1031 Exchange Expert Talk with Dave Foster

INTRODUCTION:

Join host Derek Vickers in this episode of the MHP Show podcast as he sits down with Dave Foster, founder of the 1031 Investor, to explore the nuances of real estate investment and tax-deferral strategies.

KEY TAKEAWAYS:

• Delve into Foster's extensive expertise in real estate investment and his role as the author of "Lifetime Tax-Free Wealth: The Real Estate Investor's Guide to the 1031 Exchange."

• Discover the fundamental principles behind the 1031 exchange and its significance in creating "lifetime tax-free wealth" for investors.

• Explore additional tax-deferral strategies such as cost segregation studies and reverse 1031 exchanges, offering listeners valuable insights into maximizing returns and navigating complex tax codes.

CONCLUSION:

With Foster's insights and Vickers' guidance, listeners gain a deeper understanding of how to leverage tax-deferral strategies effectively in real estate investment, paving the way for long-term financial success.

WATCH IT IN YOUTUBE:

TRANSCRIPTION:

[Music]

hey everyone welcome back to the MHP Show podcast I'm your host Derek Vickers everyone knows here on the MHP show we talk about all the crazy stuff that happens with mobile home parks or trailer parks or manufactured housing communities if we really want to be professional about it and today I have another guest with us today I have Mr Dave Foster now I'm really excited about this guest I have here today because we've never had a guest on that's been able to discuss this in depth so I'll

00:36

tell you that Dave is the founder and CEO of the 1031 investor he has 20 plus years experience investing in real estate various asset classes he's actually the author of the Amazon best-selling book lifetime tax-free wealth I love that the Real Estate Investors Guide to the 1031 exchange welcome to the ma HP show Dave you know what you are very kind Derek when you talk about just someone not being able to go that far in depth what you really mean is that I'm a nerd who has one Mentor once described I'm willing to go

01:14

two miles deep in a two foot wide Crick and that's where I live hey well look I'm telling you like I I I I love that I love that because if you become like a super expert in in one thing you become the expert of that thing instead of being you know a jack of all trades right what is a jack of all trades and a master of none you don't want to be that um but I love the the title to your book lifetime tax-free wealth that just rings to you know what real estate investor doesn't you know want tax free wealth so

01:51

I'd love to get into it here because I've got some some members of our Facebook group um and I'll just throw a little plug in for that really quick if you haven't joined our Facebook group it's it's called Park investing Pros or Mobile Home Park investing Pros on Facebook we sh lots of valuable content on there so we have some questions from people in the group that we'll eventually get to but I guess first and foremost Dave as we get into before we get into 1031 just talk a little bit

02:16

about you know kind of kind of what you currently do now right so this has all been like M like you said a 20 to 30 year outgrowth of my journey as a real estate investor um 30 years ago I made one it's not a fatal mistake but it was a bad mistake that haunts me to this day I bought my first piece of property I fixed it up I made a truckload of money and that didn't know about 1031 exchanges and so I ended up paying a $30,000 tax bill to this day it still keeps me up at night once in a while thinking about what if I had been able to keep

03:04

that $30,000 and invest it for myself compounding over 30 years that's a bunch of money for sure left on the table and that's what led me on the search for the 1031 exchange and when I discovered it it was a game changer for us because from that day forward what the 1031 exchange allows you to do is to sell investment real estate and replace that with new investment real estate and not having to pay tax in the middle so the beautiful thing is it captures what I call the second half strategy of real estate investing everybody always

03:44

everybody all knows the proverb right you make money in real estate when you buy it and and yeah I agree finding the good Bargains and fiting them out doing all the due diligence and underwriting it's awesome stuff and you do but the other half of that statement is that the way you sell it determines what you keep doesn't matter if you make all the money in the world if you don't keep it on the back sign and that's what the 1031 allows you to do so yeah lifetime tax free wealth because you're going to

04:25

be able to take all of that deferred tax for all your life and invest it for your benefit making the return for yourself and you know the best thing of all is Derek it's not something I like to think about but you and I are both heading there there is a final D that is not defer and that is die the best thing you can do is die owning your real estate because then the tax goes away and your erors get the properties taxfree so as I call it it's it's it's the 4ds defer defer defer and then die and that's lifetime tax free wealth

05:07

plus the Legacy for your ears I love that and how is that so how does that work if you know you die and the property is still in your name and that just automatically goes to your erors and it just keeps going as when it when it when you die it goes into your estate and is revalued as if your heirs paid market value for it on the day you died so all of that deferred tax over the years disappears at that moment so you don't pay it your estate doesn't pay it your heirs don't play it I have a family

05:47

that we just started a few years ago on their third generation we started doing 1031 exchanges for Granddad and when he died his son inherited everything now we didn't see him for a few years because why 1031 exchanges exist to defer tax on gain and he inherited them taxfree but a few years later once the profits again started to kick in he started doing his own exchanges with us and then he passed away a few years ago his children got his portfolio and now they are doing their own 1031 exchanges that's three

06:26

generations zero tax oh wow wow I mean you gotta love that you gotta love that what are what are some like you know Dave like what are some common misconceptions or or things that people misunderstand about 1031 because I I'm not an expert at them and so I'm just I'm curious at things that people Miss hey what let's put this question that's a great question by the way and there's a whole bunch of different levels to that let's take that in the context of the four DS of 1031 investing

07:03

so the first the first one is one very common misconception is I gotta pay the tax anyways so why not pay it now I hear that all the time and my response always is the my first question back is do you have a retirement account if they do game over why are you asking me about the power of deferred tax when that's exactly what a 401k and an IRA is and a off it's allowing your money to compound tax defert or tax rate but even more than that with the 1031 exchange because you are indefinitely deferring the tax you're able to harness

07:45

the compounding effect so whether it's two years or whether it's 40 years as long as that tax stays deferred you get the benefit of the deferment so on my $30,000 if I would have 1031 it and made 10% but only kept it for seven years 7.2 years I would have made another $30,000 if I would have kept it for 14.

08:13

4 years I would have made another $60,000 at 10% it doubles every 7.2 years so that's a very common misconception though they don't think about the compounding effect of that whether it's a short or long term so the the second most common misconception is on what what you can do with a 1031 exchange and so many people think if I'm selling a single family home I've got to buy a single family home like kind is kind of the phrase that you used well like kind really just means any type of investment real estate

08:54

and so the second D is also deferred because the 1031 exchange though will allow you to harness whatever part of the real estate cycle you're on if it's if you started investing in single family homs and the market is telling you that plays like mobile own perks are now the thing or self- storage or commercial or whatever the 1031 exchange will allow you to change sectors of real estate as long as it's used for investment so with the 1031 you can go anywhere in the country to any type of real estate cash flow

09:33

appreciation doesn't matter it'll accommodate whereever you're at and then of course the last thing the the the common misconception is you know again the endgame which we already talked about which again I'm gonna have to pay it anyways so we're not pay it now well the answer is because you don't you can defer it and as long as you defer it you get the benefit from it you can defer it to accommodate wherever the real estate cycle is you can defer it to accommodate wherever you're at to move

10:04

from active to passive from passive to multiple properties from multiple properties to a single property doesn't matter and then finally you can die and yours get it so people just don't look beyond the initial I'm going to sell this property to defer tax what is that do for me and instead if you look at the long game you'll see a huge bunch of benefit yeah yeah for sure and that's just that that's fascinating to me and like you know you mentioned like you defer defer defer defer defer to your

10:38

errors and then you mentioned something that got revalued when it's in your your your trust so that revalue is that then if your heirs try to sell it like what is their basis on the property then is it your basis or is it you get what I'm a brand new basis so you know looking at the two of us I've got more gray hair so I'm probably going to die first well my hair is short right now they I gu just got it cut and mine pops out here on theid that Line's looking that's looking stylish so but let's say that I want to

11:13

give my property to you and I've got a mobile home part that I have depreciated out so that its basis is maybe $200,000 but it's a $2 million mobile own park now if I were to sell that I'd be paying tax on what 1.8 million well that's a bunch of tax but if I hang along long enough and if you pull the plug on me when it's that time you're going to inherit that property you get the property as if you paid $2 million for it wow my basis is what's called stepped up for you so that you get it at market

11:58

value so I'm might so if you turned around and sold it the next day you would pay zero tax wow that's how powerful that is wow wow I did not know that I did not know that don't tell your kids if you got kids I'm not thinking about going into med school just so they can learn when to pull the plug yeah yeah I'm definitely not gonna let them know that um so I guess so what would be that I got a bunch of questions here and I'm trying not to jump around so like if someone let's say so for

12:32

example we were looking at potentially selling a couple of assets last year and the gain so nobody realizes and I will say this you know the people who fight against oh we should get rid of the 1031 exchange and capital gains taxes should be higher until you put yourself in the position where you you have to confront a $750,000 or a million doll tax bill to the IRS then you'll be like all right dude I just put a bunch of freaking work into this property I did all the work I did all the value ad why in the hell do

13:09

I need to write a check for a million bucks and so when I had to look I was never like someone that needs to be take that away don't get me wrong but I when I actually had to confront it myself was when I was like oh like this sucks right um so what is the process if someone wants to do that like if they say hey all right we're going to sell these properties I'm going to 1031 like what is the process right so it's actually a very transparent process that starts with the requirement that you use

13:42

the services of qualified intermediary that's an unrelated third party someone like us all we can do is to process your 1031 exchanges I'm an accountant I can't do your taxes my partners are attorneys they're not going to do your trusts we can only function to document the 1031 exchange as the sale and then we have to hold the proceeds the IRS does not let you touch the money while it's in between the sale and purchase and then there's further documentation on the purchase side and as long as you do it the right way and

14:19

there's a couple things that are really critical the first one is that the timelines are constrainted so from the day you close your sale you have 4 days to identify your potential Replacements and 180 total days to close on them you have to take title to the new property or have the be the same taxpayer for the old property as the new property and if you want to defer all tax you have to purchase at least as much as you sell and use all the proceeds to do it so it's got to be real estate you got to use a Qi you got the

14:58

time constraints you uh have to keep title the same and you have to purchase at least as much as you sell if you want to do for all tax that is the 30 second version from a two sentence statute that is created over 10,000 pages of case law so is that 30,000 feet or 50,000 feet I don't know but yeah so but for you it's really as simple as you're going to sell property you're going to buy property and you do it all the normal way and at the end of the day if you do it the right way then the IRS

15:33

reward you with indefinitely deferring the attx now I love what you when you were asking the question and you were talking about the uh you know the why how angry you get and why are these people talking about getting away from the 1031 when you're working hard to get it obor of mine once challenged me to stop thinking of the tax code as a way that the government uses to get your money he said there is an element to that yeah because we need hospitals and Roads and all that he said but more importantly the government is using the

16:12

tax code as a behavior incentivizing and if you perform the behaviors they want you will be rewarded in the tax code in those Provisions now that just boom that blew my whole mind because yeah the current Administration has tried to get rid of 1031 several times every Administration I've ever been under has talked about it why don't they ever do it because it's one of the best things for our economy that could ever happen started in 1920 for farmers who if they sold their Farms by the time they paid the tax they would not have

16:51

enough money left to go buy a bigger farm and our country desperately needed Agro business so 1031 was put into place so now but also not only could they buy new Farms what about the new guys who wanted to go into farming there was nothing to buy because the market was stagnant now let's put that at the P perspective today of 1031 exchanges yes if you do it right you're rewarded by not paying tax but it's capital gains tax whereas what happens in every transaction there's two Realtors generating fees there's two title

17:34

companies there's two appraisers two inspectors there's two title insurance companies there's all these things and all of those people are making a living good for the economy and they're also paying ordinary income tax Which is higher so in exchange for giving up a relatively modest amount of capital gains tax on real estate they're encouraging a robust economy that's employing a lot of people and the government's generating a truckload more taxes never thought about that did you I

18:11

did not I did not it's interesting and yet it makes perfect sense doesn't it it does guess what today I know you get the calls and emails every day from people who are wanting to get into the business the only way most of these people can get to the business is if people who are one step ahead of them can sell their properties to buy picker because they can only afford to buy entry level stuff right so we're just keeping the velocity of the real estate market and the government does love that yeah yeah that that's an

18:47

interesting perspective I definitely never thought of that because you know when you when you confront a big tax bill it's all like ah you know like sucks right um but I never thought of it in that perspective and it and it definitely you know it makes a lot of sense what you just said you did say one thing and so on the 45-day identification so if you can like what's the definition of identified you have to have something under contract you have to have something under Loi you have to have something to

19:16

prove that it's like what what does that mean welcome to the IRS world again it simply has to be in writing so it's a written document and it has to be a specific identification so it couldn't be I'm going to buy a unit in Clear Water it would have to be I'm going to buy a unit at 765 clear Street in Clearwater so you got to be able to go up and ring the doorbell because it's got to be specific you don't have to have it under contract it literally just has to be in writing it has to be a

19:50

specific address it has to be in place prior to midnight on day 45 because after after day 45 that list becomes set in stone it cannot be changed so if you simply put a property on your list write it down that's okay you could do that but day 60 rolls around it you lose out on that property you can only choose for properties on that list so you're basically stuck do you can add you can only buy that property you can add multiple properties to the list you can but again welcome to IRS world who started this

20:32

whole thing because they lost a court case so just imagine a tickto IRS who has to let us do this but they don't have to make it easy if you name three or fewer properties on your list it doesn't matter what they're worth so sell a property for a thousand bu 100,000 bucks name three5 million properties no problem if you want to name more than three properties then either the total value of that that list cannot exceed 200% of what you sold or you have to purchase every property on the list I know right where's the logic so

21:11

if you are as a general rule of Thum if you're selling an asset and you're wanting to buy bigger yeah keep your list of three or fewer got it if you're selling an asset and you're wanting to buy several smaller properties then you might be able to name more than three and still make that list work yeah but the key is they've got to be on your 45 day list because those are the only ones you can close on and after day 45 you can't change the list yeah yeah and if you're over three you have to buy them all unless the

21:48

total value is less than 200% ah so you could sell a $2 million asset and you can name 20 properties on it and as long as their value was no greater than $4 million you could do that interesting interesting yeah that's I never knew that and I always was curious about the 45 days to identify because I've heard people that have have had problems with that and I could understand in last year's you know Market there just wasn't that much to to buy that was penciling but um they probably start too late and

22:25

procrastinate so that's probably the issue too that's a lot of it sure can because that's one key hack for everybody out there that's kind of considering doing something like this is that you can be under contract for your new property anytime you want including before your old property closes so we will have a lot of people gosh back like four or five years ago remember what was happening in California people were getting 50 offers above ask on day one you know that kind of stuff oh yeah so

22:56

my advice to clients who were saying I'll never be able toy buy something was take care of the hardest thing first and if the hardest thing is finding your new property go out and get it under contract then list your property accept one of the offers on day one and as long as you close the sale before you close the purchase you're good to go so take care of what the market is telling you the hard job is first had a poor guy just this year who named a he was buying a bunch of smaller lots and he was going to build basically

23:35

his own Rental Community and the problem was he didn't need my advice to get them under contract so day 45 passes all he's got of these lots and he got out bid for almost all of them I said dude you can only buy these properties now because you're past 845 so you know what he had to do Derek God he had to go to Every buyer who had outbid him and offer him five or $10,000 more oh wow for their lot wow so that he could Salvage his 10 31 now it ended up being worth it he still saved money overall but think of how much more he

24:16

would have saved yeah if he just would have got him under contract it was a dark dark day yeah and and in that case if the the person he went to was like screw you dude I'm I want these lots I'm keeping them then he's going to just have to pay you know 23.8% tax or whatever it was yeah that's exactly right yeah interesting um question on you know another you know tax deferring strategy so to speak um you know cost segregation studies and accelerating the depreciation we know we're down to 60%

24:55

this year I believe and um hopefully that's going to change though right oh gosh I hope so I hope so um let's that's you know fingers crossed um now what would be the diff I guess there is a difference but like when I was in this situation we ended up not selling these properties but I'm freaking out like looking looking for like I'm literally freaking out with my accountant and the funny thing he's like dude Derek like chill I remember when you were in the insurance business making $30,000 a year like this is a

25:27

good problem dude like chill out right um but like I was looking at a cost segregation study like just buying more properties that year cost sagging them and offsetting the taxes that way like would you say a 1031 is better than doing that or is it just a different strategy what I would say is that the best strategy is to do them both um certainly and there are a lot of people they they coin it what the Lazy Man's 1031 and particularly syndicators who are putting together projects where you're buying into the

26:09

syndication because a membership interest in a syndication generally does not qualify for 1031 treatment so someone who's selling a piece of real estate and would like to go into syndication as a choice generally where they can either Buy real estate or they can go to the syndication but because the syndication is buying a membership interest in the entity it's not considered real estate so you can't do it so they're kind of faced with that choice and what what folks have always said was well you could turn this into a

26:44

lazy man's 1031 so you're going to pay the tax but that same year you're gonna go into the syndication and get your bonus depreciation and that'll offset that tax and then when you sell it later instead of having to recapture the tax you're just going to do it again yeah so basically you keep opening you're going to buy new depreciation just this last spring though the IRS came out with a some final rulings that said that you can defer any type of depreciation as long as the property you're

27:22

purchasing is substantially the same components so going from like a to a house there's all the same kinds of components the HVAC the roof the wiring and all of that that those are the kinds of things that you cing out so there the irss said you can now 1031 exchange and defer that forward as well so for you Derek let's put it be at mobile home park terms let's say you're selling an asset for a million dollar and you took you cos the bonus depreciated out and got every got rid of everything just for easy simplicity so

28:01

your basis is zero you sell the property you got tax on a billion bucks okay that ain't cool now you could go buy another property and then C say it but are you going to be able to get as much probably not now and you're still GNA be facing the the prospect of just kicking that down the road and always have to to find a new Prospect but what if instead you did a 1031 exchange into another mobile own Park let's say you 1031 exchanged into a $2 million mobile Lo Park what you just did was you deferred

28:42

all of that million dollars in gain forward and the depreciation recapture and because you bought more than you sold you just bought another billion dollars of depreciable basis so you could start depreciating that so you get the benefit of you definitely defer tax and you still get depreciation and you can buy more depreciation if you want I see I see and so you mentioned something about syndications and so if we've got a guy who's got a million bucks in a syndication we sell the property and he gets his million dollar

29:21

gain that he can't let's say I have 10 investors in this deal he can't then 1031 his portion into another property if he wants to go bu himself or 1031 into another syndication or fund right because why what does he own he owns a membership interest in a limited partnership right and that's not real estate right now the way that some syndications are able to work around this is that they will accept 1031 investors by selling to them a tened and common interest in the real estate self so that the limited partnership

30:02

becomes attended in common a partner with the investor and you just have to have your ducks in a row for how the property is going to be managed and you know what happens when it sold and their liability for the loan etc etc etc but that's generally how syndicators are able to do that um or let me give you another life hack that's just awesome with this because I see 1031 investors wanting to move into more passive Investments syndications are perfect for that but they've got all these underlying issues right because they're

30:38

really like two different asset classes so what I will counsel people is instead of just dumping the 1031 losing the compounding effect and then starting a new life with syndications why don't you sell the property if you want do a 1031 exchange buy two replacement properties so let's use an example uh I'm going to sell a property for 500,000 it's got uh three it's got 200,000 in debt okay so I walk away with $300,000 I'm gonna take $250,000 of that in my 1031 exchange I'm going to buy a

31:25

property for 250,000 free and clear it's cash I don't owe anything on it I'm going to take the other 50,000 and I'm going to buy a property with leverage for 250,000 that's a 20% down payment so at the end of the day did I buy for as much as I sold yeah I sold for five bought for five did I use all my proes my proceeds to do it yep I used 250,000 on one 50,000 on the other but what do I have now a free and clear property first of all it's out of risk all I got to do is keep the lights on I

32:05

don't have to worry about losing it but secondly and more importantly if I find the right syndication that I want to move into I simply do a Cash out refinance yep of that property and use that money which is taxfree anyways to go invested by syndication yeah so in one Fell Swoop I keep my compounding at the 1031 I'm increasing my 1031 portfolio and I'm using taxfree dollars to that invested syndications that's a lot of good expansion yeah yeah absolutely and it's funny you say that because I was going

32:42

to ask you that question because one of them we were looking at this that's one of the things I was thinking about doing I'm like okay well if this gain just buys this property cash then I can 1031 into the property and then a couple months later once in another deal is identified I can you know refy the thing and get most of my cash back out and then go invest like I I was I was like intense into this thinking of ideas and that's freaking awesome dude that that's like that that's good man and I don't

33:15

think um I'm sure some people do think about that but that's a great tip and strategy there Dave um so I want to get into some questions that we had come through on our Facebook group and I think think we actually hit some of these um so actually I did have one more question about the tenant in common thing because we run into this when we um we deal with Mom and Pop sellers they've got very low basis on their properties and they're you know they're going to pay uh you know a relatively large amount in taxes

33:50

once they sell these deals and um you know we've offered them the opportunity to potentially come and invest invest with us um and that's where that tenant in common thing would come into play so it's doable it just there's a little bit more backend work and paperwork and it sounds like yeah absolutely so generally what what we'll see is that the syndications that are able to do it will generally have a little higher minimum because it's got to be worth their while yeah just to figure out how

34:24

to make the two tenants work together but it is doable yeah got it got it all right so this someone was asking about a reverse 1031 and the process of that I don't even think I really know what that is so can you explain what that is and the well it doesn't reverse the statutory order although that kind of is what it says it does yeah again welcome to IRS world the statutory order of the tip31 exchange is that you cannot take title to your new property until after your old property has sold but what are you going to do if you

35:04

find the perfect new property but your old one hasn't closed yet this is what the reverse exchange allows you to do we as the qualified intermediary are allowed to form a holding entity and LLC that you're not a member of and that entity is going to take title to the new property and then we can hold it for up to 180 days while you finish selling your old property got it got it then you sell your old property and you purchase this property we've been holding for you got it and so you know Dave Foster LLC whatever it is purchases

35:52

XYZ mobile home park essentially but your fun you close it with your funds right well we don't have any money we're poor so you have to provide the money F I mean my f yeah my f exactly from wherever it could be a portfolio lender private lender cash on hand anything but a normal mortgage product is going to work yeah yeah okay and then if you have I I'm just this isn't registering in my head yet correctly so that's so what's going to happen you're going to lend money to us and we're going to buy the new

36:31

property yeah we're going to hold it so let's say it's a million bucks then you're going to while we're holding it it's under your control so you're actually running it generating the money fixing it up doing whatever you want it's yours in every way but title you sell your old property for a million dollars and then you're going to purchase in your 1031 exchange the property that we're holding and it's going to be you sold for a million dollars and now you're buying for a million dollars so that

37:11

million dollars from your 1031 exchange goes into the purchase part of that purchase though is that we borrowed money from you right so then the $1,000 is repaid to you and only the 1031 ex change is going forward got it got it got it so like we have a property under contract right now so let's say we're buying this and I know I've got one that I'm selling that I basically want to do this with and so basically with your you have the entity which buys it and holds title to it but we essentially I would loan money

37:51

to The Entity right and then I sell the other one it goes into the 10 31 right yes and then that your entity just reimburses me exactly and then the 10:30 I got it got it exactly now let's say because I know this happens a lot let's say it's a mobile H Park that need some improvements and you're going to sell your old property for a million bucks how much do you have to buy you have to buy a million dollars in real estate but what if you find a mobile home park that you can buy for 00,000 that needs 400,000 in

38:31

Improvement we do a reverse Improvement exchange so you lend us 600,000 and we buy the property and then you lend us 400,000 and we improve the property but who's improving it you are we're not having anything to do with it we're just that conduit then once that property has been improved what's it worth the acquisition cost was 600,000 yeah and there were $400,000 of improvements put on it so you sell your old property for a million and you buy that new property for a million and you just bought yourself a renovated up and

39:09

running Coen concern Park a mobile home park that needs you know renovation and stuff really surely not okay good so that was one question um so this one I'm not sure I understand this question but it says any potential options for 1031 when seller financing does the seller have to put all proceeds into an intermediary yeah I think what they're talking about is so many times with larger assets or quirky sectors like mobile own Parks you'll get people who either have lots of cash and bad credit or they'll

39:50

have great credit but not a lot of cash so traditional lending for them is going to be tough mmhm but what you can do is you can sell the property to them and you carry the notes so you're acting as the bank yeah now the rules of the 1031 say that you've got to purchase at least as much as you sell and you have to use all the proceeds to do that so if you sell a property for a million bucks and there was no debt on it but you took $200,000 uh about $200,000 down and carried a note for $800,000 mhm both the note and the cash would be

40:33

considered proceeds of the sale because they both have value so you have to use both the note and the pro and the cash in your next purchase well it's hard to do that right because you're gonna go to the seller of the next prodct and say would you take this on carry note they say no so what you could do is before you have to purchase the new property you simply swap out the note for cash so that now your exchange account has the full amount of cash that's needed and outside the exchange account you own the

41:14

note and that note by the way is taxfree except for the interest that comes in because you it hasn't bought it for par value right right so that's how you can do 1031 that's kind of the deep into the pool we actually have a video on that on our YouTube channel and I discuss it in LinkedIn our book as well so but that is the deep end of the pool but it is possible to use a seller finance with a 1031 okay cool cool cool and I think we may have already touched on this one if multiple partners involved with the sale

41:47

are there any workarounds so one of the partners can 1031 his portion from my understanding all proceeds can't be touched curious if any creative workarounds well let's talk about what they mean by partner so if they simply mean me you and two other people got together bought a piece of property as tenants in common we actually own our own piece of real estate it just happens to be 25% of the larger piece so when that is sold all four Partners can go separate ways and one could do a 1031 one could not however they want to do it where it

42:23

becomes complicated is what if that partnership is truly a partnership or a limited liability company with four members when that happens that multi-member LLC is filing its own tax return so it's actually the owner of the real estate right not the members the members own the LLC the LLC owns the real estate so when it's sold the LLC could do a 1031 exchange now if everybody wanted to buy their own piece of property and do a 1031 that's relatively simple the LLC sells it does it to 31 buys four properties

43:04

and then once that's done it dissolves and gives the properties to each one of the four members that's called a swap and drop swap being the 1031 process and then drop being the eliminate the LLC process there is a growing body of private letter rulings in case law that says that you can actually do the opposite as well which would be a drop and swap right before the closing of the sale the LLC is dissol and the property is quit claimed into the partner's names so what just happen now we've got

43:52

four people that are tenants in common that each own their own real estate right so again the property sold and they can each go their own way got it and so on the drop that drop and swap example there you drop the LLC then I the LLC wouldn't have to have a 1031 you know Dave could have one Derek could have one Joe could have one and Steve could have one if we all four property that's exactly right interesting interesting you know it always amazes me and I got a couple more questions if you're okay with that I

44:26

know getting on time here um you know it's so interesting I talk to other entrepreneurs and people and it's like you know whatever whatever kind of tax law that's thrown in we always find some work around on something we always find to work her out it's so true you know there I I don't know who to give credit to this for there was an old proverb that said that if you took seven monkeys and and put them in a room with typewriters that sooner or later at some point in time they would end up typing

45:04

Shakespeare that's that's the probability so I kind of adapted that saying if you put seven attorneys in a room while with their own brief memorandums sooner or later they're GNA find a way to beat the tax code yes for sure for sure just takes time definitely definitely and so sometimes I'm like okay well if they put some stupid tax law and like there's going to be some some D like some dude in a situation that has a lot of money that's going to figure it out then it's going to become

45:35

case law and it's like okay we can do this now or something to that effect and then you and I get to ride on the shoulders of those who pay big bucks I like being in that position absolutely 100% um so uh Vincent said what's the minimum amount to make it worth it for a 1031 I mean it sounds like from what we talk talked about that wouldn't matter my favorite client of all time I I love telling her story this was like 2003 she sold a lot for like $11,000 and by the time I was s done she was going to end up by paying the 1031

46:15

fee she was going to end up Sheltering like 500 bucks and I said are you sure you want to do this and her answer was hey that's my 500 bucks yes so there's a there's a philosophy yeah I've seen other people who say n it's not worth it I'm just not gonna do it yeah I guess it all depends on how dear those dollars are to you right right um another question here um we may have already um I think we may have sort of answered this but Garrett was asking can you 1031 your Equity into a deal you

46:58

already own or does it have to be a new purchase and second part of that and can you 1031 into a deal that you are syndicating or raising capital for was that did that what's that who asked that question that was uh Garrett Garrett asked that question remind me not to take his phone call he's at the deep end of the pool right there uh yeah forar the answer to every one of those is kind of it depends yeah so you're selling a piece of property that's in your name and you want to buy part of a property from a group that you're

47:40

already a member of if that's an LLC and you're not more than 50% member of that LLC you could probably do that you would buy 50% of the property from the LLC now you couldn't buy 50% of the LLC you'd have to buy 50% of the asset and so what ended up happening is your LLC would own a certain amount of property and you own a certain amount of that same property could get messy but could work if everybody were tenants in common you could buy your partner's interests out absolutely again as long

48:25

as not more than a 50% owner you're not a really dead party so yeah there's some ways to do it Karen syndications that you are putting together probably not now you could use it to buy a piece of property that you then later contribute into a syndication so you did 31 from one park to another Park to other Park what do you want to do you say you know I got a billion dollars I going to put into this thing so I'm going to Syndicate it well you would then simply take that property that was the product of the 1031

49:03

exchange and you would create the structure for the syndication contribute the property into it but once it's already in the syndication and you've got things started there's really no way to do it at that point got it got it got it I love that ah he's jumping in the deep into the pool there I I guess that's the gray are when you get into that um there there's a lot of gray when it comes to this stuff it it sounds like to a degree you know you think about how many different variations of scenarios there could be

49:38

at anything there's no way that they could have all been covered right in the statut case law so you kind of left using your best judgment and then a whole lot of people end up having to make a decision between would they rather ask forgiveness or would they rather ask permission and most folks usually with the IRS end up saying I'll ask forgiveness because I can't even talk to them on the phone so how am I ever gonna get permission yeah yeah because you know good good luck talking to anybody on the

50:11

phone there it's uh it's crazy won't won't get into that here um but Dave man you have provided a ton of value my knowledge has gone up on this just from chatting with you on here so um if people want to learn more about what you do um where can they find you and what kind of services do you provide you know tell us about the book or whatever you want to um talk about yeah so we realized early on years and years ago that the best way to create clients for 1031 exchanges is to educate them because nobody knows about

50:47

them y so the 1031 investor.com is our home website and it's got calculators it's got articles it's got links to our YouTube channel which is youtube.com th31 investor where we've got over 50 videos on every one of these little individual topics that we were talking about so plenty of ways to do that and then of course same thing just wanted to kind of close the circle on providing education resources I wrote the book lifetime taxfree wealth a Real Estate Investors Guide to the 1031 exchange and

51:26

you know honestly Derek I kind of thought when I started to write it that it was going to be this cute little how-to manual you know 103 wi exchanges for dummies or something like that but what it ended up more feed into because of all the unique scenarios we've encountered is it became more a strategic road map for how to plot a course using 1031 exchanges the part of the book I'm most happy with is when we took several case studies of actual people and tracked them through their real estate investing careers using 1031

52:07

exchanges military people people that wanted to become big and multif family people who were accidental investors people who changed courses and classes and people like us who used the 1031 exchange to end up buying a sailboat taxfree and raising our children on it for 10 years those case studies will give you a lot of fodder to say well wait a minute if that person could do that can I do this and that's what I wanted it to happen that's great that's great well awesome and so I think we've um we can

52:46

we'll throw those your links and stuff and anything in in the show notes and so Dave look I really appreciate you have uh coming on to the show you provided a ton of value today and everyone thank you for watching the MHP show and we will see you all next week please like And subscribe on YouTube Spotify where else are we iTunes and leave leave a good comment please you can leave a bad one too if you want like if you don't like it whatever um and we will see you all next week did you want to say something Dave

53:18

what was gonna say if you're gonna say something bad say it about Derek not me there you go we'll do that people do say bad stuff but it's okay it's okay it's okay all right we'll see you guys next week [Music]

Linkedin

Facebook

Instagram

Tiktok

Youtube

Twitter

Substack