May 28, 2024 • 36 mins
In this episode of the Teaching Tax Flow podcast, we jump into the intricacies of 1031 exchanges, a topic vital for anyone looking to optimize their real estate investments.
Focusing on the practical aspects of 1031 exchanges with guest, Scott Saunders, who provides a detailed explanation of the associated rules, from identification to replacement property guidelines. The conversation unearths valuable tips for investors at all stages, underscoring the potential of 1031 exchanges to enhance investment portfolios substantially.
Key Takeaways:
- 1031 exchanges allow for the deferral of taxes by swapping one investment property for another without the proceeds hitting the investor's bank account.
- Key rules for a successful 1031 exchange include not receiving cash from the sale and ensuring the exchange is set up before the property closure.
- Identifying replacement properties requires adhering to set time constraints: 45 days to identify and 180 days to complete the exchange.
- Like-kind properties are broadly defined in the context of 1031 exchanges, allowing for flexibility in investment property types.
- Partially deferred exchanges are an option, and investors can introduce outside cash to balance a decrease in mortgage value for a newer property.
Notable Quotes:
- "A 1031 exchange at the most basic level is just this. I take a property that I've held for investment or used in my business. I transfer to a buyer and then I receive back other like kind property that I hold for investment or use in my business." - Scott Saunders
- "If you haven't looked at an exchange, you gotta at least look at it, deal with your tax advisor, number one, right. That's important. Get with a knowledgeable, qualified intermediary and at least see if it makes sense for you." - Scott Saunders
- "The misconception that is out there is I have to kind of go the same type ... And that's not true at all. Like kind property ... It's any type of property that you hold for investment." - Scott Saunders
- "That's why it's a great tool, because it allows you to start with something really small, roll it into something bigger and bigger and bigger. And 30 years down the road, you've got this substantial real estate portfolio that all started with a one little single family home." - Scott Saunders
Episode Sponsor:
The Mortgage Shop
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro (00:04):
Welcome to the Teaching Tax Flow podcast, where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:15):
Hey, everyone and welcome back to the podcast
episode 85. Today, we are gonnatake a deep look into those 1031
exchanges. Now, yes, we've doneone of these shows much earlier
on in the teaching tax flowpodcast life, but that was
almost 2 years ago. So, asalways, let's take a brief
moment and thank our episodesponsor.
Ad Read (00:38):
This podcast is sponsored by the mortgage shop.
Are you looking to qualify foran investment credit loan
without jumping through hoops?That's easy. They have loans
with LTV up to 89.99%. Exploringtheir products and discovering
how they can work for you issimple. Just visit mortgage.shop
or call 8 865-325-2566, and tellthem TTF sent you.
John Tripolsky (01:03):
Hey, everybody, and welcome back to teaching tax
flow, the podcast. We know youlisten to every single one of
our episodes we have, andespecially if you go all the way
back to I think it was episodenumber 3 dating back November
ish of 2022, we talked on thistopic of 10 30 ones. So if you
didn't listen to it, you'regonna get a breakdown. And,
(01:25):
actually, we brought on a guestwho is better looking and
smarter than the both of us forthis one. But before we
introduce him, Chris Pacuro, youknow, my buddy, the tax guy.
How's it going?
Chris Picciurro (01:35):
Great to be back on my own podcast as you
usually like to say, John, orour podcast.
John Tripolsky (01:40):
I tried to mix it up a little bit this time.
You know? I tried to takeownership of it a little more
than I usually do. So Well,
Chris Picciurro (01:45):
the summer's upon us here and almost. The
days are longer, and it's warmerout, which is great. More time
for outdoor activities, certainsports that people like, and I
would be remiss withoutmentioning pickleball as
probably the number one sport inAmerica at this point. Anyway,
that's not what we're here totalk about. Although, pickleball
(02:06):
is is definitely an amenity thatthat many people look for,
especially when investing in inreal estate and rental
properties and maybe apartmentcommunities, which ties into 10
30 one exchanges.
So we did an episode, the 3rdepisode. Gotcha. It was probably
a part of the pizza box serieswhere we're recording these
podcasts in a echoey home andfloor in our Florida property,
(02:29):
and, we talked about them. Wehad some lot of great
information. But as the teachingtax law community has grown and
allowed us to expand our wings,we've been able to attract some
amazing guests.
We have an amazing guest todaythat that is going to shed life
on 1031 exchanges. We're alsogonna talk about any type of
updates in just in the realestate industry. We know we have
(02:52):
a little bit higher interestrates right now. And what we
want people when they walk awayfrom this episode, understanding
when a 10:31 might make sense,and what are some of just the
basic rules and some of thebasic challenges, but also some
of the remedies and making sure,John, you know, in Teaching
Daxelow, we talk about buildingyour board of directors. So
(03:16):
making sure you're working withthe right people.
So I'm super excited tointroduce Scott Saunders, who
has personally helped me, got meout of a pickle one time, to
successfully complete 1 of our10 31 exchanges, but also has
not only worked with people inour private CPA practice, but in
(03:36):
the teaching tax flow community.Scott, welcome to the teaching
tax flow podcast.
Scott Saunders (03:41):
Hey, Chris and John. Great to be with you. Fun
topic. Always love talking aboutall things tax deferral, helping
real estate investors andbusiness owners take that
equity, redeploy it, and getbetter rates of return. So
always a fun topic.
Really excited to jump in andkinda talk about what it is, how
people can take advantage of it.
Chris Picciurro (04:01):
Well, Scott, can you tell us a little bit
about your history, yourbackground, the team you lead,
and, and how you found yourselfas, in my opinion, the number
one qualified intermediary and10 30 1 resource out there?
Scott Saunders (04:16):
Yeah. Believe it or not, I stumbled into this
industry way back in 1988 beforewe even had the treasure
regulations that we have inplace now. So we were operating
after a tax court decision, theStarker case. And I kinda grew
up in the 10/31 industry. Beendoing this now for 36 years.
I'm a senior vice president withasset preservation. We're a
(04:36):
national qualified intermediary.I'm coming to you today from
Denver, Colorado, so that'swhere I'm based. And, you know,
I spend a lot of time justhelping investors understand
what the rules and process areand, going through it. Sometimes
you have simple scenarios.
Sometimes they get a little morecomplex and kind of everything
in between, but just always funto talk about this topic and
(04:59):
really help investors takeadvantage of this part of the
tax code. It's been around, asyou guys probably know, for a
103 years now. So it's been along part of the tax code, but
yet people are still kind ofunpacking it and realizing all
the things it can help themaccomplish. Well, I think
Chris Picciurro (05:16):
it is it is can be a complicated transaction,
but we always talk about in ourcommunity and teaching tax law
community that, you know, wewant people that can take
something complicated and thenmake it seem not complicated
instead of vice versa. Andthat's when you know you're
working with someone special. Sofor our listeners, a lot of a
lot of times they hear about 1030 one exchanges. When when when
(05:40):
does a 1031 exchange or what isit, I guess, from a 30,000 foot
view? I know you mentioned taxdeferral because we know that
tax agencies are are involuntarybusiness partner, and tax laws
are gonna encourage anddiscourage certain behavior.
So if you were to sell let's sayyou own a piece of real estate
and, and you sell that realestate, you would you are gonna
(06:01):
have a capital gain, hopefully,and then you're gonna have to
pay a portion of that capitalgain to your business partner,
the IRS. And golly, if you livein a state you know, we always
like to throw California underthe bus, New York. Some of these
high tax states, you're gonnapay some to them and maybe
local, a local tax agency. But,you know, 10 30 one exchanges
(06:21):
under the Tax Cuts and Jobs Actare really only available to
real estate, and that's whatwe're here to talk about. But,
yeah, could you tell us a littlebit about what what it is and
what Yeah.
Scott Saunders (06:35):
Yes. Yeah. Happy to do that. So at a very high
level, if you're gonna sell aproperty, if you sell it to a
buyer and they bring in cash,that's a taxable sale, and
you'll pay taxes on that,whatever your capital gain is. A
1031 exchange at the most basiclevel is just this.
I take a property that I've heldfor investment or used in my
business, I transfer to a buyer,and then I set up this thing
(06:58):
called an exchange, and we'llget into the mechanics, and I
receive back other like kindproperty that I hold for
investment or use in mybusiness. So sale, give a
property, get back cash.Exchange, give a property, get
back property. So that's what itis. Now what it allows you to
accomplish, and you alluded tothis, Chris, you don't you're
able to defer paying all thedifferent taxes that would
(07:21):
otherwise be owed.
So it's a big advantage. Youreally get all of that gross
equity that you can redeployinto another property or maybe
even properties. So you're gonnaget a better rate of return
because you got more cash you'rereinvesting. A lot of times you
can acquire more property. Youcan boost cash flow.
You can even go up in value soyou have a little bit more to
(07:44):
depreciate. So all sorts ofadvantages doing an exchange
versus just selling and payinguncle Sam and the state tax
authorities what you're gonnaowe and gain.
Chris Picciurro (07:56):
So if you're if you're listening to this and you
yourself, you or you knowsomeone that owns property
that's gone up a lot in valueand you maybe it's at the top
and you want to sell it, but youdon't wanna get hit by that tax,
the 10.31 exchange could be anamazing opportunity. The other
kinda hidden benefit of the10.31 exchange is typically when
you go into that next property,you have a larger down payment
(08:18):
because all of your deferredgain, you're not it's gonna be a
lot easier for you, to getfinanced if you do go up in
value. And the one our mostrecent one that my wife and I
did, we went up in value, yet Ididn't even bring any money to
the table because I had so muchequity that I was rolling into
my next property. And that wasthat was really great. So I
(08:39):
think some of the things so solet's talk just a little bit
about if someone's consideringdoing the 1031 exchange.
What what should they be lookingfor as far as who who who should
they have on their team and whenshould they you know, maybe you
mentioned a qualifiedintermediary, but when when
should they start gettinginvolved with 1?
Scott Saunders (09:00):
Yeah. What I would recommend, kind of step
number 1, talk to your taxadviser, the person that does
your taxes, and just find outwhat's gonna happen if I sell
this. What is my actual capitalgain? Most of the time, a tax
adviser, CPA will have that, andthey'll be able to tell you
roughly what you would owe intaxes. So that's kind of step 1.
(09:20):
A lot of times, Chris, peopleare surprised when they do that.
They go, wow. I didn't realizethat the tax hit was gonna be
that big. So that is kind of aneye opener. In terms of the
process, you actually getinvolved with an exchange once
you've got a property undercontract.
Intro (09:37):
So you've got a buyer, you've opened up with a local
title company or closingofficer. That's when you're
actually gonna set up a 10 30one exchange, and you do need
this, we call a middleman. Sothe technical word is a
qualified intermediary. In thewere in the country, you'll hear
words like intermediary, QI,facilitator, accommodator. They
(09:59):
all mean the same thing.
Scott Saunders (10:00):
That's that company in the middle that's
actually gonna hold the proceedsfrom the sale. So if you sell it
and get the money, it's taxable.You let this company called a
qualified intermediary receivethe funds from the sale, setting
up some documentation andpaperwork to do that. Now you've
got the ability to do a 10 30one exchange. So tax advisor,
(10:23):
qualified intermediary.
If you've got a larger, morecomplicated transaction, you
might wanna pull in your realestate or tax attorney. Right?
If you've got some entities ormaybe you've remarried and
you've got, you know, an issuewhere you've got separate
property and and some of thosethings going on. So those are
kind of the people that youwanna bring into your team from
(10:44):
the onset to help put togetheran exchange and a good qualified
intermediary. They're gonna asksome questions.
You know, how do you hold title?What's your vesting? They're
gonna walk through the timeline,the time requirements, and I'm
sure we'll get into that in someof the basic rules. So one thing
for your audience, if you'venever done an exchange, don't be
intimidated. There's some reallybasic rules, but an intermediary
(11:07):
is gonna kinda hold your hand,walk you through the entire
process every step of the way.
So don't feel like you've gottaunderstand all this tax stuff to
do it. You just need to know afew basic steps, and then you're
gonna have this partner calledthe qualified intermediary
guiding you through the process.
Chris Picciurro (11:26):
And I would say that if if you're con I agree a
100%. If you're consideringdoing the 10 30 one exchange,
you could open up an exchangeand and it doesn't commit you to
have to complete it. If it makesif it's in your best interest to
to not complete the exchange,you might you know, you you
would spend the money to openthe exchange, which is a modest
amount compared to the amount oftax that you're gonna pay,
(11:48):
because sometimes things justdon't work out. But a good
qualified intermediary is gonnahelp guide you. You mentioned a
couple things and and there's acouple rules based on could we
talk through the the theidentification and the closing,
rules and then and then justmaybe some rules of thumb for
identifying your replacementproperty
John Tripolsky (12:12):
to
Chris Picciurro (12:12):
make to make this happen.
Scott Saunders (12:13):
Yeah. When you do an exchange, the most common
variation is what's called thedelayed exchange, sometimes
called the deferred. So you sella property. You get the
qualified intermediary involvedprior to closing. They step into
your shoes, sell it to thebuyer.
The day it closes is day 0. Nowyou've got 45 calendar days,
what we call the identificationperiod, ends at midnight of that
(12:36):
45th day to identify property.You then have another 135 days
after that to close on whatyou've identified. So you have
the identification period, 45days. The total exchange period
is typically a 180 days, and itincludes those 45 days.
In terms of identifying, peoplehave some misconceptions there.
(12:58):
You don't even necessarily haveto be under contract to buy it.
You You just have to designatespecific properties in writing,
and they have to be what we callunambiguously described. That
just means a street address or alegal description. So you would
identify 312 Main Street or Unit62 in a condo complex.
(13:19):
So specific properties areidentified. You sign and date
that, and then you give that tothe qualified intermediary as
identification. We've got a fewdifferent rules, ways that you
can identify, and so you've gotoptions. The 2 most common, the
first one's what's called the 3property rule. So I can identify
3 different properties of anyvalue, but I'm limited to 3, but
(13:42):
the value is unlimited.
If somebody is maybe coming outof a state where they've got
higher equity amounts, say, astate like California, and
they're gonna relocate toTennessee, they may wanna take
advantage of what's called the200% rule. So they sell 1
property for 2,000,000 and theywanna buy a bunch of smaller
rentals, all 3, 400,000. You canthen identify as many as you
(14:07):
want, but no more than twice thevalue of what was sold. So for
2,000,000 is a bunch of smallproperties, but you can't go
over 4,000,000. So those are the2 basic rules.
You either use the 3 propertyrule or the 200% rule to
identify. And that allows you tohave a few different options,
and you've gotta buy from thatbasket of property. So if I
(14:30):
identify 3, I could buy property1, I could buy property 23.
Property 13. Right?
But it's gotta be within thatgrouping. So that's probably the
area where the most timepressure comes out is
identifying the property,locating it. And if I can give,
you know, the listeners ofteaching tax flow a tip, when
(14:51):
you list the property you'reselling, start working with your
broker on the purchase side atthat time. Don't wait until you
close. Get ahead of it inadvance.
And that way you can take a lotof the stress out of an exchange
because now you're looking forproperties. You might start
making offers, but you'renarrowing the field down to the
ones that really meet yourneeds. Do that well in advance,
(15:13):
and now all of a sudden thattime deadline isn't as
intimidating because you kindaknow what you're gonna go into,
or you've at least narrowed thefield down to a to a handful of
properties that are desirable.
Chris Picciurro (15:25):
Right. They're and and the the rules are out
there to prevent people frombasically god. I mean, I'm old
enough to remember the yellowpages. Right? But ripping every
page out of the yellow page andsaying, this this is what I'm
identifying.
But, typically, you know, in inpractice, you're gonna find that
that working with the rightpeople are they're gonna guide
(15:45):
you in that identification.
Scott Saunders (15:47):
Absolutely. In fact, the qualified
intermediary, when you close onthe property being sold, they're
gonna provide a summary of theidentification rules. They'll
provide a form to identify on,and a good qualified
intermediary is gonna work withyou. If they haven't received
the identification, let's say,on day 35 or 40, they're gonna
start reaching out, calling andemail and saying, hey. Your
(16:08):
deadline's coming up in a fewdays.
So there are tickler systems inplace. Now it's always the
responsibility of the investorto identify, but an intermediary
is gonna wanna try and helpinvestors, particularly people
that might be busy, forgetthey've got that deadline coming
because there's there's reallyno workaround around that.
You've got to identify withinthat time period to have an
(16:29):
exchange that qualifies. There'sthere's no wiggle room. There's
really from a practicalperspective, no extensions to
that, you know, for the vastmajority of cases.
John Tripolsky (16:41):
And, Scott, quick question for you too. I
know we we touched on it littlebits and pieces here as far as
for somebody who's not familiarwith a 10 30 1 exchange. Talk to
us maybe a little bit more onjust that relationship on how
that takes place. You know,like, is is making the
connection between a qualifiedinter intermediary and their
real estate agent, like, is thathow does that look? When do
(17:04):
those introductions take place?
Just kinda high level overalljust, you know, bird's eye view
of all the relationships andwhen the introductions
Scott Saunders (17:11):
Great question, John. So you typically, it'll be
with you'll be working with yourclosing officers. So you get a
contract accepted. Now you'veopened it up. Somebody's gonna
be handling your closing.
Intro (17:20):
Right? At that point in time, you're gonna contact the
qualified intermediary. They'regonna prepare paperwork, and
they'll send it over to thatclosing officer. Now there's one
piece that I didn't touch upon.There are a few suggested words
to include in your contract,letting everybody know that your
intent is to do an exchange.
Scott Saunders (17:39):
So we have a 1031 exchange addendum, just a
few sentences. The qualifiedintermediary can provide that to
your real estate professional toinclude that in the contract. So
the documents would go to thecloser. With the real estate
professional who's handling thesale, the qualified intermediary
can provide some suggestedlanguage. And a lot of times, an
(18:01):
agent or broker might alreadyhave that.
It varies from state to state,but a lot of firms have language
that they typically use. But theintermediary could certainly be
another conduit of providingthat. So that that's how
everybody works together. Andthen at that point in time, you
might work with the same agentto purchase if you're buying in
the same area, or you might workwith another real estate
(18:21):
professional if you're going outof state. And then they're gonna
put similar language into thepurchase agreement as you buy a
property.
Chris Picciurro (18:30):
Well, this and this brings us to something that
I I've got 2 things that I wannatouch on as as far as from the
the CPA side of things wherethere's a big misconception out
there about properties beingidentified and a lot of times
taxpayers get really stressedout about identifying properties
and finding the time what, youknow, to go look at properties.
(18:53):
And a lot of times they wantthey want to go hands off with
their with their property. Somaybe they own on a 4 unit
apartment complex that they'vethe family's owned for a long
time, and they just they don'twanna be collecting their rent,
doing the maintenance. Sosometimes they think, I don't
wanna buy another apartmentcomplex. Can you touch a little
bit on what what like kindmeans?
(19:15):
And and also we've worked with alot of clients that that go I
call it mailbox money. Go out,leave that kind of managing your
own rental portfolio to themailbox money being into a
syndication syndicatedinvestment. So, yeah, can you
kinda define maybe what likekind property is from a broad
perspective?
Scott Saunders (19:35):
So basic level, like kind property is just any
property held for investment orused in a business, exchanged
for any other property held forinvestment or used in a
business. The misconception thatthat is out there is I have to
kind of go the same type. Right?Bare land and no other bare
land, a single family and asingle family. And that's not
true at all.
(19:56):
Like kind property, and I'mgonna share with you some
basics, and then we'll kind of,you know, broaden it a little
bit. It's any type of propertythat you hold for investment,
anything. The properties thatare excluded are maybe an easier
way to look at it. You can'texchange the home you live in
because that's not held forinvestment. And then the other
category is property that's heldfor sale.
(20:17):
That might be doing a fix andflip. It might be a developer,
but anything where the intent isto hold for sale, not to have it
held for long term investment,which would typically be rental
income. Those two types ofproperties are excluded. But
what that leaves is everythingelse. So I can exchange out of a
piece of bare land and go into asingle family rental, go from 2
(20:40):
1 single family into 2, 2 singlefamily into 4, into an
apartment, into a commercialoffice building, into an
industrial, right, into a triplenet building.
Or as you mentioned, there arewhat we call fractional
ownership where you go in with abunch of co owners in a larger
commercial building. Somebodyelse manages it for you, and you
(21:02):
just get a a little slice ofthat building with a bunch of
other people that own it. Andnow somebody else manages it,
takes care of the tenants. So alot of people as they evolve is
they'll maybe move to somethinglike that. Right?
The need when you're younger isto build a portfolio. The needs
later on are cash flow and easeof management. And so in
(21:24):
exchange, you can really jump inbetween all these different
asset classes and really go fromone to another. So that's why
it's a great tool because itallows you to start with
something really small, roll itinto something bigger and bigger
and bigger. And 30 years downthe road, you've got this
substantial real estateportfolio that all started with
(21:44):
a one little single family home,you know, that somebody picked
up, and they just continuallyexchanged over time and allowed
all of that purchasing power tobe redeployed over and over
again, added a little leverageto help grow that.
And and that, honestly, for bothof you guys, that's where people
scale and grow a portfolio is byusing the 10 30 one exchange. It
(22:06):
it's such a powerful tool. Thinkabout it. If we'd looked at the
stock market, if you could buyApple or Amazon stock here and
sell it up here and not paytaxes, every financial planner
in America would say you'd becrazy to pay taxes when you're
gonna go out and buy more stock.With real estate held for
investment, we can do this overand over and over again.
(22:29):
And one of the benefits of thecode as it stands today is when
you do this, you can actuallypass away down the road and pass
it to your heirs with a fullstep up in basis. So there and
what that means is they get itat the value of the market then.
So you don't pay capital gaintaxes throughout your entire
lifetime. You pass on highlyappreciated property to your
(22:52):
heirs. They don't pay capitalgain taxes.
So this is you know, if youhaven't looked at an exchange,
you gotta at least look at it,Get with your tax advisor and
look at the benefits becauseit's a game changer in my
opinion.
Chris Picciurro (23:06):
Oh, it is. I mean, it it when you don't have
to you don't have to take achunk of your your your money at
the at closing and pay yourbusiness partner, that's huge.
And And that's gonna be the lastthing I wanna, you know last
misconception, we talk that Isee. We talk and text teaching
tax flow. Cash flow and tax inin cash flow and tax flow are
(23:29):
different.
Meaning, 1, when you sell aproperty, the cash you receive
at closing is not necessarilyyour gain. Your gain is based on
the basis of the property andand and that could be adjusted
for various things. The otherthing to consider is when you
are, when you are doing a 1031exchange, remember that you have
(23:51):
to deploy or you have to buy areplacement property for the
value of the property sold, notnecessarily the cash you receive
at closing. So and and so can wecould you touch on that just a
little bit and not to scarepeople because we know that
interest rates are a littlehigher right now. I'm not sure
what that's doing with the 10.31exchange volume.
(24:12):
I'd love your your thought onthat. So 10.31 exchange volume,
understanding the deploymentrules for the for replacement
property, and the third thing,though, is there are always
remedies for replacementproperty. We have clients that
are some clients we've workedwith that are mature age that,
quite frankly, have asignificant amount of assets.
(24:33):
They don't have a lot of income.So to get financed on a
replacement property would bechallenging, where where they
could go in and and they couldbuy a 10 30 one exchange
property and that comes withsome type of debt allocation.
And we're gonna have a separatepodcast on Delaware Statutory
Trust in the future. But can youkinda touch on those as far as,
(24:56):
1, people understanding thoserules, and, 2, easing maybe the
mind of people that areconcerned about picking up debt.
Scott Saunders (25:03):
Yeah. So there are 2 basic rules that you need
to keep in mind if you want 100%tax deferral. First one's really
simple. You look at yoursettlement statement, your
closing statement, and you'regonna have net equity. So number
1, you wanna reinvest all of thenet equity.
And by the way, that's afterclosing costs. So you're able to
(25:24):
back out the real estatecommissions, title company
closing fees. So it's netequity. If you get any cash out,
there's a term for that that youmay have heard of. It's called
cash boot, and that's taxable tothe extent you have capital
gain.
The second rule then is you'regonna look at your mortgage
payoff on the settlementstatement. If you pay off a
mortgage of 220,000, you wannahave that amount of mortgage or
(25:47):
more on what you're buying. Ifyou'd go down in mortgage, you
have what's called mortgageboot, and that's also taxable.
So reinvest all of the netequity. Number 2, the same or a
greater amount of debt.
And, you know, for both of you,if people wanna have less
leverage, they can always godown in mortgage if they bring
(26:08):
in cash to offset it. So ifsomebody wants to go near
retirement and they don't wannahave any leverage at all, if
they've got outside cash, theycan actually bring that into the
exchange, get rid of themortgage, but replace it with
new cash, and then they don'thave that debt burden to deal
with. To kind of address, thethe question about today's
(26:29):
interest rates, you know, Ithat's a common topic. I'm an
investor as well as a 10.31exchange person, and I will
share with you my biases. Ithink this is one of the best
buying opportunities right now.
I believe when the rates godown, whatever that is, I think
we're gonna see prices pick up,activity's gonna pick up, and
(26:49):
now we're gonna start to seepeople you know, because
inventory's really tight, atleast on the the single family
side of things. So I thinkthere's a high probability that
prices will go up, demand willgo up, and people are gonna be
kicking themselves. Why didn't Ibuy when the rates were higher
and it was easy to get a dealdone? In terms of the exchange,
and and you alluded thisearlier, Chris, when you do an
(27:12):
exchange because you're notpaying uncle Sam and the state,
you have all of your equity toput into that new property. So
that a lot of times makes thedeal a lot better.
Even though you're paying alittle higher rate, you've got
that bigger down payment goinginto it. And what I look at it
just from a practicalperspective, you probably heard
(27:32):
it. It's it's now getting oversaid. You know? Marry the marry
the property, date the rate.
You know? I've heard that manytimes. Get the asset. You can
always come back later when whenproperty when rates go down,
refinance, and then lock in abetter long term rate. I I did
that last year.
I bought assets myself and Ipaid the higher rate. Knowing
(27:55):
that somewhere down the road,I'm gonna do a refi probably as
the value goes up a little bit.Right? So I might even pull a
little equity out, and then I'llget a lower rate. So as an
investor, you wanna look longterm.
We're in a season where we wentfrom ridiculously low rates and
now we've kinda gone back tomore historically normal rates.
(28:17):
And I think a lot of peoplethink that, you know, they'll
start to, somewhere down theroad, they'll probably nudge
down a little bit and make itmore attractive. So if you're
investing for the long haul,lock in a good asset, get your
exchange done, get a goodpurchase that makes sense, and
then come back later on, workwith a good lender, and get a
better rate when the marketconditions change. That's my
(28:38):
take.
John Tripolsky (28:38):
And that's a good way to good way to kinda
wrap us up here too because wedon't I'm sure we can go into
the little nooks and crannies ofall the details. But before we
let you go, let's touch on onething that I thought was
actually the case, which Icouldn't have been more wrong,
you know, years back. So at10:31. Right? And I know the
(29:00):
answer to this, and I'm gonnatry to ask it in a way that
doesn't make it sound like Iknow the answer.
Can the cash ever hit my bankaccount, or where does it go
when we actually close on aproperty?
Scott Saunders (29:10):
It cannot go to your bank account. You can, in
any way, have access to it,control of it. So when you do a
1031, you've gotta set up theexchange before you close. It
can be 1 hour before closing.But we get this is the call, you
know, John and Chris, that weget all the time.
People say, oh, I wanna set upan exchange. And I go, when are
(29:32):
you closing? And they go, oh, wejust closed 2 days ago. And
unfortunately, I have to explainto them, if you've closed the
loans funded and you'vetransferred the burdens of
benefits of ownership over to abuyer, you've got a closed sale
and that money, even if it'ssitting at the title company,
there's a technical term, it'scalled constructive receipt. It
just means it's the same for youas if it actually hits your bank
(29:55):
account.
Now it's a taxable sale. So youcan't ever really unwind a
taxable sale when you've got themoney or it's Citi of the title
company. You always have to setup an exchange before you close.
And and Chris mentioned thisearlier, some people set them up
not knowing if they're gonnafind something or not. A a fee
is, you know, somewhere in theballpark of, let's say, $900 to
(30:18):
1500, somewhere that range.
So you're talking about a grand.That's your opportunity cost and
tying your money up for 45 days.So I find a lot of people do
that, and they end up after theyrealize what they owe in taxes,
they'll complete the exchange.But some people don't complete
an exchange, and it justconverts back to a taxable sale.
And then something else I wannamention, sometimes people do
(30:41):
partially deferred exchanges.
You sell an asset for $400. Youbuy one for, let's say, 360, and
you'll pay taxes on thatdifference, that boot that's in
between. And about a third ofour clients do partially
deferred exchanges. So don'tthink of it as an all or nothing
proposition. You could pull alittle cash out, take that dream
(31:02):
vacation, or go buy the sportscar, whatever you want, take the
hit on the portion you receive,and still get the benefit of an
exchange on the difference.
So I think that's something forpeople to keep in mind because
it's never fun to keepredeploying, redeploying.
Sometimes people wanna accessthe money. And the way that I'd
recommend that is you do anexchange and then refinance that
(31:24):
new property, what we call thereplacement property after the
exchange is over,
Chris Picciurro (31:29):
pull the cash out there, that's a tax free
event. Great point that youcan't touch your money, but also
we talked about different assetclasses getting exchanged. You
can exchange 1 property for 5properties. You could exchange 4
properties for 1 property. Youknow what I mean?
The timing obviously ischallenging when you're going
from several properties down to1, but it it's not always a one
(31:52):
for one one for one thing. Andthat's why it's important to get
with Scott, his team, and
Scott Saunders (31:56):
a and a qualified intermediary if if
you're typically a great realtoror most likely a title company
that's very reputable is goingto help you through it as well.
Yeah. Absolutely. That's a greatpoint. I just shared example
with some friends of mine.
I bought a piece of dirt here intown years ago for 90 grand. I
did an exchange out of that. Itbasically tripled in value, and
(32:18):
I went into 3 properties in yourgreat state of Tennessee up in
Clarksville. I bought 2 inWichita, Kansas, so I did 1 for
5. And I went from a piece ofland that produced no cash flow
into income property.
Those properties today are worthabout 1,500,000 out of a $90,000
investment and a piece of dirt.So you can see how if people do
(32:40):
that, you know, once or maybe dothat multiple times, how they
can really build a substantialportfolio pretty fast by doing
things like that. So, and it'sreal common that people scale
up, right? They sell one of theasset, they take the equity and
they buy 2 or 3, 4 replacementproperties. They might add
leverage, so they're gettingsome more benefits.
(33:02):
So it's a fantastic tool, and Ijust encourage your audience. If
you haven't looked at it, getwith your tax adviser, number 1.
Right? That's important. Getwith a knowledgeable qualified
intermediary and at least see ifit makes sense for you.
I bet you, you know, 9 times outof 10, it's probably a much
better strategy for mostinvestors unless you wanna cash
(33:23):
out. That's maybe the time itdoesn't make sense. If I'm, say,
hey, I'm done with real estate.I wanna go into other
investments and I no longerwanna own real estate. Maybe
that's the time.
But, Chris, you alluded to theDelaware Statutory Trust. That's
a great vehicle where people cankinda go from active into more
passive investment and be veryhands off. And that's why that
(33:45):
that whole niche has justexploded, you know, in recent
times.
John Tripolsky (33:50):
Well, excellent, gentlemen. Well, thank you both
for joining us on this one,obviously, talking on the topic.
And, Scott, we'll go ahead andput all your contact in the show
notes, here. So if anybody wantsto reach out to you directly,
obviously, they can. So we knowyou're a a wealth of
information.
Thank you both so much. I Ireally appreciate it. Thank you.
Alrighty, boys. Well, actuallyso next week, we have another
(34:12):
topic coming up, which, again,just watch out for wherever you
listen to podcasts.
Every Tuesday, a new show drops.But, again, I will drop Scott's
contact information in the shownotes. Feel free to reach out to
him. Great, great, greatresource and probably one of the
best educators. Not just on thistopic as a whole, but he's very,
(34:33):
very, very, very good atdescribing this in more detail.
We've actually done a longershow with him over on the mister
r show, a different one of ours,where we really dive into the
topic about an hour longactually qualifies for CPE for
those tax pros out there. Besure to check that one out as
well. And as we always closehere on the podcast, we will see
(34:54):
you same time next week,different topic, here on the
Teaching Tax Flow podcast.Everybody. Thank you for hanging
out with us here on this episodeof the podcast.
Now 10 30 ones. Right? You hearda lot about them. Maybe you knew
a lot about them. Maybe youdidn't.
(35:14):
Maybe you're just in the middle.Now you have a pretty good
understanding on them and atleast those key points that
could really keep you out ofsome some trouble, we'll say. Or
should we just say somesignificant financial loss if
you do not go about them theright way. As the example as I
brought up, something I didn'tquite understand years back,
almost found myself a little bitof little bit trouble there. But
(35:37):
with individuals like Scott andChris on your side, you will
figure this all out.
You will navigate the wonderfulworld of 1031 exchanges. So,
keep sending us over those topicideas, questions you may have.
We love them. That's what fuelsus here on the show. So we will
see everybody here next week asalways.
Disclaimer (36:01):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(36:23):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Welcome to the Teaching Tax Flow podcast, where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:15):
Hey, everyone and welcome back to the podcast
episode 85. Today, we are gonnatake a deep look into those 1031
exchanges. Now, yes, we've doneone of these shows much earlier
on in the teaching tax flowpodcast life, but that was
almost 2 years ago. So, asalways, let's take a brief
moment and thank our episodesponsor.
Ad Read (00:38):
This podcast is sponsored by the mortgage shop.
Are you looking to qualify foran investment credit loan
without jumping through hoops?That's easy. They have loans
with LTV up to 89.99%. Exploringtheir products and discovering
how they can work for you issimple. Just visit mortgage.shop
or call 8 865-325-2566, and tellthem TTF sent you.
John Tripolsky (01:03):
Hey, everybody, and welcome back to teaching tax
flow, the podcast. We know youlisten to every single one of
our episodes we have, andespecially if you go all the way
back to I think it was episodenumber 3 dating back November
ish of 2022, we talked on thistopic of 10 30 ones. So if you
didn't listen to it, you'regonna get a breakdown. And,
(01:25):
actually, we brought on a guestwho is better looking and
smarter than the both of us forthis one. But before we
introduce him, Chris Pacuro, youknow, my buddy, the tax guy.
How's it going?
Chris Picciurro (01:35):
Great to be back on my own podcast as you
usually like to say, John, orour podcast.
John Tripolsky (01:40):
I tried to mix it up a little bit this time.
You know? I tried to takeownership of it a little more
than I usually do. So Well,
Chris Picciurro (01:45):
the summer's upon us here and almost. The
days are longer, and it's warmerout, which is great. More time
for outdoor activities, certainsports that people like, and I
would be remiss withoutmentioning pickleball as
probably the number one sport inAmerica at this point. Anyway,
that's not what we're here totalk about. Although, pickleball
(02:06):
is is definitely an amenity thatthat many people look for,
especially when investing in inreal estate and rental
properties and maybe apartmentcommunities, which ties into 10
30 one exchanges.
So we did an episode, the 3rdepisode. Gotcha. It was probably
a part of the pizza box serieswhere we're recording these
podcasts in a echoey home andfloor in our Florida property,
(02:29):
and, we talked about them. Wehad some lot of great
information. But as the teachingtax law community has grown and
allowed us to expand our wings,we've been able to attract some
amazing guests.
We have an amazing guest todaythat that is going to shed life
on 1031 exchanges. We're alsogonna talk about any type of
updates in just in the realestate industry. We know we have
(02:52):
a little bit higher interestrates right now. And what we
want people when they walk awayfrom this episode, understanding
when a 10:31 might make sense,and what are some of just the
basic rules and some of thebasic challenges, but also some
of the remedies and making sure,John, you know, in Teaching
Daxelow, we talk about buildingyour board of directors. So
(03:16):
making sure you're working withthe right people.
So I'm super excited tointroduce Scott Saunders, who
has personally helped me, got meout of a pickle one time, to
successfully complete 1 of our10 31 exchanges, but also has
not only worked with people inour private CPA practice, but in
(03:36):
the teaching tax flow community.Scott, welcome to the teaching
tax flow podcast.
Scott Saunders (03:41):
Hey, Chris and John. Great to be with you. Fun
topic. Always love talking aboutall things tax deferral, helping
real estate investors andbusiness owners take that
equity, redeploy it, and getbetter rates of return. So
always a fun topic.
Really excited to jump in andkinda talk about what it is, how
people can take advantage of it.
Chris Picciurro (04:01):
Well, Scott, can you tell us a little bit
about your history, yourbackground, the team you lead,
and, and how you found yourselfas, in my opinion, the number
one qualified intermediary and10 30 1 resource out there?
Scott Saunders (04:16):
Yeah. Believe it or not, I stumbled into this
industry way back in 1988 beforewe even had the treasure
regulations that we have inplace now. So we were operating
after a tax court decision, theStarker case. And I kinda grew
up in the 10/31 industry. Beendoing this now for 36 years.
I'm a senior vice president withasset preservation. We're a
(04:36):
national qualified intermediary.I'm coming to you today from
Denver, Colorado, so that'swhere I'm based. And, you know,
I spend a lot of time justhelping investors understand
what the rules and process areand, going through it. Sometimes
you have simple scenarios.
Sometimes they get a little morecomplex and kind of everything
in between, but just always funto talk about this topic and
(04:59):
really help investors takeadvantage of this part of the
tax code. It's been around, asyou guys probably know, for a
103 years now. So it's been along part of the tax code, but
yet people are still kind ofunpacking it and realizing all
the things it can help themaccomplish. Well, I think
Chris Picciurro (05:16):
it is it is can be a complicated transaction,
but we always talk about in ourcommunity and teaching tax law
community that, you know, wewant people that can take
something complicated and thenmake it seem not complicated
instead of vice versa. Andthat's when you know you're
working with someone special. Sofor our listeners, a lot of a
lot of times they hear about 1030 one exchanges. When when when
(05:40):
does a 1031 exchange or what isit, I guess, from a 30,000 foot
view? I know you mentioned taxdeferral because we know that
tax agencies are are involuntarybusiness partner, and tax laws
are gonna encourage anddiscourage certain behavior.
So if you were to sell let's sayyou own a piece of real estate
and, and you sell that realestate, you would you are gonna
(06:01):
have a capital gain, hopefully,and then you're gonna have to
pay a portion of that capitalgain to your business partner,
the IRS. And golly, if you livein a state you know, we always
like to throw California underthe bus, New York. Some of these
high tax states, you're gonnapay some to them and maybe
local, a local tax agency. But,you know, 10 30 one exchanges
(06:21):
under the Tax Cuts and Jobs Actare really only available to
real estate, and that's whatwe're here to talk about. But,
yeah, could you tell us a littlebit about what what it is and
what Yeah.
Scott Saunders (06:35):
Yes. Yeah. Happy to do that. So at a very high
level, if you're gonna sell aproperty, if you sell it to a
buyer and they bring in cash,that's a taxable sale, and
you'll pay taxes on that,whatever your capital gain is. A
1031 exchange at the most basiclevel is just this.
I take a property that I've heldfor investment or used in my
business, I transfer to a buyer,and then I set up this thing
(06:58):
called an exchange, and we'llget into the mechanics, and I
receive back other like kindproperty that I hold for
investment or use in mybusiness. So sale, give a
property, get back cash.Exchange, give a property, get
back property. So that's what itis. Now what it allows you to
accomplish, and you alluded tothis, Chris, you don't you're
able to defer paying all thedifferent taxes that would
(07:21):
otherwise be owed.
So it's a big advantage. Youreally get all of that gross
equity that you can redeployinto another property or maybe
even properties. So you're gonnaget a better rate of return
because you got more cash you'rereinvesting. A lot of times you
can acquire more property. Youcan boost cash flow.
You can even go up in value soyou have a little bit more to
(07:44):
depreciate. So all sorts ofadvantages doing an exchange
versus just selling and payinguncle Sam and the state tax
authorities what you're gonnaowe and gain.
Chris Picciurro (07:56):
So if you're if you're listening to this and you
yourself, you or you knowsomeone that owns property
that's gone up a lot in valueand you maybe it's at the top
and you want to sell it, but youdon't wanna get hit by that tax,
the 10.31 exchange could be anamazing opportunity. The other
kinda hidden benefit of the10.31 exchange is typically when
you go into that next property,you have a larger down payment
(08:18):
because all of your deferredgain, you're not it's gonna be a
lot easier for you, to getfinanced if you do go up in
value. And the one our mostrecent one that my wife and I
did, we went up in value, yet Ididn't even bring any money to
the table because I had so muchequity that I was rolling into
my next property. And that wasthat was really great. So I
(08:39):
think some of the things so solet's talk just a little bit
about if someone's consideringdoing the 1031 exchange.
What what should they be lookingfor as far as who who who should
they have on their team and whenshould they you know, maybe you
mentioned a qualifiedintermediary, but when when
should they start gettinginvolved with 1?
Scott Saunders (09:00):
Yeah. What I would recommend, kind of step
number 1, talk to your taxadviser, the person that does
your taxes, and just find outwhat's gonna happen if I sell
this. What is my actual capitalgain? Most of the time, a tax
adviser, CPA will have that, andthey'll be able to tell you
roughly what you would owe intaxes. So that's kind of step 1.
(09:20):
A lot of times, Chris, peopleare surprised when they do that.
They go, wow. I didn't realizethat the tax hit was gonna be
that big. So that is kind of aneye opener. In terms of the
process, you actually getinvolved with an exchange once
you've got a property undercontract.
Intro (09:37):
So you've got a buyer, you've opened up with a local
title company or closingofficer. That's when you're
actually gonna set up a 10 30one exchange, and you do need
this, we call a middleman. Sothe technical word is a
qualified intermediary. In thewere in the country, you'll hear
words like intermediary, QI,facilitator, accommodator. They
(09:59):
all mean the same thing.
Scott Saunders (10:00):
That's that company in the middle that's
actually gonna hold the proceedsfrom the sale. So if you sell it
and get the money, it's taxable.You let this company called a
qualified intermediary receivethe funds from the sale, setting
up some documentation andpaperwork to do that. Now you've
got the ability to do a 10 30one exchange. So tax advisor,
(10:23):
qualified intermediary.
If you've got a larger, morecomplicated transaction, you
might wanna pull in your realestate or tax attorney. Right?
If you've got some entities ormaybe you've remarried and
you've got, you know, an issuewhere you've got separate
property and and some of thosethings going on. So those are
kind of the people that youwanna bring into your team from
(10:44):
the onset to help put togetheran exchange and a good qualified
intermediary. They're gonna asksome questions.
You know, how do you hold title?What's your vesting? They're
gonna walk through the timeline,the time requirements, and I'm
sure we'll get into that in someof the basic rules. So one thing
for your audience, if you'venever done an exchange, don't be
intimidated. There's some reallybasic rules, but an intermediary
(11:07):
is gonna kinda hold your hand,walk you through the entire
process every step of the way.
So don't feel like you've gottaunderstand all this tax stuff to
do it. You just need to know afew basic steps, and then you're
gonna have this partner calledthe qualified intermediary
guiding you through the process.
Chris Picciurro (11:26):
And I would say that if if you're con I agree a
100%. If you're consideringdoing the 10 30 one exchange,
you could open up an exchangeand and it doesn't commit you to
have to complete it. If it makesif it's in your best interest to
to not complete the exchange,you might you know, you you
would spend the money to openthe exchange, which is a modest
amount compared to the amount oftax that you're gonna pay,
(11:48):
because sometimes things justdon't work out. But a good
qualified intermediary is gonnahelp guide you. You mentioned a
couple things and and there's acouple rules based on could we
talk through the the theidentification and the closing,
rules and then and then justmaybe some rules of thumb for
identifying your replacementproperty
John Tripolsky (12:12):
to
Chris Picciurro (12:12):
make to make this happen.
Scott Saunders (12:13):
Yeah. When you do an exchange, the most common
variation is what's called thedelayed exchange, sometimes
called the deferred. So you sella property. You get the
qualified intermediary involvedprior to closing. They step into
your shoes, sell it to thebuyer.
The day it closes is day 0. Nowyou've got 45 calendar days,
what we call the identificationperiod, ends at midnight of that
(12:36):
45th day to identify property.You then have another 135 days
after that to close on whatyou've identified. So you have
the identification period, 45days. The total exchange period
is typically a 180 days, and itincludes those 45 days.
In terms of identifying, peoplehave some misconceptions there.
(12:58):
You don't even necessarily haveto be under contract to buy it.
You You just have to designatespecific properties in writing,
and they have to be what we callunambiguously described. That
just means a street address or alegal description. So you would
identify 312 Main Street or Unit62 in a condo complex.
(13:19):
So specific properties areidentified. You sign and date
that, and then you give that tothe qualified intermediary as
identification. We've got a fewdifferent rules, ways that you
can identify, and so you've gotoptions. The 2 most common, the
first one's what's called the 3property rule. So I can identify
3 different properties of anyvalue, but I'm limited to 3, but
(13:42):
the value is unlimited.
If somebody is maybe coming outof a state where they've got
higher equity amounts, say, astate like California, and
they're gonna relocate toTennessee, they may wanna take
advantage of what's called the200% rule. So they sell 1
property for 2,000,000 and theywanna buy a bunch of smaller
rentals, all 3, 400,000. You canthen identify as many as you
(14:07):
want, but no more than twice thevalue of what was sold. So for
2,000,000 is a bunch of smallproperties, but you can't go
over 4,000,000. So those are the2 basic rules.
You either use the 3 propertyrule or the 200% rule to
identify. And that allows you tohave a few different options,
and you've gotta buy from thatbasket of property. So if I
(14:30):
identify 3, I could buy property1, I could buy property 23.
Property 13. Right?
But it's gotta be within thatgrouping. So that's probably the
area where the most timepressure comes out is
identifying the property,locating it. And if I can give,
you know, the listeners ofteaching tax flow a tip, when
(14:51):
you list the property you'reselling, start working with your
broker on the purchase side atthat time. Don't wait until you
close. Get ahead of it inadvance.
And that way you can take a lotof the stress out of an exchange
because now you're looking forproperties. You might start
making offers, but you'renarrowing the field down to the
ones that really meet yourneeds. Do that well in advance,
(15:13):
and now all of a sudden thattime deadline isn't as
intimidating because you kindaknow what you're gonna go into,
or you've at least narrowed thefield down to a to a handful of
properties that are desirable.
Chris Picciurro (15:25):
Right. They're and and the the rules are out
there to prevent people frombasically god. I mean, I'm old
enough to remember the yellowpages. Right? But ripping every
page out of the yellow page andsaying, this this is what I'm
identifying.
But, typically, you know, in inpractice, you're gonna find that
that working with the rightpeople are they're gonna guide
(15:45):
you in that identification.
Scott Saunders (15:47):
Absolutely. In fact, the qualified
intermediary, when you close onthe property being sold, they're
gonna provide a summary of theidentification rules. They'll
provide a form to identify on,and a good qualified
intermediary is gonna work withyou. If they haven't received
the identification, let's say,on day 35 or 40, they're gonna
start reaching out, calling andemail and saying, hey. Your
(16:08):
deadline's coming up in a fewdays.
So there are tickler systems inplace. Now it's always the
responsibility of the investorto identify, but an intermediary
is gonna wanna try and helpinvestors, particularly people
that might be busy, forgetthey've got that deadline coming
because there's there's reallyno workaround around that.
You've got to identify withinthat time period to have an
(16:29):
exchange that qualifies. There'sthere's no wiggle room. There's
really from a practicalperspective, no extensions to
that, you know, for the vastmajority of cases.
John Tripolsky (16:41):
And, Scott, quick question for you too. I
know we we touched on it littlebits and pieces here as far as
for somebody who's not familiarwith a 10 30 1 exchange. Talk to
us maybe a little bit more onjust that relationship on how
that takes place. You know,like, is is making the
connection between a qualifiedinter intermediary and their
real estate agent, like, is thathow does that look? When do
(17:04):
those introductions take place?
Just kinda high level overalljust, you know, bird's eye view
of all the relationships andwhen the introductions
Scott Saunders (17:11):
Great question, John. So you typically, it'll be
with you'll be working with yourclosing officers. So you get a
contract accepted. Now you'veopened it up. Somebody's gonna
be handling your closing.
Intro (17:20):
Right? At that point in time, you're gonna contact the
qualified intermediary. They'regonna prepare paperwork, and
they'll send it over to thatclosing officer. Now there's one
piece that I didn't touch upon.There are a few suggested words
to include in your contract,letting everybody know that your
intent is to do an exchange.
Scott Saunders (17:39):
So we have a 1031 exchange addendum, just a
few sentences. The qualifiedintermediary can provide that to
your real estate professional toinclude that in the contract. So
the documents would go to thecloser. With the real estate
professional who's handling thesale, the qualified intermediary
can provide some suggestedlanguage. And a lot of times, an
(18:01):
agent or broker might alreadyhave that.
It varies from state to state,but a lot of firms have language
that they typically use. But theintermediary could certainly be
another conduit of providingthat. So that that's how
everybody works together. Andthen at that point in time, you
might work with the same agentto purchase if you're buying in
the same area, or you might workwith another real estate
(18:21):
professional if you're going outof state. And then they're gonna
put similar language into thepurchase agreement as you buy a
property.
Chris Picciurro (18:30):
Well, this and this brings us to something that
I I've got 2 things that I wannatouch on as as far as from the
the CPA side of things wherethere's a big misconception out
there about properties beingidentified and a lot of times
taxpayers get really stressedout about identifying properties
and finding the time what, youknow, to go look at properties.
(18:53):
And a lot of times they wantthey want to go hands off with
their with their property. Somaybe they own on a 4 unit
apartment complex that they'vethe family's owned for a long
time, and they just they don'twanna be collecting their rent,
doing the maintenance. Sosometimes they think, I don't
wanna buy another apartmentcomplex. Can you touch a little
bit on what what like kindmeans?
(19:15):
And and also we've worked with alot of clients that that go I
call it mailbox money. Go out,leave that kind of managing your
own rental portfolio to themailbox money being into a
syndication syndicatedinvestment. So, yeah, can you
kinda define maybe what likekind property is from a broad
perspective?
Scott Saunders (19:35):
So basic level, like kind property is just any
property held for investment orused in a business, exchanged
for any other property held forinvestment or used in a
business. The misconception thatthat is out there is I have to
kind of go the same type. Right?Bare land and no other bare
land, a single family and asingle family. And that's not
true at all.
(19:56):
Like kind property, and I'mgonna share with you some
basics, and then we'll kind of,you know, broaden it a little
bit. It's any type of propertythat you hold for investment,
anything. The properties thatare excluded are maybe an easier
way to look at it. You can'texchange the home you live in
because that's not held forinvestment. And then the other
category is property that's heldfor sale.
(20:17):
That might be doing a fix andflip. It might be a developer,
but anything where the intent isto hold for sale, not to have it
held for long term investment,which would typically be rental
income. Those two types ofproperties are excluded. But
what that leaves is everythingelse. So I can exchange out of a
piece of bare land and go into asingle family rental, go from 2
(20:40):
1 single family into 2, 2 singlefamily into 4, into an
apartment, into a commercialoffice building, into an
industrial, right, into a triplenet building.
Or as you mentioned, there arewhat we call fractional
ownership where you go in with abunch of co owners in a larger
commercial building. Somebodyelse manages it for you, and you
(21:02):
just get a a little slice ofthat building with a bunch of
other people that own it. Andnow somebody else manages it,
takes care of the tenants. So alot of people as they evolve is
they'll maybe move to somethinglike that. Right?
The need when you're younger isto build a portfolio. The needs
later on are cash flow and easeof management. And so in
(21:24):
exchange, you can really jump inbetween all these different
asset classes and really go fromone to another. So that's why
it's a great tool because itallows you to start with
something really small, roll itinto something bigger and bigger
and bigger. And 30 years downthe road, you've got this
substantial real estateportfolio that all started with
(21:44):
a one little single family home,you know, that somebody picked
up, and they just continuallyexchanged over time and allowed
all of that purchasing power tobe redeployed over and over
again, added a little leverageto help grow that.
And and that, honestly, for bothof you guys, that's where people
scale and grow a portfolio is byusing the 10 30 one exchange. It
(22:06):
it's such a powerful tool. Thinkabout it. If we'd looked at the
stock market, if you could buyApple or Amazon stock here and
sell it up here and not paytaxes, every financial planner
in America would say you'd becrazy to pay taxes when you're
gonna go out and buy more stock.With real estate held for
investment, we can do this overand over and over again.
(22:29):
And one of the benefits of thecode as it stands today is when
you do this, you can actuallypass away down the road and pass
it to your heirs with a fullstep up in basis. So there and
what that means is they get itat the value of the market then.
So you don't pay capital gaintaxes throughout your entire
lifetime. You pass on highlyappreciated property to your
(22:52):
heirs. They don't pay capitalgain taxes.
So this is you know, if youhaven't looked at an exchange,
you gotta at least look at it,Get with your tax advisor and
look at the benefits becauseit's a game changer in my
opinion.
Chris Picciurro (23:06):
Oh, it is. I mean, it it when you don't have
to you don't have to take achunk of your your your money at
the at closing and pay yourbusiness partner, that's huge.
And And that's gonna be the lastthing I wanna, you know last
misconception, we talk that Isee. We talk and text teaching
tax flow. Cash flow and tax inin cash flow and tax flow are
(23:29):
different.
Meaning, 1, when you sell aproperty, the cash you receive
at closing is not necessarilyyour gain. Your gain is based on
the basis of the property andand and that could be adjusted
for various things. The otherthing to consider is when you
are, when you are doing a 1031exchange, remember that you have
(23:51):
to deploy or you have to buy areplacement property for the
value of the property sold, notnecessarily the cash you receive
at closing. So and and so can wecould you touch on that just a
little bit and not to scarepeople because we know that
interest rates are a littlehigher right now. I'm not sure
what that's doing with the 10.31exchange volume.
(24:12):
I'd love your your thought onthat. So 10.31 exchange volume,
understanding the deploymentrules for the for replacement
property, and the third thing,though, is there are always
remedies for replacementproperty. We have clients that
are some clients we've workedwith that are mature age that,
quite frankly, have asignificant amount of assets.
(24:33):
They don't have a lot of income.So to get financed on a
replacement property would bechallenging, where where they
could go in and and they couldbuy a 10 30 one exchange
property and that comes withsome type of debt allocation.
And we're gonna have a separatepodcast on Delaware Statutory
Trust in the future. But can youkinda touch on those as far as,
(24:56):
1, people understanding thoserules, and, 2, easing maybe the
mind of people that areconcerned about picking up debt.
Scott Saunders (25:03):
Yeah. So there are 2 basic rules that you need
to keep in mind if you want 100%tax deferral. First one's really
simple. You look at yoursettlement statement, your
closing statement, and you'regonna have net equity. So number
1, you wanna reinvest all of thenet equity.
And by the way, that's afterclosing costs. So you're able to
(25:24):
back out the real estatecommissions, title company
closing fees. So it's netequity. If you get any cash out,
there's a term for that that youmay have heard of. It's called
cash boot, and that's taxable tothe extent you have capital
gain.
The second rule then is you'regonna look at your mortgage
payoff on the settlementstatement. If you pay off a
mortgage of 220,000, you wannahave that amount of mortgage or
(25:47):
more on what you're buying. Ifyou'd go down in mortgage, you
have what's called mortgageboot, and that's also taxable.
So reinvest all of the netequity. Number 2, the same or a
greater amount of debt.
And, you know, for both of you,if people wanna have less
leverage, they can always godown in mortgage if they bring
(26:08):
in cash to offset it. So ifsomebody wants to go near
retirement and they don't wannahave any leverage at all, if
they've got outside cash, theycan actually bring that into the
exchange, get rid of themortgage, but replace it with
new cash, and then they don'thave that debt burden to deal
with. To kind of address, thethe question about today's
(26:29):
interest rates, you know, Ithat's a common topic. I'm an
investor as well as a 10.31exchange person, and I will
share with you my biases. Ithink this is one of the best
buying opportunities right now.
I believe when the rates godown, whatever that is, I think
we're gonna see prices pick up,activity's gonna pick up, and
(26:49):
now we're gonna start to seepeople you know, because
inventory's really tight, atleast on the the single family
side of things. So I thinkthere's a high probability that
prices will go up, demand willgo up, and people are gonna be
kicking themselves. Why didn't Ibuy when the rates were higher
and it was easy to get a dealdone? In terms of the exchange,
and and you alluded thisearlier, Chris, when you do an
(27:12):
exchange because you're notpaying uncle Sam and the state,
you have all of your equity toput into that new property. So
that a lot of times makes thedeal a lot better.
Even though you're paying alittle higher rate, you've got
that bigger down payment goinginto it. And what I look at it
just from a practicalperspective, you probably heard
(27:32):
it. It's it's now getting oversaid. You know? Marry the marry
the property, date the rate.
You know? I've heard that manytimes. Get the asset. You can
always come back later when whenproperty when rates go down,
refinance, and then lock in abetter long term rate. I I did
that last year.
I bought assets myself and Ipaid the higher rate. Knowing
(27:55):
that somewhere down the road,I'm gonna do a refi probably as
the value goes up a little bit.Right? So I might even pull a
little equity out, and then I'llget a lower rate. So as an
investor, you wanna look longterm.
We're in a season where we wentfrom ridiculously low rates and
now we've kinda gone back tomore historically normal rates.
(28:17):
And I think a lot of peoplethink that, you know, they'll
start to, somewhere down theroad, they'll probably nudge
down a little bit and make itmore attractive. So if you're
investing for the long haul,lock in a good asset, get your
exchange done, get a goodpurchase that makes sense, and
then come back later on, workwith a good lender, and get a
better rate when the marketconditions change. That's my
(28:38):
take.
John Tripolsky (28:38):
And that's a good way to good way to kinda
wrap us up here too because wedon't I'm sure we can go into
the little nooks and crannies ofall the details. But before we
let you go, let's touch on onething that I thought was
actually the case, which Icouldn't have been more wrong,
you know, years back. So at10:31. Right? And I know the
(29:00):
answer to this, and I'm gonnatry to ask it in a way that
doesn't make it sound like Iknow the answer.
Can the cash ever hit my bankaccount, or where does it go
when we actually close on aproperty?
Scott Saunders (29:10):
It cannot go to your bank account. You can, in
any way, have access to it,control of it. So when you do a
1031, you've gotta set up theexchange before you close. It
can be 1 hour before closing.But we get this is the call, you
know, John and Chris, that weget all the time.
People say, oh, I wanna set upan exchange. And I go, when are
(29:32):
you closing? And they go, oh, wejust closed 2 days ago. And
unfortunately, I have to explainto them, if you've closed the
loans funded and you'vetransferred the burdens of
benefits of ownership over to abuyer, you've got a closed sale
and that money, even if it'ssitting at the title company,
there's a technical term, it'scalled constructive receipt. It
just means it's the same for youas if it actually hits your bank
(29:55):
account.
Now it's a taxable sale. So youcan't ever really unwind a
taxable sale when you've got themoney or it's Citi of the title
company. You always have to setup an exchange before you close.
And and Chris mentioned thisearlier, some people set them up
not knowing if they're gonnafind something or not. A a fee
is, you know, somewhere in theballpark of, let's say, $900 to
(30:18):
1500, somewhere that range.
So you're talking about a grand.That's your opportunity cost and
tying your money up for 45 days.So I find a lot of people do
that, and they end up after theyrealize what they owe in taxes,
they'll complete the exchange.But some people don't complete
an exchange, and it justconverts back to a taxable sale.
And then something else I wannamention, sometimes people do
(30:41):
partially deferred exchanges.
You sell an asset for $400. Youbuy one for, let's say, 360, and
you'll pay taxes on thatdifference, that boot that's in
between. And about a third ofour clients do partially
deferred exchanges. So don'tthink of it as an all or nothing
proposition. You could pull alittle cash out, take that dream
(31:02):
vacation, or go buy the sportscar, whatever you want, take the
hit on the portion you receive,and still get the benefit of an
exchange on the difference.
So I think that's something forpeople to keep in mind because
it's never fun to keepredeploying, redeploying.
Sometimes people wanna accessthe money. And the way that I'd
recommend that is you do anexchange and then refinance that
(31:24):
new property, what we call thereplacement property after the
exchange is over,
Chris Picciurro (31:29):
pull the cash out there, that's a tax free
event. Great point that youcan't touch your money, but also
we talked about different assetclasses getting exchanged. You
can exchange 1 property for 5properties. You could exchange 4
properties for 1 property. Youknow what I mean?
The timing obviously ischallenging when you're going
from several properties down to1, but it it's not always a one
(31:52):
for one one for one thing. Andthat's why it's important to get
with Scott, his team, and
Scott Saunders (31:56):
a and a qualified intermediary if if
you're typically a great realtoror most likely a title company
that's very reputable is goingto help you through it as well.
Yeah. Absolutely. That's a greatpoint. I just shared example
with some friends of mine.
I bought a piece of dirt here intown years ago for 90 grand. I
did an exchange out of that. Itbasically tripled in value, and
(32:18):
I went into 3 properties in yourgreat state of Tennessee up in
Clarksville. I bought 2 inWichita, Kansas, so I did 1 for
5. And I went from a piece ofland that produced no cash flow
into income property.
Those properties today are worthabout 1,500,000 out of a $90,000
investment and a piece of dirt.So you can see how if people do
(32:40):
that, you know, once or maybe dothat multiple times, how they
can really build a substantialportfolio pretty fast by doing
things like that. So, and it'sreal common that people scale
up, right? They sell one of theasset, they take the equity and
they buy 2 or 3, 4 replacementproperties. They might add
leverage, so they're gettingsome more benefits.
(33:02):
So it's a fantastic tool, and Ijust encourage your audience. If
you haven't looked at it, getwith your tax adviser, number 1.
Right? That's important. Getwith a knowledgeable qualified
intermediary and at least see ifit makes sense for you.
I bet you, you know, 9 times outof 10, it's probably a much
better strategy for mostinvestors unless you wanna cash
(33:23):
out. That's maybe the time itdoesn't make sense. If I'm, say,
hey, I'm done with real estate.I wanna go into other
investments and I no longerwanna own real estate. Maybe
that's the time.
But, Chris, you alluded to theDelaware Statutory Trust. That's
a great vehicle where people cankinda go from active into more
passive investment and be veryhands off. And that's why that
(33:45):
that whole niche has justexploded, you know, in recent
times.
John Tripolsky (33:50):
Well, excellent, gentlemen. Well, thank you both
for joining us on this one,obviously, talking on the topic.
And, Scott, we'll go ahead andput all your contact in the show
notes, here. So if anybody wantsto reach out to you directly,
obviously, they can. So we knowyou're a a wealth of
information.
Thank you both so much. I Ireally appreciate it. Thank you.
Alrighty, boys. Well, actuallyso next week, we have another
(34:12):
topic coming up, which, again,just watch out for wherever you
listen to podcasts.
Every Tuesday, a new show drops.But, again, I will drop Scott's
contact information in the shownotes. Feel free to reach out to
him. Great, great, greatresource and probably one of the
best educators. Not just on thistopic as a whole, but he's very,
(34:33):
very, very, very good atdescribing this in more detail.
We've actually done a longershow with him over on the mister
r show, a different one of ours,where we really dive into the
topic about an hour longactually qualifies for CPE for
those tax pros out there. Besure to check that one out as
well. And as we always closehere on the podcast, we will see
(34:54):
you same time next week,different topic, here on the
Teaching Tax Flow podcast.Everybody. Thank you for hanging
out with us here on this episodeof the podcast.
Now 10 30 ones. Right? You hearda lot about them. Maybe you knew
a lot about them. Maybe youdidn't.
(35:14):
Maybe you're just in the middle.Now you have a pretty good
understanding on them and atleast those key points that
could really keep you out ofsome some trouble, we'll say. Or
should we just say somesignificant financial loss if
you do not go about them theright way. As the example as I
brought up, something I didn'tquite understand years back,
almost found myself a little bitof little bit trouble there. But
(35:37):
with individuals like Scott andChris on your side, you will
figure this all out.
You will navigate the wonderfulworld of 1031 exchanges. So,
keep sending us over those topicideas, questions you may have.
We love them. That's what fuelsus here on the show. So we will
see everybody here next week asalways.
Disclaimer (36:01):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(36:23):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Popular Podcasts
United States of Kennedy
United States of Kennedy is a podcast about our cultural fascination with the Kennedy dynasty. Every week, hosts Lyra Smith and George Civeris go into one aspect of the Kennedy story.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com