, and thenthey can use the exchange or
again use the primary residencerule.
(11:10):
So it just depends.
Speaker 1 (11:12):
If you had a $5 million home or a $3 million
home or a $2 million home andyou were married and you were
taking your $500 deduction butyou were making all you know.
Maybe you owned it free andclear and you're making, you
know, $1 million, $2 million, $3million, it might make more
sense to do because there's nolimit on the amount of gain that
(11:32):
you could defer.
Speaker 2 (11:33):
If you're going that way, now the key is, you know,
if I'm selling my $3 millionproperty and number one, you
know, am I willing to move outof it and rent it?
You know, because that might bea tough thing to swallow, and
then, if I do, I have to go outand buy investment property.
So if I'm selling my $3 millionproperty and my idea was to go
(11:55):
buy another primary, that won'tconform with the 1031 rules.
But the answer to your questionis so if you had a million
dollars of gain, the 1031 isgreat because there's no limit
on the amount of gain that youcould defer, and so the 1031
would be a nice maneuver to notpay the taxes on a property that
has more gains than $500,000.
If you had the patience, timeand ability to do that.
Speaker 1 (12:20):
How much patience do you need?
So if you moved out and livedin your other million-dollar
property or your second home orwhatever else you've got, how
long do you have to move out for?
And would just listing it forrent suffice or not?
Do you have to take an income?
Speaker 2 (12:35):
just listing it for rent suffice or not?
Do you have to take an income?
I mean, you know, if you gotdown to it and someone
questioned your motives, youknow, could you point to?
You know my intent was to rentthe property out here's.
You know my ads for renting theproperty just didn't come
together.
I think you know it's easy ifyou show rental income and take
depreciation on a tax return.
I think that establishes it ashealth for investment purposes.
(12:59):
I think there's no time periodthat you have to move out, but
typically a rule of thumb isprobably a year, so you can show
it on a tax return or maybe twotax returns.
I think that establishes it ashealth for investment.
Speaker 1 (13:14):
None of us have a crystal ball right.
We're not really sure it's agray area, so when you sorry go
ahead when you make that twomillion dollars from your house
because you've moved out intoyour other, one of your other
million dollar properties orsecond home or whatever is going
on.
When you make that million, twomillion, three million,
whatever you're making you I'mguessing you can go and buy a
(13:37):
quadplex or an eight unitbuilding at that point with the
money, you don't have to buy asingle $2 million house at that
point.
Right, you can buy whatever youwant, as long as it's
investment real estate, or arethere guidelines on that?
Can you only buy a?
Speaker 2 (13:51):
quadplex, yeah.
So the first one is yes, youhave to reinvest in real estate
that's held for investment.
But then the rules are suchthat the 1031 exchange envisions
a scenario where you'rereinvesting in property that's
equal or greater value.
You're always continuing on orup in your investments.
As long as you continue to dothat, then you'll defer the
(14:13):
taxes.
So you sold for $3 million.
You could deduct your closingcosts, but you'd need to buy
other property that's at leastequal or greater in value,
spending all your equity andreplacing debt with new debt.
So that could be made up inmultiple properties or it could
be one property.
But if you found a singlefamily rental that was a million
(14:33):
and you found a multi-familyproperty that was 2 million
combined, you would be able touse those and conform with the
rules of the 1031 exchange.
Speaker 1 (14:44):
Nice.
I would imagine quite a fewpeople do that, because if
you've got a number ofproperties that are high value,
or perhaps you've got a kidthat's gone to college in a
different state you could nowbuy a six unit building.
You know your kid could be oneof them, I'm guessing, because
he's paying rent.
Would that conform?
Speaker 2 (15:02):
yeah, that would.
That certainly would be ascenario that could work and we
see, you know, we'll see a lotof people who buy multiple
properties as replacements forthe property that they're
selling.
Speaker 1 (15:13):
So we're going to talk about some success stories
and some horror stories as well,because they're always fun.
I think for the success stories, could you give us a few
scenarios where people have soldthis and moved it into this and
give me a few differentexamples so people can
understand how you could usethis?
We just did one with kids goingto college, and a lot of people
(15:36):
do that.
They invest in a property thattheir kid's living in and then
eventually sell it.
You know, especially if they'redoing a master's or a PhD or
something and they're going tobe there longer and then that
property gets.
It might be one house.
That that's the usual scenario.
Right, it's one house and alltheir friends move in and pay
rent allegedly and, um, you know, that's often the way it plays
(15:57):
out.
But if you were doing it on alarger scale, like we talked
about, it could be numerousproperties.
You could take your million,two million, and turn it into
numerous rental propertiesanywhere in the country, right?
So you could get a midwest andbuy 250 000 properties and have
eight of them all all of asudden and have a portfolio or
Airbnbs or whatever you want todo Can you give us some more
(16:19):
scenarios, ronnie, because Iknow you really are the king of
this.
Give us some more scenarios thathave worked for people that are
different, like we wouldn'treally think of.
Speaker 2 (16:28):
I like being king for a day.
It's interesting.
So I think a lot of timespeople take a look at you know
where they've invested and youknow we've seen, honestly, we've
seen a lot of transactionswhere people are coming out of,
for example, california andgoing to other parts where they
(16:48):
can use appreciated dollars tomaybe buy multiple properties
appreciated dollars to maybe buymultiple properties.
Maybe just things have changedin that neighborhood and so they
decide, gee, we don't want tobe here anymore.
Or maybe they've held theproperty for 20 years and now we
want to go buy something that'snew.
I just was talking to aninvestor who is looking to sell
(17:11):
in Hawaii.
Their property had appreciatedin value and they said, taking a
look at the rents that theywere getting on the property
with the value of the property,they weren't getting a
commensurate rent with theamount of value that the
property's increased.
So they said I have to doexchange and get into other
properties so I can use mydollars to increase my rental
(17:34):
income, which is you, whichmakes sense, but a lot of people
don't think that way.
They had an appreciated assetbut it just wasn't getting the
return on investment that theyshould have commanded and so
they were going to exchange forother properties.
So we see a lot of people goingto different locations, newer
(17:55):
properties.
Maybe they want to change thetype of property, maybe land
which is appreciated in value.
They want to go to otherproperties that will provide
income.
We've seen people go fromproperties where they have to
manage them and they determine.
(18:17):
You know this might be more forsome older clientele but they
don't want to pay the taxes, butthey don't want to go into
another property.
They have to be involved inmanaging the property, what we
call passive investmentopportunities, dsts or triple
net leases, where they'll buy apiece of a big building or a
(18:37):
portfolio of buildings and theydon't have to be involved
day-to-day.
They get a check in the mail.
So we've seen that for some ofour clienteles that really are
clients who just don't want tomanage day-to-day.
We've also seen some too, whogo out of again management
intensive properties, go intomineral rights.
(18:58):
There's opportunities therewhere they can buy into mineral
rights which are considered tobe real property and are pretty
passive in nature, and so theyget a check in the mail.
Speaker 1 (19:10):
And you're talking about these big conglomerates
now that have put thesemanagement companies together to
portfolio of properties whereyou pay in and get a guaranteed
minimum 8% Right.
Talk a little bit more aboutthat because I'm not sure a lot
of realtors or people watchingthis know about that.
So talk a bit more about thosecompanies.
(19:30):
You're talking about,particularly boomers.
That's our biggest you know ofpeople, obviously, and you we
deal with this every day as areal estate agent.
So 60 and up, um, and you knowyou may have had a couple of
rental properties you may have.
I mean, this is one actuallywhere what we talked about
before would work.
(19:51):
You could move out of yourmillion, two million dollar home
and you might have two or threelittle rental properties.
You could move into one of yourrental properties and just suck
it up for a couple of years ora year, you said, and then sell
your million-dollar property asyour investment and then put all
of that money that could be atwo-year play or a one-year play
to put all of that money intoone of these big conglomerates
(20:13):
which is completely passive,right.
Speaker 2 (20:15):
Yeah, yeah, I mean I don't.
You know we have advisors thatwe work with that you know are
really familiar with the product.
We're a little moretransactionally oriented, but in
general you're able to takethose dollars, defer the taxes
because kind of the last thingyou want to do is take the tax
hit now Because if you make theexchange, defer the taxes in
(20:38):
whatever investment property yougo into, if, as I, pass away
and leave properties for myheirs, they get a stepped up
basis and so all the gain I'vedeferred goes away.
They could sell the propertyafter I've passed and they
wouldn't have any capital gain.
So it's kind of a shame if yousell, pay the taxes and then you
(21:03):
know, have less dollars to workwith to invest that you could
have left for your heirs.
But you know there's differentportfolios, different properties
, as far as the DSTs and triplenet leases go, and again you
know you're buying a piece of abig pie.
You know, depending on how muchyou're investing, you might
have a 1.52% interest in a $30million property.
They, you know, control theship, they manage the property.
(21:26):
And then you know we've seenwhen people will turn those
properties over and you knowwe're working with 20 different
investors who are going intoother properties maybe similar
DST or might be some other typeof property and so I'm DST.
Speaker 1 (21:41):
A lot of people listening won't know what DST is
.
Speaker 2 (21:43):
It's a Delaware statutory trust or it's a tenant
and common ownership interestin property.
So the acronym is DST Delawarestatutory trust but it really
relates to buying propertiesthat are professionally managed
and there's just all differenttypes of opportunities to get
into.
Like I said, you know more ofthe younger investor wants to
(22:05):
kind of be more hands on.
They'll probably get a littlebit better return if they're
personally involved.
But for some who you know justdon't want to pay the taxes and
want something that's a littlemore, you know that day-to-day
being involved, they don't haveto go check to see if the
electricity is, you know, stillon, or they have to replace the
toilet or whatever it might be.
(22:25):
So it certainly does work forsome of the clients and we
certainly have handledtransactions where that's made
sense for the client and it'sbeen a good opportunity for them
.
Speaker 1 (22:41):
I know from personal experiences that so many mom and
pops out there that just gettired and they might have.
It's just like short-termrentals, you know the regular
short-term rental portfolio issix and at some point you can
just get really tired of it,whether it's short-term rentals,
mid-term rentals, long-termrentals.
You thought it was a great planway back when, and now you've
(23:03):
got six of them or 12 of them,and I don't know.
You're in your 60s and like,well, I could sell all these at
the top of this market.
Another thing here, lauriethatori, that lani on that point
is that claremont juglar, 1867to 11 year economic cycle, most
places in the country now almostevery state, we're seeing a
decline and we're we crested twoyears ago in most places.
(23:26):
Yes, new jersey, I know you'restill fine, mainly in the
northeast, but for the rest ofus, you know, Nick Gurley is the
guy I really trust on thefigures ReVenture and he is
saying I mean everything I seeright now is forecast between
four and a half to 12s and 14sin South Florida.
(23:48):
Decline this year, like it's.
You know, we're on the declineand we're expecting that for two
or three years.
What does that mean for a 1031exchange other than sell it now
and put your money in a 1031?
How long have you got to waitfor those prices to come down a
little bit to reinvest it or putit in a DST or one of the
portfolio players that we'vebeen talking about?
(24:10):
How is the switch in the marketgoing to change things,
particularly those boomers whohave six properties or 12
properties like sure now already?
Speaker 2 (24:19):
I mean they do have a 45 day window after closing to
identify a property.
So you kind of have to have anidea of where you're going with
your money and then a 180 daywindow to complete your exchange
.
I have an uncle who kind of gotme into business and I would
consider him one of my mentorsand he was always saying when he
(24:40):
made his like-kind exchanges heknew where he was going, he
knew what potentially he wasgoing to make on that property.
So he always had a plan, so healways was looking to find the
replacement property because hefigured he could always come up
with the ability to sell.
But yeah, I mean, I think whatthat means is you need to look
at different markets, you needto look at different assets and
(25:03):
see where the best opportunityis going to be.
Have you kind of been in amarket that's gone up and has
kind of peaked and am I lookingat some other place where there
might be an opportunity?
I mean, because any propertyinside the United States
qualifies and so you haveopportunities to move, you know,
(25:24):
from state to state.
We get that question Can I, youknow, can I take my dollars
outside this state and goreinvest somewhere else and I
would say you know, probably 60,70 percent of our deals are are
going from one state to theother.
Speaker 1 (25:37):
So yeah, and I love it there, one that you've done.
And why?
Why is that person going fromone state to another?
What kind of reason?
Because that's what people willidentify with.
Speaker 2 (25:47):
You know what kind of cause this yeah, and again, I
mean I, I would say you know, we, we probably are a little more
west coast based and we see alot of, a lot of opportunities
or a lot of people going EastCoast based the Ohio's,
tennessee's, florida's, texas,some of the Carolinas.
Maybe you know.
(26:08):
Again, you pay me later.
No, I think again, my bootsaren't on the ground.
You know, finding investmentsfor clients.
I'm completing their exchanges.
I can tell you what my visualtrend is, just from our clients,
but I just think they're insearch of a property that's
(26:34):
going to appreciate more thanyou know where they are.
Maybe rents are better, maybedifferent types of properties we
work with.
We work with a client who hasdone a number of transactions
with, who is big intomultifamily and now they're
buying a, they're buying gasstations.
(26:56):
Now, again, I don't know allthe ins and outs, but I know
they're very smart investors andI'm sure that they have a very
good rationale for theirmovement towards that.
But so you know, I think youkind of look at, you know what
is my investment strategy.
Where can I best, you know,employ my dollars to get my best
(27:20):
return?
You know what does the marketlook like, and if New Jersey is
the place, then you know, thenmaybe that's the place to take
your dollars to and watch it goup in New Jersey and then ride
that up and then come back toanother property.
And that's the thing.
The 1031 exchange gives you thatability to change, you know,
(27:40):
from one locale to another andbetter your investment
opportunity.
And I think you got to be.
Whether you're investing inreal estate or any kind of
investment, you always got to belooking at my, at your
investment and seeing, you know,am I get the best return?
Am I invested in the rightthings?
Am I making the right decision?
Is it time to, you know, notjust put my head in the sand,
(28:05):
but is it time to go?
Okay, you know this has donewell for me, and can I take
those dollars and go into someother place that will continue
that trend versus I'm got it andI'm holding for 20 minutes or
20, 20 years by golly.
You know so, um, you know yougot to by golly.
You just I think you know thethe.
The good news is you have to toget good advisors around you to
(28:28):
take a look at what you own andum, and have a good plan as to
what your next move is.
It's gee.
I've made a you know, a goodpurchase, and now what's the
plan for this particularproperty, versus not really
being diligent about taking alook at the best path to get
your best return on yourinvestment.
Speaker 1 (28:48):
So you've done your 1031, so you've got 45 days to
identify.
But the identify could be oneof the portfolio players we're
talking about which you couldlook into and take your time
before you actually sellsomething, right, so you could
have that identified already forthe people who like that more
safety, that are a little moreconservative.
And then you've got 180 days toactually close on it, which
(29:11):
obviously in that scenariowouldn't be any problem.
So how long can you jump again?
So let's say, for example,we're looking at South Florida
right now and the prices arecoming down and we're going to
take that investment and we'regoing to sell it and we're going
to put it in for the sake ofargument.
New Jersey Because we might beable to ride it out for another
(29:31):
year before you know New Jerseyare a little bit behind us.
Are they ever going to, youknow, see the decline?
Probably, if history isanything to tell us, by, but
they're probably a year behind.
So if you flipped it into NewJersey and bought something
there, how long have you got tohold it before you can pull it
out again and do a 1031somewhere else?
Can we do this every month?
Speaker 2 (29:52):
Yeah, good question.
So they do.
There's a Form 8824, which youuse to report the 1031 exchange
to the IRS and one of thequestions on that form is how
long the property was held thatwas given up in the exchange.
Now, again, there's no set timeperiod but there is if you have
a short time period six months,three months there's a term
property held primarily forresale.
(30:13):
So if you start in and you'rereporting it, you've held the
property under a year.
I'm not sure it's an automaticfail, but it might throw up the
red flag because, again, you doreport that timeframe.
However you can, you canconstruct as many 1031 exchanges
as you desire.
There's no, there's no limit.
Like I said, we've kind ofworked with a company.
(30:37):
They've probably done 150exchanges with us in the last
five years, so you know.
So I have another client that'sprobably done 70 exchanges down
in Florida.
So you probably want to show ona tax return, rental income
depreciation.
Probably a year or two years isprobably a good time frame.
But if you pin me down, I can'tgive you an exact time frame.
Speaker 1 (30:57):
It's very clear that I understand, but we can't give
you an exact timeframe, becausethere is that I understand, but
we can say a minimum of a year.
Speaker 2 (31:04):
Yeah, I think that's a good rule of thumb because,
like I said, we know the flipside is they have overturned
transactions for the propertythat was held primarily for
resale.
It didn't hold long enough,didn't show rental income, take
depreciation, and so they deemedit really not held for
investment purposes.
Speaker 1 (31:20):
That's scary.
That's the kind of thing thatwould take a small investor down
.
So that's useful to know, whichmoved very nicely into horror
stories.
So we see how it can work for abroad amount of people small
investors, big investors, momand pop.
You know we've got six rentals,mom and pop.
We've got one rental, maybe acouple that got together and
(31:40):
they're renting.
That also very commonly happens, where they either build a
house together or they rent outone of their homes and then move
in together in the other homethat kind of thing where they've
got it as a 1031.
So now we can talk about ooh,what are the horror stories?
Where have you seen it go wrong?
Speaker 2 (31:57):
You just did one about ooh, what are the horror
stories?
Why have you seen it go wrong?
You just did one.
Yeah, I would say I mean theone that happens pretty commonly
.
I mean we market a lot toinvestors.
We get a lot of phone calls.
I'm going to say at least three, four times a month we get the
call of I just closed and I tookthe money and I'm wondering if
(32:20):
I can do the 1031.
And if, as soon as they takethe money, as soon as they close
, then it's a done deal andthere's no ability to save their
1031 exchange.
Flip side is we get calls likefrom some of our friendly title
companies or closers and they'llsay hey, I'm sitting with
so-and-so and they're looking tomake, like, an exchange.
(32:41):
They didn't know how it workedor they didn't know much about
it, but they're sitting heretelling us we want to do a 1031
exchange, can we save them?
And we'll scramble, get ourpaperwork together and we've had
a lot of success with thatwhere they hadn't closed and
taken the money.
But at least in our phone calls, at least three or four times a
month, we'll get the.
(33:01):
I'm sorry to say that we're toolate and there's nothing that I
can do to recreate yourtransaction.
The other is that it's one thattrips people up as a 45 day
identification period.
They're notified, they know,you know, they have information
that tells them when they should.
You know they have informationthat that tells them when they
should, um, you know, beidentifying property and and
(33:22):
they'll go along and and maybethey'll have a property or
properties that fall out ofescrow or they do their due
diligence and it's just not theproperty they thought it was.
They get past their 45 days andthey can't introduce any new
properties into the mix, despitetheir desire to do so.
So those ones are tough, man, Ican remember, and it seemed
(33:44):
like, uh, you know, of courseI'm getting older and some of
the details get fuzzy, but Iknow I had a transaction where
someone again took money or didsomething and they had like a $2
million tax bill that that, um,I had a conversation with them
about because they didn't planappropriately and it was not, uh
, not not nothing that we haddone, it was just they were too
(34:07):
late to the dance, so to speak,and so, um, but so we see, we
see some of those just becausethey they haven't prepared
appropriately, and I would saytoo, from a real estate agent
perspective.
You know, anytime you're workingwith an investor.
When you're working with aninvestor, you just need to give
(34:30):
them the idea that the 1031exchange is a possibility.
They should do their duediligence and make sure that
they can have a conversationwith their tax advisors so they
understand what their potentialliability would be.
But you just don't want to bein a situation where the client
ends up calling us.
(34:52):
We've had this where they'llcall and they've closed, taken
the money and they will say andwhether it's the fault of the
agent or not, but they'll tellus.
You know, we were never reallyinformed.
Now I'm not sure that an agentisn't a tax advisor, but if
they're knowledgeable and it'sjust good client help to notify
(35:13):
them or just guide them in theright direction to consider the
1031 exchange, exchange plusfrom a real estate agent.
Speaker 1 (35:20):
Right, you pick up the phone.
I mean, these guys pick up thephone, guys like I've called him
so many times and put a bunchof clients we've all been happy.
Just pick up the phone, givethem to lonnie and they can have
a, have a conversation aboutwhether it's right for them and
what the strategy looks like.
Lonnie, how long does it takeyou once somebody calls and says
(35:40):
, okay, what's going on?
Obviously you have the consult.
How long does it take you toget the paperwork in place?
I know you said you scrambledbefore and that probably takes
you a couple of days, but what'sa comfortable period of time?
Speaker 2 (35:51):
Yeah, I mean I tell investors when I talk to them
when you have an offer acceptedon a property.
I mean we can haveconversations conceptually about
how the 1031 works, thetimeframes et cetera, but once
you have an offer accepted,that's an indication to them
that they should get us involvedin the transaction.
We'll create the file.
So usually a couple of weeksprior to closing is usually
(36:16):
timely enough.
It gets everyone involved inthe transaction.
We get our instructions out toeveryone, but a couple of weeks
or once you have an offer, ifyou know you're going to move
forward on the exchange, there'sno downside in getting us
involved.
So our fee doesn't get paidunless you close.
And so if somehow a buyerdidn't come together, then we
wait with you and once you havea buyer that circles back, we'll
(36:39):
work with your transaction whenit comes back together.
So, but usually we turndocuments around 24 hours.
You know if we get informationtoday, they'll.
You know paperwork will go outtomorrow.
We understand the timeliness oftransactions.
People want to have a smoothtransaction.
When they close they want tomake sure that everything's in
place, it doesn't hold them up,and so we've done this 20,000
(37:06):
times and enough times to knowthat you know what the
expectations are, and we want tobe a good middleman and just
not notice.
We want everything to gosmoothly and that's our goal and
people come back and work withus again because we do that.
Speaker 1 (37:16):
Of course, here I am, so you know, talking about mom
and pop again or the smallertime investor that maybe doesn't
know you already.
I would, I mean, tell me if I'mwrong here.
I would say those people shouldget their clients with you from
the get-go so that you can havea conversation.
So I know you need two weeks toget the paperwork through, but
just to discuss strategy.
(37:37):
Are you willing to do that withthem?
Speaker 2 (37:39):
of course.
So we take questions all daylong, every day, um, with people
who have questions.
I call them, we walk them offthe ledge.
What is this 1031?
I know I need it.
You know what do I have to do?
How does it work?
Have I missed the time frames?
Um, so we have conversationswith investors all day long and
(38:00):
real estate agents.
I tell them you know, we havecollection of different topics
on the 1031, everything that youcould kind of imagine that's
applicable to a transaction anddifferent scenarios, and so we
can make them, the agent, lookgreat.
They can, you know, getinformation from us and feed it
(38:20):
to their client or, if they wantto, you know, do a Zoom call or
tag team and have aconversation with their client,
or we can call their clientdirectly.
So, however, it works, becausewe know successful real estate
agents, successful transactions,lead to transactions for us,
and so we're very motivated tohelp them complete transactions
(38:42):
that make sense for theirinvestor clients, and we're very
friendly.
That way it's prettyself-serving.
Speaker 1 (38:48):
I think we need to build you a mini course on the
app, actually about 1031Exchange that people can go
through.
We have free courses on therethat they can step through with
a number of scenarios, becauseobviously it's lots of different
scenarios involved.
Thank you so much, Lonnie.
You're awesome.
Is there anything?
Speaker 2 (39:04):
we missed Always.
No, it's always nice to talkwith you and thanks for inviting
us to come and participate onyour show.
And yeah, our motivation is tohelp investors save in capital
gains taxes, and we knoweveryone likes to do that.
It's not a tough sell and it'sa great maneuver.
If you're an investor in realestate, then the 1031 just has
(39:26):
to be part of your investmentconcepts and if you have any
questions about it, we're theguys that pick up the phone and
we laugh because we'll pick upthe phone over the weekend and
people will be just amazed thatwe're somehow grabbing the phone
the weekend and people will bejust, you know, amazed that
we're somehow grab the phone.
But we know usually if someone'scalling on the weekend, they
want to hear from us becausethey probably have a question
(39:47):
that needs to be answered beforeMonday, and so I've had a
number of transactions wheresomeone will call it's Saturday,
we're closing Monday.
Can we get this done?
I'm like, if you give meinformation, I'll have
everything ready for your closerMonday morning.
It'll be a scramble, but we'llget it done.
So we do.
You know we take calls.
(40:08):
I've talked to peopleidentifying property and
there'll be a midnight deadlineto identify and they'll be
calling me at 11 o'clock atnight, going.
You know how does this work.
Or can I put this one in?
Or what about this one?
You know?
So we like to be, you know,consider ourselves very
available for a client.
We might not be perfect on theweekends, but we pretty much no
(40:29):
one goes 24 hours withouthearing from us.
Speaker 1 (40:32):
So this is my good friend, lonnie Nielsen, from
1031 Pros, so just go ahead,reach out, and we're going to
have buttons below this as well,and we'll see you all soon.
Thank you so much, lonnie.
Speaker 2 (40:43):
Thank you, ruy, have a nice day and I really
appreciate your time.
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