Episode Transcript

Welcome to Episode Two of Season Three of the Growing Empires show. This is part one of my interview with Cindi Platt-Elliot from the 1031 Corporation. And today we're going to talk about how to complete a 1031 exchange. So stay tuned.

00:16

Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:36

Alright, so welcome, Cindi to the growing Empire Show. I'm so glad that you're here. Thank you so much for having me. Absolutely. Let's kick off this episode, we're gonna be discussing completing a 1031 exchange and what you need to know about it. But I'd like you to share a little bit about the work that you're doing now with the 1031 Corp, and how you got into the industry and worked your way up to senior exchange officer. I have always loved real estate. And years ago, I wanted to get, you know, find a job that was a little closer to home. And lo and behold, I saw an ad in the paper for a company that was about a mile down the road from my house, never dreaming, it would be my dream job. So 1031 Corp, you know, when as I learned about the process, I started as an exchange coordinator. And over the years, you know, as I learned more, I moved up to senior exchange officer. So we handle, you know, I handled the whole transaction beginning to end. We do have coordinators that assist us, but it's a really great strategy. It's a creative way to help taxpayers, instead of having to pay that capital gains tax when they sell, they can roll that value into what they're purchasing. So it is really beneficial for anyone who's an investor that wants to, you know, have more cash flow to put into another property. This is the answer. Fantastic. Well, I'm really excited about today, because I certainly love working with you and Diane and the team of the 1031 Corp. And every transaction we've ever had together has been seamless and perfect and professional and all the things that I would, you know, ask for in a partner essentially, you know. So in keeping with our season three theme, which is winning the money game, I thought it would be prudent today to talk about one of our hottest topic among investors, which is tax strategies, how to defer capital gains, and more importantly, how to keep money in your pocket. So today we're going to discuss a couple of things we're going to discuss what is a 1031 exchange and why should you consider it? We're going to talk about what is a QI and why do you need one? We'll talk a little bit about the timelines and the rules for completing a 1031 exchange. And then we're going to go into some frequently asked questions that I know, Cindi, you experience on your end when talking to investors regarding a 1031 exchange. Sounds good. Perfect. So let's get started.

03:09

So tell me a little bit about what is a 1031 exchange? And why should somebody consider doing one? Okay. A 1031 exchange is a process where you can save tax dollars. If you have a property that is for business use or investment, and you're selling that property, and you are replacing it with another property that's for business use or investment, then if you do a 1031 exchange, it's a way to instead of having to pay the capital gains tax, you're deferring that into the property that you're buying, that alleviates a huge tax bill at the time of your sale. And furthermore, you can keep deferring and deferring and deferring. This is not a one time deal. And you can constantly defer. So it helps to build your portfolio and save you tax money at the same time. Perfect. So there's no rules to how many exchanges you can complete in your lifetime. Essentially, you as long as you're following the rules, you can complete as many as you can, you know, sell and buy properties essentially. Correct. Correct. No Limit. Very nice. So what is a QI? What is a Qualified Intermediary? And why do you need one to complete an exchange? So the regulations from the IRS state that in order to complete a 1031 exchange, there are a couple of thresholds that you need to stay within number one, you cannot be in constructive receipt of your funds. When you sell the title company will provide your exchange proceeds to 1031 Corp. We will hold them in an escrow account for you until you're ready to make your purchase. Many times we'll get a call that the client, you know, wants to do a 1031 exchange, but they already had settlement. So you want to make sure that everything is always setup well in advance of the time of your sale. Now, I did say, well in advance, we have had situations where a client has called from the settlement table, you know, we don't prefer that. But as long as you know, no documents have been signed, if they find out about this strategy at the very last second, we just don't want you to think that it's too late, you know, right up until the minute you know, the deed is signed, or the title is transferred. You know, if everyone can give us a little bit of time, we can throw the documents together and help you out with that. But it's always better. You know, we usually suggest once you have a signed contract for the property that you're selling, that's the perfect time to initiate an exchange. And we can have everything set up for you well within that time frame. Perfect. So just as a little bit more clarity. So 1031 Corp essentially is the Qualified Intermediary. Okay, and you are the liaison essentially between the relinquished property, the property that you sold, and the replacement property, the property that you're purchasing. That is absolutely correct. Perfect. Okay.

06:21

So let's talk a little bit about important timelines on a 1031 exchange, probably one of the questions that I get the most is, the timelines and how they work and what somebody needs to know to complete a 1031 exchange. Okay, the timelines for an exchange are 180 days, the clock does not start ticking until the day your relinquished property sells, and title legally is transferred to the buyer. The clock starts ticking and in the first 45 days, you have to send in a formal written identification, this is a detailed list of any properties that you might want to purchase, then you have the remainder of 135 days to purchase something off that formal written identification. So again, the total exchange period is 180 days. And that's right around the six month mark. Perfect. Thank you very much. So why don't we you touched on it a little bit briefly, but why don't we talk about the rules for identifying properties? I know, you know, I have heard about the three property rule I know about the 200% rule, I don't know if there's additional ones. But why don't we talk a little bit in detail about those two specific rules for identifying properties? Okay, so in the identification process, you're going to keep in the forefront of your mind the contract sales price of the property that you sold. So just for example, we'll use a sale price of $100,000. Now in the exchange process, if you're if you have between one and three properties, on your identification, the value of each of those properties could be unlimited, they could be $20 million properties. But what you want to keep in mind, if you put four or more properties on your list, the total combined value for everything on your identification form cannot be more than twice the contract sales price of what you sold. So in this example, if you had four or more properties on your list, you wouldn't want the total value to exceed $200,000, because that's twice the contract sales price. However, if you had three or less properties on your ID, the total value, it's unlimited, you know, they could all be $20 million properties. The other role that Jennifer touched on, there actually is one more rule, it's called the 95% rule. And what that means is, if you exceed that 200% rule, you've got four or more properties on your list, and you're over twice the contract sales price of what you sold, you can still do an exchange. However, for it to work, you would have to basically purchase every single property on your identification. And I have actually had that happen once in my entire time here with 1031 Corp. So those are the identification rules. So do you typically recommend to people is it better to try to limit your identification to three properties because it seems like it gets a little complicated, right? If you're not really sure what you're buying, I can see why somebody would want to identify more, but it sounds to me like you actually have more flexibility if you can try to narrow it down to your top three, does that sound right? Is that something you would recommend? It is usually, it all depends on the value of the property that you're selling. Because a lot of times we have, you know, that mom and pop who have owned a rental property, just the one property for many years but the sale price, you know, maybe they bought it for, you know, $25,000 30 years ago, and now they're selling it for 150. However, it's still a bit limiting, because now to try and purchase replacement properties, and maybe have four or more on your list, but still keep that under $300,000 would be difficult. So a lot of times, it depends on the value of the property being sold. As far as how easy it is to list more than three properties on your identification. Okay, fair enough. Understood, and I'm sure you would help if somebody would call you and just discuss their personal situation, I'm sure you would help them and give them guidance as to what you recommend for their specific situation. Absolutely. I know that you're very helpful with that.

11:09

The episode will continue in just a moment.

11:19

This season is all about winning the money game with your real estate investing. However, simply investing in real estate with all of its advantages that it promises, you can still get taken to the bank, if you don't know how to make smart money decisions, or have access to the right resources to save you time and headaches. Building your investments so that they grow in value over time requires a lot of factors to go right. And the money part is a big one. It's not always about the property. It's how you make the critical decisions about leveraging money so that you have the most control and freedom while growing your portfolio. Whether you're concerned about the validity of that too good to be true offer on a property or you can't settle on the right mortgage structure, I can help I will answer your money questions on a quick call and if I don't know the answer, I can certainly connect you with somebody who does. Visit GrowingEmpires.com and schedule that call with me today. That's GrowingEmpires.com and I will help you make smarter money decisions and put you in full control of your investing success.

12:09

So the first question is out of your sales proceed, how much do you need to reinvest? Okay, that we do get asked that question a lot. Many times clients are under the impression that even if they're paying off a mortgage, they only need to reinvest the value that they're basically walking away from the table with. So in the 1031 exchange process, the calculations are actually starting at your contract sales price, you can deduct any of those usual and customary closing costs, you know, especially realtor commissions, transfer tax, charges from the title company, things like that. Just taking your contract sales price and deducting those qualified closing costs, that takes you down to a net sales price. So if you're paying off a mortgage, you want to keep in mind that when you purchase, and to get the most benefit out of your exchange, you want to include that mortgage payoff in the value of what you're buying. So an easy way to think about it is if there is a mortgage involved, you want to use all of your exchange proceeds. And then you also want to offset whatever that mortgage payoff was when you purchase. It is not mandatory to reinvest everything, but at the end of the day if the value of the property that you're purchasing falls a little bit short than the net sales price of what you sold, again, that's your contract sales price, less your closing cost, then that's called a trade down. So you can still do an exchange, you're only taxed on the value that is not reinvested. Okay. All right, fantastic. So we're talking about to maximize your essential your capital gains deferral, right, you need to reinvest your net sales price in full. Correct. Is there anything else regarding numbers that somebody would need to know about reinvesting to maximize their capital gains deferral? Well, that is you know, if you just do that process right there, if you reinvest your net sales price, then right there, you've gotten the most benefit out of your exchange. Okay, perfect.

14:28

And I know I've had people ask me before, you know, what if I want to take some money out what if I don't want to reinvest it all? Okay, so that there's a nickname for taxable funds in a 1031 exchange, so the nickname is boot. So any funds that are not reinvested, they're automatically taxable, but you always have the option at the beginning of the exchange, you know, you could say, you know, hey, Cindi, we want to keep $5,000 in our pocket, we'll reinvest everything else. And then we would set up the documents accordingly. And when you sell the title company, it would give you a check at closing, those funds are automatically taxable, but it doesn't affect the balance of your exchange. Another strategy that many clients will use, if they want to have some cash in their pocket, they'll go ahead and roll everything in at the beginning of the exchange. And then at the time that you purchase, you're walking in the door with all that extra equity, after you purchase, then they would take out, you know, maybe a line of credit or something like that, that puts some cash in your pocket. And then you have the rental income coming in to pay off that loan. So in that type of situation, you're not taxed on the funds that you're quote, unquote, getting out of the exchange, it's just taking place after you purchase your replacement property so that you're not taxed on them. Well, that's a really interesting trick. I actually didn't know that. I’m learning something new. I appreciate that. That's really creative, that's a good way to do it. Yeah. Because I think that, you know, there's a lot of situations where that really is true, right? They're really increasing the equity, if they're using a lot of that capital from the first the first deal, and especially if you want to keep you know, a couple thousand dollars might be one thing, but maybe someone would want, you know, a significant amount and that strategy would really be beneficial. Yeah, yeah, absolutely. And that's really what the name of the game is it right. It's how to spread your money further. And this is like a topic that I speak about literally daily with investors. It's about being creative with money. It's about all the advantages and all the things that are out there that allow you to capitalize on, you know, future investment purchases, and this just happens to be one of my most favorite topics. Well we're glad to hear that! Absolutely. We will back with more from Cindi in next week’s episode so stay tuned!

17:23

For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit GrowingEmpires.com

Contact for Cindi:

Cindi Platt-Elliot, Sr. Exchange Officer

610-792-4880 ext 216

cindi@1031CORP.com

www.1031CORP.com