Episode Transcript

Welcome to Episode Three of Season Three of the Growing Empires show. This is our part two segment with Cindi Platt-Elliot from the 1031 Corporation. And we're going to continue our conversation with things that you need to know about completing 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

I’m back with Cindi and we’re going to continue our conversation about how to complete a successful 1031 exchange. We left of last week talking about some frequently asked questions. So let’s jump right in. The next question is can I buy and sell more than one property in any given exchange? Absolutely. So in the 1031 exchange transaction, you can sell as many relinquished properties as you would like, and purchase as many replacement properties as you would like, within one transaction. The main thing you want to think about when you're planning this, it does take some, you know, significant planning, but anything that you want to sell has to be sold before you purchase your very first replacement property. Once that first property is purchased, you can purchase as many additional replacement properties as you want, you know, as long as they're on your formal ID. And, you know, it's all within your timeframe, of course, but you can't sell any other properties after you purchase your first replacement property in any given exchange. So just basically, sell everything you want to sell first, and then buy your replacement properties. Perfect. So actually, since you're talking a little bit about timeline, I think maybe we should just go into that a little bit. So people kind of understand how this plays out, maybe, because I get asked this, and sometimes, you know, the market makes the way that you go about this shift, right? Because properties are really, really hard to come by now, and inventory is low, we've been almost simultaneously out there looking for properties for replacement properties at the same time that their current properties under contract, but not yet closed. But ideally, let's just talk about the timeframe, assuming that the markets not adjusting that timeframe. Do you want to just kind of go through what happens in what order? Okay. And before I dig into that, just as a side note, you don't have to wait until your relinquished property, that property that you're selling, you don't have to wait until that actually goes to closing before you put a deposit down or before you get your replacement property under contract. In fact, if you're you know, if you're planning ahead, and you're able to get that replacement property under contract, even before you go to settlement for the property that you're selling, that is the best scenario because you're locking in your replacement property, so that when the clock starts ticking, and you're in that first 45 day identification period, you've already got your replacement property under contract. Again, that's not mandatory. But I did fail to mention when we were talking about the identification process, once midnight on day 45 comes and goes, You can't make any changes to your identification. If something happens within the first 45 days, you can change it as many times as you would like. But it is to the minute, midnight on day 45. That's it. Once that time frame passes, that whatever that final list is, then that's what you have to choose from as far as what you want to purchase. So if you happen to put a deposit down on your replacement property out of your pocket, when you go to settlement, if you have enough funds in your exchange account, then you actually can pay yourself back tax free any out of pocket deposit monies and we work hand in hand with the title companies and we would set that up for you. But as far as the timeline goes, basically what you do you know you reach out to us, let us know you're selling a rental property or whatever the case may be. We will reach out, we'll ask you for a copy of the contract, your basic information, we will reach out to the title company handling your sale, we'll do all the footwork we'll get everything in place for you and you will just basically show up to settlement like you normally would if there was not a 1031 exchange in place. So once settlement takes place that will trigger us to send you what's called the next steps in your exchange, and that'll have the identification package in there, the forms that you'll use to identify, you're in that 45 day window, day 45 comes and goes, we have your formal identification on file. And now you have the balance of 135 days to purchase something that's on that formal written identification. And as you go through this process, we're going to send you reminder letters, we watch your deadlines and your timeframes and we’re that second set of eyes that makes sure that you don't miss any of those key deadlines. Perfect. Perfect. I know, touching on what you had said earlier, one of the things that I have been doing with clients and it's it seems like we we almost don't have to think about the 45 day period, because a lot of times we're identifying the property that we're buying and under contract long before we actually go to settlement on the first one, the right now the market is very generous in the fact that it allows us it's moving so fast on both sides, that it does allow us that flexibility to kind of get into contract, even do due diligence, in most cases, long before we even settle on the you know, relinquished property. And then that kind of takes us through, you know, by then we already are certain what properties we're buying. So the identification period, you know, we really don't have to worry about how many properties or the value of the properties because we've already picked out in our contracted for what we're purchasing, so. So that's, you know, really helpful. But thank you for all that insight on that, because that's really, really key.

06:43

So another question we have is, can I refinance after I purchased my replacement property? Is there any timelines to be concerned about? Can it be fairly immediately after settlement? Or do we have to wait any specific time? Okay, and we actually, do you get that question a lot. How long do I have to wait until after I purchase to do some refinancing? The answer is, quote, unquote, a nanosecond. So immediately allow, you can start the refi process, right after settlement, if you wanted to. You just want to make sure that settlement takes place, everything's closed, and then start that process. Okay, fantastic. Fantastic. So can you exchange mixed use properties? So let's say I have a business that I operate in a retail location, let's just say, and then I have apartments above that I collect rental income on and maybe I'm not the owner occupant of it. But if I had a mixed use property, does that complicate the exchange in any way, or can that be a type of property that you're including in an exchange, it does not complicate the exchange process in any way. As long as your property is held for business use or investment, you can mix and match, it could be mixed use, and you could, you could sell mixed use and buy a condo, or you could you know, sell a condo and buy a commercial property, you can also purchase vacant land. But the one factor we like to mention, if you're selling a property with an existing building on it, and you decide that, hey, you know, I'd like to purchase a piece of vacant land as my replacement property, you can absolutely do that. And you're still deferring the federal gains, however, you would not be able to defer the depreciation recapture, like you would in a regular exchange if you were purchasing another rental property because vacant land does not depreciate. So there is no depreciation recapture when you purchase vacant land. So that's just something to keep in mind. But you know, if you're selling vacant land, you can purchase a property that already has that rental unit on it, or whatever the case may be, or commercial property. So you can absolutely mix and match the character of the properties that you're selling and buying.

09:23

The episode will continue in just a moment.

09:27

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 investment 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.

10:13

Okay, why don't we elaborate a little bit and talk about the like kind requirement for an exchange? Okay, what does that mean? So like kind is a little bit misleading in that many times clients will call and say, you know, I'm selling, I'm selling a condo, do I need to buy another condo? As long as the properties that you are using in your exchange are held for that business use or investment, they don't have to mirror each other they can be, it can be all different types of properties. So a single family home for a commercial property, anything like that, you can totally mix and match. Okay, perfect. And if I'm understanding that correctly, what you can't do though, is you can't sell a business or an investment property and then buy a home that you're going to live in. That is a really good point, Jennifer. So there is a strategy that in the 1031 exchange process, sometimes clients are, you know, they want to sell their rental properties and you can actually, you know, if you wanted to pick out your dream home, you can do that. But the initial point of when you purchase the property, for the first one to two tax returns, you want to show that that is a rental property, you know, you want to rent it out, doesn't have to be 365 days a year, but you do want to rent it out, you have to limit your personal use. And once you've met that threshold, just for example, maybe two years down the road, you can convert it to your primary residence or a second home, and all the taxes that you've deferred into it, they're just lying there dormant, because you still own that property, you've not sold it, you're still on the deed. So all the taxes, the Federal gains that you've deferred into it just lie there. So that's a strategy that, you know, many clients will use, if they're looking for maybe a vacation home, or sometimes clients want to downsize, you know, at the time that you move into your replacement property and convert it to your primary residence, when you sell your primary residence, you know, 99% of the time you can take the primary residence exclusion. So it's pretty much a win win all the way around. If you're, you know, planning for that perfect retirement home. How did I know you'd have a creative answer for that one, too? See, this is why I love working with you, always know the answer.

12:52

So here's a really interesting question, and this is one I came up with on my own that I wonder if people really ask you, but I'm curious. So I what are some of the mistakes that you've watched people make that could be avoided if they just had more information? I'm sure there are some. Yes, I think the main, the main one would be that they call us after settlement. Okay, it's not as frequent as it used to be because I think the word is really getting out there as far as 1031 exchanges, but we still every now and then we get those calls that say, Hey, I sold my property last Monday, and I want to do a 1031 exchange. And our first question is, do you mean it's under contract, or you actually went to settlement? And once you've gone to settlement, you can’t unwind it, I mean, settlement could have taken place an hour before, and it is just too late once once that threshold is passed. As far as any other mistakes.. That's like the main one that comes to mind. I can't really think of any other mistakes that really, that we get calls about. Maybe you haven't experienced this, but have you ever had a title company kind of end up giving the proceeds to the seller in that case the buyer and you know, avoiding the exchange? We've actually if they've done that it was because we didn't know about the transaction but once we know about the transaction and we reach out to the title company. We make sure that you know those funds are you know, allocated to 1031 Corp on behalf of the clients. We've never, not that I know of, we've been in business for 29 years I've not heard of any title company ever making that mistake as far as giving the the funds directly to the client and another good note is we work with so many title companies. And a lot of them are much more well versed in 1031 exchanges now than they've ever been. So we keep it very simple for all parties, there, just some minimal changes that we will have the title company make on the closing statement when you sell. And again, when you purchase, so that when you go to file your tax return, you've got a very clean paper trail from your sale to your purchase that reflects your 1031 exchange. And then when the exchange is completed, we'll send you what's called a documents summary package. It's everything, all the pertinent documents regarding your transaction in a nice, neat folder, you can basically hand it over to your accountant, we will even send a copy to your accountant on your behalf if you instruct us to do so. So it's a seamless process. Perfect. So your two biggest pieces of advice then would be if I can summarize is make sure you're notified before settlement. Okay, number one, make sure you're notified before settlement. And number two, maybe just make sure all parties involved are aware that you're doing a 1031 exchange, specifically the title company, they should know, as quickly as you order title they should know that you're doing or trying to complete a 1031 exchange. Correct. Yeah, perfect.

16:13

Let's talk for a brief moment about rent prorations and security deposits on a settlement sheet and how that pertains to a 1031 exchange. That is a great topic. So whenever you are selling, if the tenants are remaining in your property, when you go to settlement, for instance, if you are not doing a 1031 exchange, the value of the rent prorations and the security deposits would just go over to the buyer as a credit In the 1031 exchange world, if it happens that way, then you're actually taxed on that whatever that value is, you do have the option to just keep it as is. But if you want to sort of get past that, what you can do is basically just take a check to closing to cover whatever those values are. And then you're not taxed on whatever that amount is. Because to make it a little clearer, the IRS looks at it as, Oh, Johnny and Susie Smith have a $1,000 deposit in their escrow account from these tenants. They're selling this property, and they're just going to give the buyer a credit on the sheet on the closing statement. However, Johnny and Suzy Smith still have that $1,000 sitting in their bank account, so we're going to tax them on it. So sometimes clients will say, you know what, just leave it on the sheet. It's okay. If it's not, you know, a huge amount. But then there are situations where, you know, it could be you know, a couple thousand dollars or more. I mean, we do exchanges where it could be an apartment complex, multifamily units, you're really you know, the numbers can be significant. So, what we do is, when we are working with the title company, we're basically an extra set of eyes for you, if we see any red flags on the settlement statement, we're going to reach out to you, we'll let you know what your options are. And you know, it's you know, you always have the option to just leave it as is, or if you want to save some additional money and get creative, then we’ll tell you how to you know how to work around those obstacles. And the title companies always work with us as well. So it's, it's a pretty seamless and easy process. Perfect, perfect. Well, I can't thank you enough for all of your insight and expertise today, I know that this is gonna be hugely valuable to my listeners. And I just can't thank you enough. It's been such a pleasure to work with you over the years and everybody at the 1031 Corp. And I literally feel like I have a great business partner when it comes to, you know, helping investors buy and sell investment property. So I really do appreciate all that you've done for us and all that you've done for clients of mine. And I just I am very appreciative of all of your expertise and help and I just think it's fantastic how you guys really work step by step and kind of hold the clients hands through that and, and watch over everything and just really have their back to make sure that they can be successful and deferring their capital gains. So, thank you so much for your insight today, Cindi, I really, really appreciate it and I look forward to many more transactions with you in the future. Well, we very much appreciate you having us on your show and it is when I tell you it is a pleasure working with you and your clients, when we see you know, the email come over from you, Diane and I both are like, Oh, good, it's Jennifer de Jesus. We know you know what you're talking about, and the clients when we're talking to them, they rave about you and your team so, but you should know that as well. Seriously. It's a pleasure working with you. Thank you, thank you very much. I really appreciate that. All right, well, that is it for today. Thank you so much. You too, thank you.

20:29

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