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
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
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John Tripolsky:
Hey, everyone and welcome back to the podcast episode 85. Today, we are gonna take a deep look into those 1031 exchanges. Now, yes, we've done one of these shows much earlier on in the teaching tax flow podcast life, but that was almost 2 years ago. So, as always, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:
Hey, everybody, and welcome back to teaching tax flow, the podcast. We know you listen to every single one of our episodes we have, and especially if you go all the way back to I think it was episode number 3 dating back November ish of 2022, we talked on this topic of 10 30 ones. So if you didn't listen to it, you're gonna get a breakdown. And, actually, we brought on a guest who is better looking and smarter than the both of us for this one. But before we introduce him, Chris Pacuro, you know, my buddy, the tax guy.
John Tripolsky:
How's it going?
Chris Picciurro:
Great to be back on my own podcast as you usually like to say, John, or our podcast.
John Tripolsky:
I tried to mix it up a little bit this time. You know? I tried to take ownership of it a little more than I usually do. So Well,
Chris Picciurro:
the summer's upon us here and almost. The days are longer, and it's warmer out, which is great. More time for outdoor activities, certain sports that people like, and I would be remiss without mentioning pickleball as probably the number one sport in America at this point. Anyway, that's not what we're here to talk about. Although, pickleball is is definitely an amenity that that many people look for, especially when investing in in real estate and rental properties and maybe apartment communities, which ties into 10 30 one exchanges.
Chris Picciurro:
So we did an episode, the 3rd episode. Gotcha. It was probably a part of the pizza box series where we're recording these podcasts in a echoey home and floor in our Florida property, and, we talked about them. We had some lot of great information. But as the teaching tax law community has grown and allowed us to expand our wings, we've been able to attract some amazing guests.
Chris Picciurro:
We have an amazing guest today that that is going to shed life on 1031 exchanges. We're also gonna talk about any type of updates in just in the real estate industry. We know we have a little bit higher interest rates right now. And what we want people when they walk away from this episode, understanding when a 10:31 might make sense, and what are some of just the basic rules and some of the basic challenges, but also some of the remedies and making sure, John, you know, in Teaching Daxelow, we talk about building your board of directors. So making sure you're working with the right people.
Chris Picciurro:
So I'm super excited to introduce Scott Saunders, who has personally helped me, got me out of a pickle one time, to successfully complete 1 of our 10 31 exchanges, but also has not only worked with people in our private CPA practice, but in the teaching tax flow community. Scott, welcome to the teaching tax flow podcast.
Scott Saunders:
Hey, Chris and John. Great to be with you. Fun topic. Always love talking about all things tax deferral, helping real estate investors and business owners take that equity, redeploy it, and get better rates of return. So always a fun topic.
Scott Saunders:
Really excited to jump in and kinda talk about what it is, how people can take advantage of it.
Chris Picciurro:
Well, Scott, can you tell us a little bit about your history, your background, the team you lead, and, and how you found yourself as, in my opinion, the number one qualified intermediary and 10 30 1 resource out there?
Scott Saunders:
Yeah. Believe it or not, I stumbled into this industry way back in 1988 before we even had the treasure regulations that we have in place now. So we were operating after a tax court decision, the Starker case. And I kinda grew up in the 10/31 industry. Been doing this now for 36 years.
Scott Saunders:
I'm a senior vice president with asset preservation. We're a national qualified intermediary. I'm coming to you today from Denver, Colorado, so that's where I'm based. And, you know, I spend a lot of time just helping investors understand what the rules and process are and, going through it. Sometimes you have simple scenarios.
Scott Saunders:
Sometimes they get a little more complex and kind of everything in between, but just always fun to talk about this topic and really help investors take advantage of this part of the tax code. It's been around, as you guys probably know, for a 103 years now. So it's been a long part of the tax code, but yet people are still kind of unpacking it and realizing all the things it can help them accomplish. Well, I think
Chris Picciurro:
it is it is can be a complicated transaction, but we always talk about in our community and teaching tax law community that, you know, we want people that can take something complicated and then make it seem not complicated instead of vice versa. And that's when you know you're working with someone special. So for our listeners, a lot of a lot of times they hear about 10 30 one exchanges. When when when does a 1031 exchange or what is it, I guess, from a 30,000 foot view? I know you mentioned tax deferral because we know that tax agencies are are involuntary business partner, and tax laws are gonna encourage and discourage certain behavior.
Chris Picciurro:
So if you were to sell let's say you own a piece of real estate and, and you sell that real estate, you would you are gonna have a capital gain, hopefully, and then you're gonna have to pay a portion of that capital gain to your business partner, the IRS. And golly, if you live in a state you know, we always like to throw California under the bus, New York. Some of these high tax states, you're gonna pay some to them and maybe local, a local tax agency. But, you know, 10 30 one exchanges under the Tax Cuts and Jobs Act are really only available to real estate, and that's what we're here to talk about. But, yeah, could you tell us a little bit about what what it is and what Yeah.
Scott Saunders:
Yes. Yeah. Happy to do that. So at a very high level, if you're gonna sell a property, 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 basic level is just this.
Scott Saunders:
I take a property that I've held for investment or used in my business, I transfer to a buyer, and then I set up this thing called an exchange, and we'll get into the mechanics, and I receive back other like kind property that I hold for investment or use in my business. So sale, give a property, get back cash. Exchange, give a property, get back property. So that's what it is. Now what it allows you to accomplish, and you alluded to this, Chris, you don't you're able to defer paying all the different taxes that would otherwise be owed.
Scott Saunders:
So it's a big advantage. You really get all of that gross equity that you can redeploy into another property or maybe even properties. So you're gonna get a better rate of return because you got more cash you're reinvesting. A lot of times you can acquire more property. You can boost cash flow.
Scott Saunders:
You can even go up in value so you have a little bit more to depreciate. So all sorts of advantages doing an exchange versus just selling and paying uncle Sam and the state tax authorities what you're gonna owe and gain.
Chris Picciurro:
So if you're if you're listening to this and you yourself, you or you know someone that owns property that's gone up a lot in value and you maybe it's at the top and you want to sell it, but you don't wanna get hit by that tax, the 10.31 exchange could be an amazing opportunity. The other kinda hidden benefit of the 10.31 exchange is typically when you go into that next property, you have a larger down payment because all of your deferred gain, you're not it's gonna be a lot easier for you, to get financed if you do go up in value. And the one our most recent one that my wife and I did, we went up in value, yet I didn't even bring any money to the table because I had so much equity that I was rolling into my next property. And that was that was really great. So I think some of the things so so let's talk just a little bit about if someone's considering doing the 1031 exchange.
Chris Picciurro:
What what should they be looking for as far as who who who should they have on their team and when should they you know, maybe you mentioned a qualified intermediary, but when when should they start getting involved with 1?
Scott Saunders:
Yeah. What I would recommend, kind of step number 1, talk to your tax adviser, the person that does your taxes, and just find out what's gonna happen if I sell this. What is my actual capital gain? Most of the time, a tax adviser, CPA will have that, and they'll be able to tell you roughly what you would owe in taxes. So that's kind of step 1.
Scott Saunders:
A lot of times, Chris, people are surprised when they do that. They go, wow. I didn't realize that the tax hit was gonna be that big. So that is kind of an eye opener. In terms of the process, you actually get involved with an exchange once you've got a property under contract.
Intro:
So you've got a buyer, you've opened up with a local title company or closing officer. That's when you're actually gonna set up a 10 30 one exchange, and you do need this, we call a middleman. So the technical word is a qualified intermediary. In the were in the country, you'll hear words like intermediary, QI, facilitator, accommodator. They all mean the same thing.
Scott Saunders:
That's that company in the middle that's actually gonna hold the proceeds from the sale. So if you sell it and get the money, it's taxable. You let this company called a qualified intermediary receive the funds from the sale, setting up some documentation and paperwork to do that. Now you've got the ability to do a 10 30 one exchange. So tax advisor, qualified intermediary.
Scott Saunders:
If you've got a larger, more complicated transaction, you might wanna pull in your real estate or tax attorney. Right? If you've got some entities or maybe you've remarried and you've got, you know, an issue where you've got separate property and and some of those things going on. So those are kind of the people that you wanna bring into your team from the onset to help put together an exchange and a good qualified intermediary. They're gonna ask some questions.
Scott Saunders:
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 some of the basic rules. So one thing for your audience, if you've never done an exchange, don't be intimidated. There's some really basic rules, but an intermediary is gonna kinda hold your hand, walk you through the entire process every step of the way.
Scott Saunders:
So don't feel like you've gotta understand all this tax stuff to do it. You just need to know a few basic steps, and then you're gonna have this partner called the qualified intermediary guiding you through the process.
Chris Picciurro:
And I would say that if if you're con I agree a 100%. If you're considering doing the 10 30 one exchange, you could open up an exchange and and it doesn't commit you to have to complete it. If it makes if it's in your best interest to to not complete the exchange, you might you know, you you would spend the money to open the exchange, which is a modest amount compared to the amount of tax that you're gonna pay, because sometimes things just don't work out. But a good qualified intermediary is gonna help guide you. You mentioned a couple things and and there's a couple rules based on could we talk through the the the identification and the closing, rules and then and then just maybe some rules of thumb for identifying your replacement property
John Tripolsky:
to
Chris Picciurro:
make to make this happen.
Scott Saunders:
Yeah. When you do an exchange, the most common variation is what's called the delayed exchange, sometimes called the deferred. So you sell a property. You get the qualified intermediary involved prior to closing. They step into your shoes, sell it to the buyer.
Scott Saunders:
The day it closes is day 0. Now you've got 45 calendar days, what we call the identification period, ends at midnight of that 45th day to identify property. You then have another 135 days after that to close on what you've identified. So you have the identification period, 45 days. The total exchange period is typically a 180 days, and it includes those 45 days.
Scott Saunders:
In terms of identifying, people have some misconceptions there. You don't even necessarily have to be under contract to buy it. You You just have to designate specific properties in writing, and they have to be what we call unambiguously described. That just means a street address or a legal description. So you would identify 312 Main Street or Unit 62 in a condo complex.
Scott Saunders:
So specific properties are identified. You sign and date that, and then you give that to the qualified intermediary as identification. We've got a few different rules, ways that you can identify, and so you've got options. The 2 most common, the first one's what's called the 3 property rule. So I can identify 3 different properties of any value, but I'm limited to 3, but the value is unlimited.
Scott Saunders:
If somebody is maybe coming out of a state where they've got higher equity amounts, say, a state like California, and they're gonna relocate to Tennessee, they may wanna take advantage of what's called the 200% rule. So they sell 1 property for 2,000,000 and they wanna buy a bunch of smaller rentals, all 3, 400,000. You can then identify as many as you want, but no more than twice the value of what was sold. So for 2,000,000 is a bunch of small properties, but you can't go over 4,000,000. So those are the 2 basic rules.
Scott Saunders:
You either use the 3 property rule or the 200% rule to identify. And that allows you to have a few different options, and you've gotta buy from that basket of property. So if I identify 3, I could buy property 1, I could buy property 23. Property 13. Right?
Scott Saunders:
But it's gotta be within that grouping. So that's probably the area where the most time pressure comes out is identifying the property, locating it. And if I can give, you know, the listeners of teaching tax flow a tip, when you list the property you're selling, start working with your broker on the purchase side at that time. Don't wait until you close. Get ahead of it in advance.
Scott Saunders:
And that way you can take a lot of the stress out of an exchange because now you're looking for properties. You might start making offers, but you're narrowing the field down to the ones that really meet your needs. Do that well in advance, and now all of a sudden that time deadline isn't as intimidating because you kinda know what you're gonna go into, or you've at least narrowed the field down to a to a handful of properties that are desirable.
Chris Picciurro:
Right. They're and and the the rules are out there to prevent people from basically god. I mean, I'm old enough to remember the yellow pages. Right? But ripping every page out of the yellow page and saying, this this is what I'm identifying.
Chris Picciurro:
But, typically, you know, in in practice, you're gonna find that that working with the right people are they're gonna guide you in that identification.
Scott Saunders:
Absolutely. In fact, the qualified intermediary, when you close on the property being sold, they're gonna provide a summary of the identification rules. They'll provide a form to identify on, and a good qualified intermediary is gonna work with you. If they haven't received the identification, let's say, on day 35 or 40, they're gonna start reaching out, calling and email and saying, hey. Your deadline's coming up in a few days.
Scott Saunders:
So there are tickler systems in place. Now it's always the responsibility of the investor to identify, but an intermediary is gonna wanna try and help investors, particularly people that might be busy, forget they've got that deadline coming because there's there's really no workaround around that. You've got to identify within that time period to have an exchange that qualifies. There's there's no wiggle room. There's really from a practical perspective, no extensions to that, you know, for the vast majority of cases.
John Tripolsky:
And, Scott, quick question for you too. I know we we touched on it little bits and pieces here as far as for somebody who's not familiar with a 10 30 1 exchange. Talk to us maybe a little bit more on just that relationship on how that takes place. You know, like, is is making the connection between a qualified inter intermediary and their real estate agent, like, is that how does that look? When do those introductions take place?
John Tripolsky:
Just kinda high level overall just, you know, bird's eye view of all the relationships and when the introductions
Scott Saunders:
Great question, John. So you typically, it'll be with you'll be working with your closing officers. So you get a contract accepted. Now you've opened it up. Somebody's gonna be handling your closing.
Intro:
Right? At that point in time, you're gonna contact the qualified intermediary. They're gonna prepare paperwork, and they'll send it over to that closing 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:
So we have a 1031 exchange addendum, just a few sentences. The qualified intermediary can provide that to your real estate professional to include that in the contract. So the documents would go to the closer. With the real estate professional who's handling the sale, the qualified intermediary can provide some suggested language. And a lot of times, an agent or broker might already have that.
Scott Saunders:
It varies from state to state, but a lot of firms have language that they typically use. But the intermediary could certainly be another conduit of providing that. So that that's how everybody works together. And then at that point in time, you might work with the same agent to purchase if you're buying in the same area, or you might work with another real estate professional if you're going out of state. And then they're gonna put similar language into the purchase agreement as you buy a property.
Chris Picciurro:
Well, this and this brings us to something that I I've got 2 things that I wanna touch on as as far as from the the CPA side of things where there's a big misconception out there about properties being identified and a lot of times taxpayers get really stressed out about identifying properties and finding the time what, you know, to go look at properties. And a lot of times they want they want to go hands off with their with their property. So maybe they own on a 4 unit apartment complex that they've the family's owned for a long time, and they just they don't wanna be collecting their rent, doing the maintenance. So sometimes they think, I don't wanna buy another apartment complex. Can you touch a little bit on what what like kind means?
Chris Picciurro:
And and also we've worked with a lot of clients that that go I call it mailbox money. Go out, leave that kind of managing your own rental portfolio to the mailbox money being into a syndication syndicated investment. So, yeah, can you kinda define maybe what like kind property is from a broad perspective?
Scott Saunders:
So basic level, like kind property is just any property held for investment or used in a business, exchanged for any other property held for investment or used in a business. The misconception that that 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 a single family. And that's not true at all.
Scott Saunders:
Like kind property, and I'm gonna share with you some basics, and then we'll kind of, you know, broaden it a little bit. It's any type of property that you hold for investment, anything. The properties that are excluded are maybe an easier way to look at it. You can't exchange the home you live in because that's not held for investment. And then the other category is property that's held for sale.
Scott Saunders:
That might be doing a fix and flip. It might be a developer, but anything where the intent is to hold for sale, not to have it held for long term investment, which would typically be rental income. Those two types of properties are excluded. But what that leaves is everything else. So I can exchange out of a piece of bare land and go into a single family rental, go from 2 1 single family into 2, 2 single family into 4, into an apartment, into a commercial office building, into an industrial, right, into a triple net building.
Scott Saunders:
Or as you mentioned, there are what we call fractional ownership where you go in with a bunch of co owners in a larger commercial building. Somebody else manages it for you, and you just get a a little slice of that building with a bunch of other people that own it. And now somebody else manages it, takes care of the tenants. So a lot of people as they evolve is they'll maybe move to something like that. Right?
Scott Saunders:
The need when you're younger is to build a portfolio. The needs later on are cash flow and ease of management. And so in exchange, you can really jump in between all these different asset classes and really go from one to another. So 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, you know, that somebody picked up, and they just continually exchanged over time and allowed all of that purchasing power to be redeployed over and over again, added a little leverage to help grow that.
Scott Saunders:
And and that, honestly, for both of you guys, that's where people scale and grow a portfolio is by using the 10 30 one exchange. It it's such a powerful tool. Think about it. If we'd looked at the stock market, if you could buy Apple or Amazon stock here and sell it up here and not pay taxes, every financial planner in America would say you'd be crazy to pay taxes when you're gonna go out and buy more stock. With real estate held for investment, we can do this over and over and over again.
Scott Saunders:
And one of the benefits of the code as it stands today is when you do this, you can actually pass away down the road and pass it to your heirs with a full step up in basis. So there and what that means is they get it at the value of the market then. So you don't pay capital gain taxes throughout your entire lifetime. You pass on highly appreciated property to your heirs. They don't pay capital gain taxes.
Scott Saunders:
So this is you know, if you haven't looked at an exchange, you gotta at least look at it, Get with your tax advisor and look at the benefits because it's a game changer in my opinion.
Chris Picciurro:
Oh, it is. I mean, it it when you don't have to you don't have to take a chunk of your your your money at the at closing and pay your business partner, that's huge. And And that's gonna be the last thing I wanna, you know last misconception, we talk that I see. We talk and text teaching tax flow. Cash flow and tax in in cash flow and tax flow are different.
Chris Picciurro:
Meaning, 1, when you sell a property, the cash you receive at closing is not necessarily your gain. Your gain is based on the basis of the property and and and that could be adjusted for various things. The other thing to consider is when you are, when you are doing a 1031 exchange, remember that you have to deploy or you have to buy a replacement property for the value of the property sold, not necessarily the cash you receive at closing. So and and so can we could you touch on that just a little bit and not to scare people because we know that interest rates are a little higher right now. I'm not sure what that's doing with the 10.31 exchange volume.
Chris Picciurro:
I'd love your your thought on that. So 10.31 exchange volume, understanding the deployment rules for the for replacement property, and the third thing, though, is there are always remedies for replacement property. We have clients that are some clients we've worked with that are mature age that, quite frankly, have a significant amount of assets. They don't have a lot of income. So to get financed on a replacement property would be challenging, where where they could go in and and they could buy a 10 30 one exchange property and that comes with some type of debt allocation.
Chris Picciurro:
And we're gonna have a separate podcast on Delaware Statutory Trust in the future. But can you kinda touch on those as far as, 1, people understanding those rules, and, 2, easing maybe the mind of people that are concerned about picking up debt.
Scott Saunders:
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 your settlement statement, your closing statement, and you're gonna have net equity. So number 1, you wanna reinvest all of the net equity.
Scott Saunders:
And by the way, that's after closing costs. So you're able to back out the real estate commissions, title company closing fees. So it's net equity. If you get any cash out, there's a term for that that you may have heard of. It's called cash boot, and that's taxable to the extent you have capital gain.
Scott Saunders:
The second rule then is you're gonna look at your mortgage payoff on the settlement statement. If you pay off a mortgage of 220,000, you wanna have that amount of mortgage or more on what you're buying. If you'd go down in mortgage, you have what's called mortgage boot, and that's also taxable. So reinvest all of the net equity. Number 2, the same or a greater amount of debt.
Scott Saunders:
And, you know, for both of you, if people wanna have less leverage, they can always go down in mortgage if they bring in cash to offset it. So if somebody wants to go near retirement and they don't wanna have any leverage at all, if they've got outside cash, they can actually bring that into the exchange, get rid of the mortgage, but replace it with new cash, and then they don't have that debt burden to deal with. To kind of address, the the question about today's interest rates, you know, I that's a common topic. I'm an investor as well as a 10.31 exchange person, and I will share with you my biases. I think this is one of the best buying opportunities right now.
Scott Saunders:
I believe when the rates go down, whatever that is, I think we're gonna see prices pick up, activity's gonna pick up, and now we're gonna start to see people you know, because inventory's really tight, at least on the the single family side of things. So I think there's a high probability that prices will go up, demand will go up, and people are gonna be kicking themselves. Why didn't I buy when the rates were higher and it was easy to get a deal done? In terms of the exchange, and and you alluded this earlier, Chris, when you do an exchange because you're not paying uncle Sam and the state, you have all of your equity to put into that new property. So that a lot of times makes the deal a lot better.
Scott Saunders:
Even though you're paying a little higher rate, you've got that bigger down payment going into it. And what I look at it just from a practical perspective, you probably heard it. It's it's now getting over said. You know? Marry the marry the property, date the rate.
Scott Saunders:
You know? I've heard that many times. Get the asset. You can always come back later when when property when rates go down, refinance, and then lock in a better long term rate. I I did that last year.
Scott Saunders:
I bought assets myself and I paid the higher rate. Knowing 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'll get a lower rate. So as an investor, you wanna look long term.
Scott Saunders:
We're in a season where we went from ridiculously low rates and now we've kinda gone back to more historically normal rates. And I think a lot of people think that, you know, they'll start to, somewhere down the road, they'll probably nudge down a little bit and make it more attractive. So if you're investing for the long haul, lock in a good asset, get your exchange done, get a good purchase that makes sense, and then come back later on, work with a good lender, and get a better rate when the market conditions change. That's my take.
John Tripolsky:
And that's a good way to good way to kinda wrap us up here too because we don't I'm sure we can go into the little nooks and crannies of all the details. But before we let you go, let's touch on one thing that I thought was actually the case, which I couldn't have been more wrong, you know, years back. So at 10:31. Right? And I know the answer to this, and I'm gonna try to ask it in a way that doesn't make it sound like I know the answer.
John Tripolsky:
Can the cash ever hit my bank account, or where does it go when we actually close on a property?
Scott Saunders:
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 the exchange before you close. It can be 1 hour before closing. But we get this is the call, you know, John and Chris, that we get all the time.
Scott Saunders:
People say, oh, I wanna set up an exchange. And I go, when are you closing? And they go, oh, we just closed 2 days ago. And unfortunately, I have to explain to them, if you've closed the loans funded and you've transferred the burdens of benefits of ownership over to a buyer, you've got a closed sale and that money, even if it's sitting at the title company, there's a technical term, it's called constructive receipt. It just means it's the same for you as if it actually hits your bank account.
Scott Saunders:
Now it's a taxable sale. So you can't ever really unwind a taxable sale when you've got the money or it's Citi of the title company. You always have to set up an exchange before you close. And and Chris mentioned this earlier, some people set them up not knowing if they're gonna find something or not. A a fee is, you know, somewhere in the ballpark of, let's say, $900 to 1500, somewhere that range.
Scott Saunders:
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 they realize what they owe in taxes, they'll complete the exchange. But some people don't complete an exchange, and it just converts back to a taxable sale. And then something else I wanna mention, sometimes people do partially deferred exchanges.
Scott Saunders:
You sell an asset for $400. You buy one for, let's say, 360, and you'll pay taxes on that difference, that boot that's in between. And about a third of our clients do partially deferred exchanges. So don't think of it as an all or nothing proposition. You could pull a little cash out, take that dream vacation, or go buy the sports car, whatever you want, take the hit on the portion you receive, and still get the benefit of an exchange on the difference.
Scott Saunders:
So I think that's something for people to keep in mind because it's never fun to keep redeploying, redeploying. Sometimes people wanna access the money. And the way that I'd recommend that is you do an exchange and then refinance that new property, what we call the replacement property after the exchange is over,
Chris Picciurro:
pull the cash out there, that's a tax free event. Great point that you can't touch your money, but also we talked about different asset classes getting exchanged. You can exchange 1 property for 5 properties. You could exchange 4 properties for 1 property. You know what I mean?
Chris Picciurro:
The timing obviously is challenging when you're going from several properties down to 1, but it it's not always a one for one one for one thing. And that's why it's important to get with Scott, his team, and
Scott Saunders:
a and a qualified intermediary if if you're typically a great realtor or most likely a title company that's very reputable is going to help you through it as well. Yeah. Absolutely. That's a great point. I just shared example with some friends of mine.
Scott Saunders:
I bought a piece of dirt here in town years ago for 90 grand. I did an exchange out of that. It basically tripled in value, and I went into 3 properties in your great state of Tennessee up in Clarksville. I bought 2 in Wichita, Kansas, so I did 1 for 5. And I went from a piece of land that produced no cash flow into income property.
Scott Saunders:
Those properties today are worth about 1,500,000 out of a $90,000 investment and a piece of dirt. So you can see how if people do that, you know, once or maybe do that multiple times, how they can really build a substantial portfolio pretty fast by doing things like that. So, and it's real common that people scale up, right? They sell one of the asset, they take the equity and they buy 2 or 3, 4 replacement properties. They might add leverage, so they're getting some more benefits.
Scott Saunders:
So it's a fantastic tool, and I just encourage your audience. If you haven't looked at it, get with your tax adviser, number 1. Right? That's important. Get with a knowledgeable qualified intermediary and at least see if it makes sense for you.
Scott Saunders:
I bet you, you know, 9 times out of 10, it's probably a much better strategy for most investors unless you wanna cash out. That's maybe the time it doesn't make sense. If I'm, say, hey, I'm done with real estate. I wanna go into other investments and I no longer wanna own real estate. Maybe that's the time.
Scott Saunders:
But, Chris, you alluded to the Delaware Statutory Trust. That's a great vehicle where people can kinda go from active into more passive investment and be very hands off. And that's why that that whole niche has just exploded, you know, in recent times.
John Tripolsky:
Well, excellent, gentlemen. Well, thank you both for joining us on this one, obviously, talking on the topic. And, Scott, we'll go ahead and put all your contact in the show notes, here. So if anybody wants to reach out to you directly, obviously, they can. So we know you're a a wealth of information.
John Tripolsky:
Thank you both so much. I I really appreciate it. Thank you. Alrighty, boys. Well, actually so next week, we have another topic coming up, which, again, just watch out for wherever you listen to podcasts.
John Tripolsky:
Every Tuesday, a new show drops. But, again, I will drop Scott's contact information in the show notes. Feel free to reach out to him. Great, great, great resource and probably one of the best educators. Not just on this topic as a whole, but he's very, very, very, very good at describing this in more detail.
John Tripolsky:
We've actually done a longer show with him over on the mister r show, a different one of ours, where we really dive into the topic about an hour long actually qualifies for CPE for those tax pros out there. Be sure to check that one out as well. And as we always close here on the podcast, we will see 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 episode of the podcast.
John Tripolsky:
Now 10 30 ones. Right? You heard a lot about them. Maybe you knew a lot about them. Maybe you didn't.
John Tripolsky:
Maybe you're just in the middle. Now you have a pretty good understanding on them and at least those key points that could really keep you out of some some trouble, we'll say. Or should we just say some significant financial loss if you do not go about them the right way. As the example as I brought up, something I didn't quite understand years back, almost found myself a little bit of little bit trouble there. But with individuals like Scott and Chris on your side, you will figure this all out.
John Tripolsky:
You will navigate the wonderful world of 1031 exchanges. So, keep sending us over those topic ideas, questions you may have. We love them. That's what fuels us here on the show. So we will see everybody here next week as always.
Disclaimer:
The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer.
Disclaimer:
The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.
