Episode Transcript
[00:00:00] Speaker A: Welcome to AllView360 all things real Estate Podcast. With your hosts Daniel Gutierrez and Shannon Dempsey, we explore real estate from every angle, giving you insights, tools and confidence to make smart decisions that support your future. It's time for a new perspective on Property. Welcome to AllView360. Hi, Daniel.
[00:00:18] Speaker B: Hello. How are you?
[00:00:20] Speaker A: Good. Excited to be doing this again. My favorite part of how often do we do this? Every two weeks?
[00:00:25] Speaker B: Every other week.
[00:00:26] Speaker A: Every other week.
So the topic today, this is more your wheelhouse as far as the details, but. Well, you're the host, Daniel Gutierrez, and I'm Shannon Dempsey.
[00:00:37] Speaker B: Yes.
[00:00:38] Speaker A: And we're going to be talking about 1031 exchange.
Yeah. You're very excited about it.
[00:00:44] Speaker B: Yeah.
[00:00:45] Speaker A: Yeah. Okay, let's. You asked me if I know the history of them.
[00:00:49] Speaker B: Yeah.
[00:00:50] Speaker A: And I do not.
[00:00:51] Speaker B: Okay. So the history is often misunderstood. It dates back to.
Oh, gosh, sorry, I need to move my.
[00:00:59] Speaker A: Did you know this this morning or did you just Google this?
[00:01:01] Speaker B: No, I've known it for a long time. I like, this is something I vividly remember from grad school. And I like first deeply went into 1031 exchanges and how awesome they are and what we could all do, but more so the exact date, which I definitely didn't remember, but I remember it was a long time ago and it was 1921 in the revenue Act.
[00:01:22] Speaker A: Whoa.
[00:01:23] Speaker B: Yeah, it's been around for a long time. It's changed over the years and most recently it changed in 2017 with the jobs act, which is the first time the. Our legislator defined a 1031 exchange for only being applicable to real estate. Where in the past it was a like kind exchange for really pretty much any investment boats, cars, houses, artwork, cows, everything.
So it's, it's been around for a really long time. There was a lot of different uses.
But now specifically the only legal like kind exchange is real estate. And where it's also still misconstrued is it's not a condo for a condo, an office building for an office building, or a gas station for a gas station. It's real estate for real estate and specifically investment real estate for investment real estate. And it has to be investment. There's a few litmus tests there that the IRS would will look at in order to determine whether this falls within the confines of a 1031 exchange. And the 1031 comes from Internal Revenue Code, Section 1031 in the US Internal Revenue Code.
[00:02:32] Speaker A: Can you hold up? Yes, slow down.
Can you give just an elevator pitch on what a 1031 exchange is okay.
[00:02:42] Speaker B: 1031 exchange is a like kind exchange as defined by the Internal revenue code section 1031 where a real estate investor is able to sell investment real estate and buy investment real estate with while deferring taxes and not paying the capital gains as long as it's done correctly. Done correctly being that it's an investment property, it's sold, proceeds are held by a qualified intermediary, never touched by the seller and then deployed back into another investment real estate as outlined by IRC 1031. So you have to be defined within 45 days or identified within 45 days and closed within 180 days. And there's a few nuances that we're going to go into throughout the podcast but that's the gist of it.
[00:03:34] Speaker A: That's the, that's the definition. Let's take it back even further. I am a client. I have a house or I'm an investor. I have a gas station. I am going to have a million dollars in net proceeds on this property. Daniel, I heard about there's a 1031 exchange. Is that something I can should consider and why would I not just sell this and pay the gains?
[00:03:55] Speaker B: Yeah, absolutely. So you should absolutely consider it. It's not necessarily always the right thing to do, but if you have a lot of capital gains and you're in a really high tax bracket or you know you're going to have a really large tax liability that given year, think about doing a 1031 exchange where you defer those capital gains to a later date where you either aren't as worried about the taxes or just continue 10:30 wanting the proceeds and never pay those capital gains. Now at the end of the day the IRS will get their money so that's why they're okay with it.
[00:04:31] Speaker A: When is the end of the day for some people?
[00:04:33] Speaker B: Death.
[00:04:35] Speaker A: Death. So if I 1031, if I sell a property I 1031 the proceeds into a like investment and continue to do that over the next four decades and then I die and I did it 20 times.
I now where does that money come from to pay back all of those deferred taxes on all of those properties? And who's tracking that?
[00:04:59] Speaker B: The IRS tracks it. It's tracked in your tax returns and then when you die the estate will be responsible for paying that. There's stories of people starting out with, you know, especially back in the day like a $5,000 house and they've 1031 it so many times over so many decades that that $5,000 house is now like a $500 million apartment building with.
[00:05:24] Speaker A: A ton of deferred taxes along the way.
[00:05:26] Speaker B: A ton.
[00:05:27] Speaker A: Exactly a ton.
[00:05:29] Speaker B: So there has been multiple attempts to eliminate 1031s and every time it fails. Not to say that it won't, they won't succeed in the future, but as of right now, still fully legal and being done on a day to day basis.
[00:05:45] Speaker A: Can we, since we're speaking on capital gains. A lot, just to be clear, it's 250,000 if you're an individual, 500,000 if you're married or have a second person involved and you're not paying gains on that. It's anything beyond that.
[00:06:01] Speaker B: No, no, no.
[00:06:03] Speaker A: Tell me.
[00:06:04] Speaker B: Well, I shouldn't say no, but more than likely not because you're talking about your primary residence. That's where that exclusion falls in.
[00:06:11] Speaker A: Oh.
[00:06:11] Speaker B: If you're 1031, you're talking about an investment. So. So you can buy a home, live in it for two, three years, turn it into an investment for a year, and then 1031 it. And that would kind of fall within the bucket of all of it. You would still be have that $500,000 potential exclusion if married, filing jointly, which is a huge benefit. But if it's above the 500,000, then you're still paying the difference.
Or if you haven't met that requirement to live in the home for, what is it, two out of the last five years, then yeah, you're paying it.
[00:06:45] Speaker A: So then in that case, just to clear that up. So that number, those two numbers were set in 1997 have not changed.
[00:06:52] Speaker B: Correct. Do you see increasing?
[00:06:55] Speaker A: Yes. Do you think that that will. I, I think there needs to be an adjustment to it.
[00:06:59] Speaker B: Yeah.
When you look at the average price of a home in the United States, you're close to like, I think It's a low 400,000.
So it's not even just the like outliers on the coast anymore that are really getting disadvantaged by that number, but even Mid America is now coming close to that $500,000 average purchase price. So yes, I think over time it will be increased.
[00:07:21] Speaker A: Okay.
Okay, so let's keep going. Sorry, I just wanted to make sure we cleared that up.
Okay, so how does it work?
[00:07:28] Speaker B: Yeah, so you want to sell a property, you want to sell an investment property, you decide to sell, you hire an awesome real estate agent, awesome broker, and ideally, so you're selling what's called your down leg, your initial property property. Ideally you would want to find what's called your uplade first or your buy property first in order to not put yourself in a time crunch. After you sell, once you sell the property, escrow closes. The money is going to be transferred to a qualified intermediary. We'll talk about that in more detail later.
But then you have 45 days to identify the, the property you're going to buy and then 180 days to close on it in order to be within the rules of the law. So your qualified intermediary is going to hold the proceeds from escrow, they're going to file the necessary paperwork for the identification and closing, and then they will send the proceeds out to escrow for the closing of your up leg or your purchase.
[00:08:35] Speaker A: So when I close escrow on the property, we close escrow. That starts day one of the 45 days to identify what property we plan to exchange into.
[00:08:45] Speaker B: That is correct.
[00:08:46] Speaker A: And then from day 45 there, that then starts 180 days to get that property closed.
[00:08:52] Speaker B: No.
[00:08:52] Speaker A: Or that starts with day one on the 45 as well.
[00:08:55] Speaker B: Correct? Yes.
[00:08:56] Speaker A: Okay.
[00:08:57] Speaker B: Yeah.
[00:08:57] Speaker A: So basically day one, after you close escrow on the down leg, you have 180 days. And in that 180 days, the first 45, you need to identify.
[00:09:07] Speaker B: Yeah, you could identify, you could identify one property, you could identify multiple properties.
But there does become some complicate or some issues, some complications when you identify more than one property. But when you identify, you literally send the property to your qualified intermediary and they will file the necessary paperwork within those 45 days for, for that identification. If you don't, if you don't make it within those 45 days, your 1031 is gone. You're, you're no longer eligible for it.
[00:09:41] Speaker A: So then you pay the gains and you just get the remaining of the net proceeds.
[00:09:44] Speaker B: Correct.
[00:09:45] Speaker A: Okay.
[00:09:46] Speaker B: Yeah.
So there's a few details within that. What, and this is more of the strategy side. You want to find your up leg first because what you don't want to happen is go into escrow on your down leg. The buyer knows that you're in a 1031 and, or you're going to have to 1031 and your, your blood in the water.
[00:10:07] Speaker A: Yeah, you have, you have to buy this property.
[00:10:09] Speaker B: Yeah, you have to buy this property. Exactly.
So there's, there's strategy across the board. Work with your real estate agent, work with your broker, make sure they know what you're doing so they could help you. Any, you know, qualified and sophisticated broker or agent is going to know the rules, going to know the laws and they're going to be able to help you with this. Otherwise, if you're on the other side of a deal with a buyer, seller, or an agent who is sophisticated, who does know that they could very much use it against you if you're not ready.
[00:10:44] Speaker A: And as far as, why would you identify multiple properties because you're not sure.
[00:10:49] Speaker B: Which one you're actually going to want to close on.
[00:10:51] Speaker A: Okay, so, so say I sell my gas station, I have one gas station that I'm really interested in. Would I. I would still have backup properties that I'm also identifying. So I'm actually interested in all three of these. I'm strongly pursuing this one.
[00:11:06] Speaker B: Yeah, but you can't just give a list of a hundred properties.
[00:11:10] Speaker A: Isn't it three?
[00:11:11] Speaker B: It is, exactly. Okay, so there's some nuances there. So, for instance, if I was going to be selling one of my properties and I knew I was doing a 1031, what I would do is, is first find the up leg, get into escrow with that and ask for a little bit of a longer escrow so I could accommodate the sale of my down leg. From there, I'm listing my down leg, listing my existing property and selling it. So then by the time that I am closing escrow, the money goes to the qualified intermediary, they file the paperwork, and then a few days or weeks thereafter, I'm closing on my up leg.
What could happen?
[00:11:51] Speaker A: So during the escrow on the down leg.
[00:11:53] Speaker B: Yeah, what could happen is I list my existing property, I sell it, money goes to qualified intermediary, I identify my properties, I go into escrow with one of them, and the seller of that property knows I'm doing a 1031, my time has run out, I'm over the 45 days I've already identified and my negotiating leverage goes to zero.
They know that I either have to buy their property or I'm going to have to pay all the capital gains. Now, at that point, it becomes a business question for you is what's cheaper? Paying the capital gains or paying whatever they're now asking or no longer willing to budge on or negotiate on.
[00:12:36] Speaker A: And I do know some people that decide I'm just going to pay the gains and get. If they can't get a property that they feel is going to serve their portfolio.
[00:12:44] Speaker B: Yeah. At the same time, too, you don't want to be in a position where you're being forced to buy a property you otherwise wouldn't. Is like what my account says, don't let the tail wag the Dog, don't make bad decisions to save on taxes while ruining my, you know, my overall financial situation.
[00:13:00] Speaker A: Because now those deferred, not tax free numbers, the deferred numbers are now going to sit in the next property.
[00:13:07] Speaker B: Correct. And that is a very good designation or distinction, I should say.
It's not tax free. It is tax deferred. The IRS will eventually collect their money.
[00:13:19] Speaker A: So I was telling you about a scenario recently or it was a client that had sold a single family home investment, 1031, that we put it into another single family home investment rental property.
[00:13:31] Speaker B: Yeah.
[00:13:32] Speaker A: It ended up being his daughter lived in that area. So she was the tenant and she paid into an account and everything. But for whatever reason, it, at the end of the day, when he sold, that did not work as far as how he intended it to. And then he had to pay the deferred taxes on the first property and it was like $400,000.
Just.
It didn't work. You got to follow the exact steps of how to do it and make sure you stay within the parameters and do it all correctly.
[00:14:02] Speaker B: Yeah.
So some of the, the nuances of what we were talking about as far as identification, just so I don't get this wrong, I'm going to read it.
So the three property role, you can identify up to three properties, reg list of the value and purchase any or all of them. The 200% rule, you can identify any number of properties as long as their combined fair market value does not exceed 200% of the value of the property you sold. And then the last One is the 95% rule. You could identify more than three properties or exceed 200%, but you must acquire at least 95% of the total value of the properties you identified.
And then another little plug for us, we have a really great blog on our website that breaks down every detail of this and shows you best practices on how to do it.
First and foremost, I would make sure that you have an agent who knows how to do it. You have a qualified intermediary that you know and trust and you are comfortable with the rules and what you're doing. If not, you could get into issues.
[00:15:10] Speaker A: Agreed, Agreed. Agreed.
[00:15:12] Speaker B: Do you want me to tell you about qualified intermediaries, Shannon?
[00:15:15] Speaker A: Yes, that's what that was my next question.
[00:15:16] Speaker B: God, I'm so excited about this.
So unlike escrows, qualified intermediaries are like kind of the gray area of this transaction.
A lot less regulation, pretty much anyone could do it. And because of that, there's bad actors in the industry.
You can have your attorney do it. You. Some escrow companies do it.
There's a specific 1031 exchange Intermediary companies that do it. And there's long, you know, long established good reputations and then there's the fly by night ones. Once that money goes to them, there's lots of stories of them disappearing.
[00:15:52] Speaker A: What?
[00:15:53] Speaker B: Yeah.
So for instance, escrow is regulated by the state. Tons of regulations, licensures, insurance requirements, all of that. Right.
Real estate agents, same thing. An attorney, the same thing. Qualified intermediaries, Wild west, anyone could do it. Whoa.
Yeah.
[00:16:12] Speaker A: So there are. So it's not heavily regulated. Meaning that they could literally run off with the money.
[00:16:18] Speaker B: They could literally run off the money and they're. And there's a lot of stories of that happening.
Aren't you glad you asked?
[00:16:27] Speaker A: Yeah, that's good to know.
So make sure that you are using a reputable, reputable, vetted, trusted 1031 exchange company or go through like an escrow attorney, something like that. What do you recommend?
[00:16:42] Speaker B: Yeah, even then an attorney. I mean you could use an attorney, but unless it's their wheelhouse, they could not do it. Right. It's not that they don't know how to.
It may be just new for them or they don't, they get busy and forget the dates. If it was me. And what I do is use a reputable 1031 exchange intermediary company. There's quite a few out there, a few really long established ones that do a great job. They're easy to work with. The, you know, the agents are great and that's best case scenario how?
[00:17:14] Speaker A: I mean I've used and recommended the same person over and over again.
Is that just the history there? Or how would someone know how to find some one that has a good record?
[00:17:26] Speaker B: So you could look online, but the best thing is a referral. You've done transactions with them, they do a good job, you know them and there's that trust built over multiple transactions and a long reputation.
Looking at their, their website, their reviews, or even asking your attorney, they're probably going to have good recommendations as well.
But making sure they're reputable, they're established, they're not a brand new company.
[00:17:56] Speaker A: Okay, I want to talk about a, like what the huge advantages are and the success stories there and then also what the risk and pitfalls are and where this can go wrong. If this is your plan and you don't execute it properly, what that looks.
[00:18:10] Speaker B: Like, let's do it.
[00:18:11] Speaker A: But let's talk about the positive stuff first. Okay, so what are the advantages? Why would someone do this? Why? How has it worked?
When have you seen it work?
[00:18:20] Speaker B: Well, I've seen it work well a lot. And why people do it is because you get to defer the capital gains on the sale of the property.
Let's say, even going back to one of the examples you and I discussed and one of our last podcasts, the first home you helped me buy in Huntington beach, it's more than doubled in value at this point, which is going to be a fairly large capital gain.
And then you have depreciation, recapture, you have a lot of other things there. So instead of paying that massive capital gain, I could take that investment, sell it 1031 into another investment and not have to pay those taxes on it. Also too, I'm now going to be able to invest into likely a larger asset, a higher cash flowing asset, and ideally a better performing asset without even needing to potentially put any more money down because I have all of the gains from that original home that I'm selling, where I could sell, you know, a townhome by the beach in Huntington and turn it into, you know, a large office building in Newport or Irvine. And is that your plan ideally? Probably.
[00:19:38] Speaker A: Well, sounds like a great one.
[00:19:39] Speaker B: Yeah, one of them.
And not have to put any more money in or pay taxes on it.
[00:19:45] Speaker A: And now you're going to have a larger property, more appreciation over time, higher cash flow.
[00:19:50] Speaker B: More cash flow.
[00:19:51] Speaker A: Yeah. And no taxes at that moment.
[00:19:53] Speaker B: And there's another strategy too where you could do that. And if you don't, if you need the cash but don't want to pay the capital gains or some nuances in between, you could do a 1031 exchange into that higher value property and then do a cash out refi and pull equity out of the deal. But you still are well within the laws of the 1031.
So I could sell, let's say say that same Huntington property, go 1031 into whatever, an apartment building, and then I say, hey, I'd much rather have the cash in my pocket than just having all that equity in that next purchase. Then you take a, you could take a line of credit on that property or you take a cash out refi and you still haven't paid the capital gains, you still have the taxes or you saw the cash in your pocket and you just have a little bit more debt on that next purchase.
[00:20:42] Speaker A: Okay, that's a good strategy there.
[00:20:45] Speaker B: Yeah.
[00:20:46] Speaker A: What about, what are the risks and pitfalls? Like what would be a scenario where this fails? Or. Yeah, I mean we kind of touched on it a little bit. Like if you don't identify a property or if you don't do it correctly, it could hit you later on down the road. But in general, what are the major risks to consider?
[00:21:05] Speaker B: I mean, you pick the wrong intermediary and they steal all your money.
[00:21:09] Speaker A: Yeah.
[00:21:09] Speaker B: You put yourself in a bad position with your up leg and are forced to buy something you otherwise wouldn't because your potential capital gains is just too large for you to stomach.
You try getting very creative with what you're buying and selling. And the IRS comes back and says not only did you not abide by the rules, but you know, we found you to be committing fraud by trying to do it this way.
And then that's not just them coming back and saying, well, now you owe all the penalty or all the taxes. That's them coming back and saying you owe all the taxes plus all the penalties and fines.
I think those are the biggest ones that come to mind.
[00:21:53] Speaker A: I think another, I think the market and what the market's doing during the time that someone would want to do this is a big risk as well. Like if it's an incredibly low inventory time or if there's not options, then that's when you're going to run your timeline out and end up not securing a property that you like or being forced into one. Like we talked about, that's not a good choice. And you, you felt forced and had to do it.
[00:22:18] Speaker B: Yeah, but you could buy across the entire country.
So there's a lot of opportunities to get out of one specific market into another.
[00:22:28] Speaker A: When, what markets do you see the capital gains conversation happen more?
[00:22:34] Speaker B: Well, high appreciation markets, the, primarily the coasts. So the coasts are generally going to be higher appreciation and then middle America is going to be more so the, the higher returns, not necessarily higher cash flow because the rents are going to be lower, the numbers are going to be lower relative to coastal properties or you know, class A markets. But the, yeah, the, the higher end markets, the coast where you have those massive appreciations like California is averaging 10% appreciation year over year for the last like 20, 20 years almost.
So that's where you're going to see these be a lot more advantageous. But people use it everywhere. It's advantageous regardless. If you could, your, if you could defer your taxes. Defer them.
[00:23:21] Speaker A: Yeah.
What about, so when you were Talking about the three rules, the 200%, the 95%, my question during that was, so say I have a property, it's worth $3 million I sell it. I have $3 million. Can I then go and buy three $1 million homes or three $2 million homes?
[00:23:41] Speaker B: Yeah.
[00:23:41] Speaker A: And turn my one investment into three?
[00:23:43] Speaker B: Absolutely.
[00:23:44] Speaker A: Could I buy two $2 million homes and a gas station?
[00:23:48] Speaker B: Yep.
[00:23:50] Speaker A: Literally. So it's more about.
Here's the money. You have a certain way to disperse it, and you can't just. You just can't do it into a primary residence.
[00:23:59] Speaker B: Correct. So you could do all of that. You buy it, you do the 1031. And they have to remain rentals for investment properties.
[00:24:08] Speaker A: If you move in for a certain period of time.
[00:24:11] Speaker B: Say again?
[00:24:12] Speaker A: For a certain period of time. What if I sell a rental property? I buy my forever house. I'm not going to live in it for the next 20 years.
What happens when I move in and make that house my primary residence?
[00:24:23] Speaker B: Yeah. Then your accountant should send the IRS a nice letter saying, hey, this is no longer an investment. This is actually now primary residence. And the IRS is going to send you a nice letter back saying you owe us a ton of money. Money.
[00:24:34] Speaker A: Oh.
[00:24:35] Speaker B: Because now at that point, it's no longer within the confines of a 1031, and you're no longer able to defer that capital gain and it all becomes due.
[00:24:46] Speaker A: How do they calculate?
Obviously, it's whatever gains were deferred from the property I sold to purchase that one. But then are there gains at that point evaluated for the current property?
[00:24:56] Speaker B: Depending what state you're in, is how it would be assessed. But yeah, they're gonna. They're gonna wanna assess it, determine the value, and then figure out the capital gains. And all of that is recorded on an annual basis on your tax return.
[00:25:09] Speaker A: So you have to essentially purchase your rental property to make your primary in some capacity, not for the full amount, but you do have to pay to be able to make that.
[00:25:18] Speaker B: Yeah.
[00:25:19] Speaker A: What if I just make it a second home?
[00:25:22] Speaker B: Nope.
You could have.
[00:25:24] Speaker A: It's not an investment.
[00:25:26] Speaker B: You. So you could use it as a second home, but you're gonna be.
You're gonna be really limited and really in that gray zone. So if you use it like a few days a year. Sure. If you're there six months a year. No chance. And that's where you start getting into some of the really creative ideas that you especially see on like Instagram or Tick Tock or all those crazy people who are like, you know, the, the tax fraud influencers.
If you're, if you're getting that creative, it's. It's not going to work at the.
[00:25:55] Speaker A: End of the day either your estate is dealing with paying the deferred taxes, or you at some point in your life will have to pay back all of the deferred taxes.
[00:26:05] Speaker B: So one of the ones I see or hear is people say, hey, I'm going to do a 1031, and then from there I'm going to buy it as an investment property, then I'm going to lease it to myself, or I'm going to lease it to my, my LLC or my corporation and I'm going to live in there. But technically, this lease to my LLC.
[00:26:20] Speaker A: Or corporation, like on paper it looks like an investment.
[00:26:22] Speaker B: Yeah, not happening. The IRS is smarter than that.
It's not going to fly. You may not get caught immediately, you may even never get caught, but when you do, and if you do, you're in trouble.
[00:26:34] Speaker A: Okay, so there really are no loopholes around this.
The win is that you get to defer your taxes and keep your money in real estate. And you're essentially committing to keeping your investment in real estate in this scenario.
[00:26:48] Speaker B: Correct. I mean, it's been around for so long that the loopholes have been tried and they've been closed.
And the government's gotten really good too at putting laws in place. They kind of blanket any potential loopholes and say, hey, if we find you that you did something with the intent of defrauding the government, like they're coming down on you.
[00:27:10] Speaker A: Okay, but that's if you're trying to find a loophole, but if you're genuinely trying to use this in a way to build your portfolio, build your worth, build your cash flow, all of that good stuff, this is a wonderful way to do that.
As long as you don't plan on using that cash for something else or that equity anytime soon.
[00:27:29] Speaker B: Correct?
Yeah. Okay, but even if you're planning on using that cash or something else, you could still do a cash out refi. You could still take a line of equity out on that property and pull that cash out without having to pay those capital gains.
[00:27:43] Speaker A: Can I give you a real life scenario?
[00:27:45] Speaker B: Let's do it.
[00:27:45] Speaker A: Okay, so if I have a client, they own a house free and clear.
They have already purchased their next house, so it's a primary residence. They don't have a lot of single individuals. So there's 250,000 in.
What is that? Exceptions there for the gains. But realistically, there's a lot of gains there that will be paid. Okay, but when he purchased the next house, a family member gave a loan, a personal loan that will have to be paid off with the proceeds of the other house. Okay, so it's. So the cash is needed. But what kind of. Listening to you today.
He could 1031 that into a duplex or something that would produce higher cash flow, be more intended for a rental investment property, move the money there, then do a cash out refi and pull out the amount that he would have to pay back the family member for.
[00:28:38] Speaker B: Yes. Assuming that there's enough equity in that next deal for a bank to actually loan them that cash out refi or that line of equity. But yeah, absolutely.
[00:28:47] Speaker A: So, like right now we're dealing with interest rates.
My motion detector. We're dealing with interest rates that are high but going down. So if there was time on their side with the payback and everything, you essentially could get a deal now with how the market is. And then once the rate starts to trickle down, then you could do that, cash out refi, make everyone whole again. And now you have a better rental investment in your portfolio.
[00:29:14] Speaker B: 100%.
[00:29:14] Speaker A: And you deferred the gains.
[00:29:16] Speaker B: Yep, exactly.
[00:29:17] Speaker A: Okay, that's a win.
[00:29:19] Speaker B: Yeah.
Cool.
[00:29:23] Speaker A: What is your. Like, do you want to sum this all up? Do you have more fun facts in your small little brain?
[00:29:31] Speaker B: That's rude.
I mean, there's a ton of benefits to it. I highly recommend that everyone evaluate this as an option when selling if they have the ability to keep the home or turn it into a rental or want to get into investing.
I've seen a lot of people defer a lot of money for a very long time and be able to really add to their portfolio like they otherwise wouldn't have if they had to pay all those capital gains.
So a great tool, a great resource, a great opportunity for. For, you know, the everyday person to be able to really supercharge their real estate investing and build generational wealth for themselves and their families.
[00:30:20] Speaker A: This is something that if someone's considering or has questions, they can reach out to you a hundred percent to kind of discuss. You'll probably be jazzed on it.
[00:30:27] Speaker B: Yeah, those are fun. I like those conversations.
[00:30:29] Speaker A: Those conversations.
[00:30:30] Speaker B: Yeah.
[00:30:32] Speaker A: Okay.
[00:30:33] Speaker B: I mean, I'm trying to, but going, going back to the previous point, like, if you're gonna get super sneaky and technical, like, oh, I'm going to sell this property to my llc and then I'm going to have my daughter move into it with the lease, and then I'm going to use the proceeds to buy this other one. Like, if you're getting that creative, it's not going to work.
[00:30:55] Speaker A: It's pretty black and white. It is, and it's been around forever. I'm surprised that most.
I know a lot of people know about it, but I feel like it's not as common or as well known as it should be for how beneficial it is and how long it's been around.
[00:31:09] Speaker B: Yeah. Well, the conversation I have with clients, or I guess that I hear back from clients, is like, oh, I've heard that's difficult, or it's complicated, or they're just afraid of it, and they don't.
[00:31:19] Speaker A: All good things are complicated.
[00:31:20] Speaker B: Yeah. They don't do it like the Augusta rule. Are you familiar with Augusta rule?
[00:31:25] Speaker A: Do you think I'm familiar with the Augusta rule?
[00:31:27] Speaker B: I do, because you have a big brain and I have confidence in you.
[00:31:33] Speaker A: I do not. I know nothing about it.
[00:31:34] Speaker B: Okay. The Augusta rule is the rule.
It's the PGA Tour in Augusta. Augusta, Georgia. I believe it is where you. And the rule is now applicable for the entire country. You could rent your home up to eight days a year and not pay taxes on the rental proceeds from. For. For those eight days.
And that was set up.
I need to look at the history.
[00:32:05] Speaker A: I don't understand.
Why would you. You can rent your home for eight days a year. Was this because when the PGA Tour was there, people would rent their homes out and then they would not have to pay taxes on that amount?
[00:32:15] Speaker B: Yeah, for, like, crazy amounts. Like, people are renting their homes, like, their little homes out in Augusta, Georgia, for, you know, their entire monthly mortgage on any given day of rental.
[00:32:27] Speaker A: Okay. So if you have a property in a area that has an annual event that the properties get high rents during that particular couple weeks of the year.
[00:32:38] Speaker B: Yeah.
[00:32:38] Speaker A: You can apply the Augusta rule.
[00:32:40] Speaker B: Correct.
Cool.
So there's certain, like, you know, cool little laws like that that you could take advantage of. 1031 is one of them. Like, I have a buddy, lives on the beach is his primary residence.
But generally for, like, Fourth of July or like, the air show or things like that, he'll rent his house out for a crazy amount of money. He'll go on vacation somewhere, and, you know, it's tax free.
[00:33:06] Speaker A: Yeah. Take that rent, go on a killer vacation, come back. And does he apply the Augusta rule?
[00:33:12] Speaker B: He does. Cool. Yeah.
[00:33:15] Speaker A: How do I buy a house in Augusta or on the beach?
I get 1031.
[00:33:20] Speaker B: The homes near Coachella. Right. Like, they're not the expensive homes. They're getting more and more expensive, but they're. The nightly rent during Coachella and Stagecoach is probably enough to cover six months of their mortgage.
[00:33:37] Speaker A: I'm so happy you're a friend that never said, let's go to Coachella.
[00:33:40] Speaker B: Yeah, that's not me.
[00:33:41] Speaker A: Nah, that was not the vibe.
[00:33:44] Speaker B: But I hear the stories of everyone's hot dirty, the lines, the bathrooms. I'm just like, what were we doing.
[00:33:51] Speaker A: When everyone was at Coachella?
[00:33:53] Speaker B: I don't know. Probably not waiting in line for a.
[00:33:55] Speaker A: Porta Potter buying and selling real estate.
[00:33:57] Speaker B: Yeah.
[00:33:57] Speaker A: Yeah.
Yikes.
[00:33:59] Speaker B: Yeah, okay.
[00:34:00] Speaker A: Yeah, but that makes sense. The Indio houses and things like that.
So that's more of a. That's more of a fun rule for people that already own property. Like, I wouldn't intentionally seek out that. But for people that own properties in those areas.
Yeah, that's awesome. Austin. If you own it during south by Southwest. Yeah, things like that.
[00:34:20] Speaker B: Yeah, exactly.
And then the legislation, as we mentioned on 1031 is there's always a potential for it to change.
My personal opinion that is that if it does change, I find it very hard to believe that the government would turn around and say, okay, everyone who's been doing ten 31s now has to pay all the capital gains. What I think would be more than likely to happen is them to say, okay, this is being phased out over this many months or years, and then you can no longer do it. And then once you sell out of your property, you're likely to, you know, you're going to be likely to have to pay those capital gains at that point because they're going to phase out that 1031 exclusion.
[00:35:04] Speaker A: I wonder what the number is of current deferred taxes through 1031 exchanges.
Do you think ChatGPT knows?
[00:35:11] Speaker B: I think so.
[00:35:13] Speaker A: Who can get there first? I'm going to ask.
[00:35:15] Speaker B: Okay.
[00:35:20] Speaker A: Okay.
How would I ask it? What is the estimated total of deferred taxes sitting in 1031 exchanged properties?
Okay, so they have a number. They've estimated.
[00:36:02] Speaker B: They.
[00:36:02] Speaker A: The Joint Committee of Taxation, J. CT has estimated the cost of 1031 exchanges around.
What do you think the number is? And this is just from 2019 to 2023 was when this number was extracted.
[00:36:19] Speaker B: I don't know. I would probably put it at a few hundred billion.
[00:36:23] Speaker A: $51 billion.
[00:36:25] Speaker B: Oh, okay.
[00:36:26] Speaker A: In deferred taxes sitting in properties that have been 1031 exchanged.
[00:36:30] Speaker B: I thought it would be more than that.
[00:36:34] Speaker A: You said three billion.
[00:36:35] Speaker B: No, I said a few hundred billion.
[00:36:37] Speaker A: Oh, a few hundred billion. 51 billion.
[00:36:39] Speaker B: Okay, let me ask you another question.
What do you think is higher? The number of deferred taxes in 1031 exchanges or the Harvard Endowment Fund.
[00:36:55] Speaker A: Because the Harvard Endowment Fund.
[00:36:57] Speaker B: Yeah.
[00:36:58] Speaker A: What is that number?
[00:36:59] Speaker B: I think it was like 54 billion last time I looked at.
[00:37:02] Speaker A: Dang. Why would you be looking at that?
[00:37:04] Speaker B: I think it's just such a wild number to think about. And they still charge tuition.
They have $54 billion in their endowment and like they still charge people to go to school.
Wow.
[00:37:22] Speaker A: Another little fun fact.
[00:37:24] Speaker B: Yeah. Then what university do you think is number two highest endowment?
[00:37:29] Speaker A: Yale.
[00:37:30] Speaker B: No, that's good.
Good guess.
[00:37:35] Speaker A: What is it?
[00:37:36] Speaker B: Texas.
Oh, A and M.
No, Texas. Texas. Oh, yeah, it would be Texas A and M. Yeah. Longhorns. Yeah, Texas name.
And the majority of it is from.
[00:37:47] Speaker A: Donors from oil money in that campus is incredible.
[00:37:51] Speaker B: Yeah.
[00:37:52] Speaker A: Okay, any other fun facts, closing statements on 1031 exchanges?
[00:38:01] Speaker B: No. But I want to ask you what is your best story from a 1031 from one of your clients?
[00:38:08] Speaker A: I've had a few people that just have been incredibly successful with it not being as stressful as it might seem with the timelines and everything like that. We knew what we were dealing with going into it. We kind of did what you said where we knew in general what they wanted to purchase with the 1031 exchange, that there were options there before we committed to the sale of the property.
And they've. They did it successfully. I can think of three right now that they still have them. Rental properties.
Bigger, better, greater locations from properties two of them were. They owned kind of one bedroom condos as first properties. They end up, you know, getting married or moving into a different property and then they 1031 that into a bigger investment for themselves.
And they're happy with it. Yeah, I haven't really had any major fails with them.
[00:38:59] Speaker B: Yeah.
[00:39:01] Speaker A: And they seem to move along just like a normal transaction. It's just kind of this added element to the beginning and the end.
[00:39:10] Speaker B: Yeah, that's how it should be.
[00:39:12] Speaker A: Do you want me to ask you what your major success stories are with it?
[00:39:16] Speaker B: Only if you want to.
[00:39:18] Speaker A: I hope it's in the future going to be Huntington beach into a bigger office building.
[00:39:22] Speaker B: Yes, maybe.
Probably Long beach into a bigger office building. Huntington Beach, I think has still has a lot more room to run Long Beach.
Just the fact that it's in LA County. I would be more than happy to sell that building and get that capital out of LA county and deploy it in Orange County.
[00:39:43] Speaker A: We need to tell that Long beach story in a podcast at some point.
[00:39:46] Speaker B: Oh, we do.
[00:39:49] Speaker A: With that agent. Yeah, she was great. Okay. Anything else on 1031 exchanges or do you want me to Beg people for likes and subscribes and comments.
[00:39:59] Speaker B: You could beg, but I think that's the majority of it.
I guess one thing to note too is look at the laws of the individual state where you're buying and selling, because there are nuances there where it wouldn't be applicable to the federal government or the IRS's capital gains, but you still may have to pay some kind of tax in your state. So look at that.
[00:40:26] Speaker A: Okay. Basically get advised by someone that knows what they're doing or can ask the right questions, at least knows what questions that need to be asked, what marks need to be hit to make sure it's done successfully.
[00:40:38] Speaker B: Yeah. And if you're questioning why you need a qualified intermediary and you think it's a waste of time or money, if you touch that money at any point, if the seller in any way takes hold of that money, controls that money, gets that money into their bank account, the 1031 is over. There is no going forward. It's null and void. It's done.
So you need a qualified intermediary. Don't even think about not using one. It will null and void any 1031 plans you had going forward.
[00:41:12] Speaker A: Be cautious, be cautious, be cautious. Okay, I'm excited for the next topic.
We want people to, like, subscribe, comment, let us know what you guys want to talk about. We have a whole list coming up, but if there's anything specific, we would love to do a deep dive on it.
[00:41:32] Speaker B: Yeah.
[00:41:34] Speaker A: Okay.
[00:41:36] Speaker B: Well, thank you, Shannon. This was. Bye.
Bye.
[00:41:40] Speaker A: Bye. See you later.
[00:41:42] Speaker B: See ya.
[00:41:43] Speaker A: That's a wrap on this episode of AllView360, all things real estate. If you found this helpful, don't forget to subscribe, leave a review and share it with someone navigating their own real estate journey. Connect with us anytime on Instagram @AllView360 and on LinkedIn @AllView Real Estate. Until next time, stay curious and keep your perspective. 360.
