1031 Exchange?

Question

So I dropped my first batch of yellow letters in the mail yesterday, and just now got 2 calls, almost back to back. The first was clearly not motivated. But the second caller said that she's not interested in selling outright, but is looking to do a 1031 exchange...?

I tried my best not to sound like I had no idea what that was. I told her that it's probably not something that I'd be interested in, but I'd check with my partners to see if they could work with her.

Some quick googling has led me to believe that it involves trading one property for another and not having to pay taxes... so I'm assuming this is a dead end. But as a wholesaler, is there any kind of creative way to structure a deal here? And what sorts for reasons might a person be interesting in trading their property as opposed to selling?

Bill Exeter · Answer

As to the why, many people look at the 1031 Exchange merely as a transactional tool to defer the payment of taxes on one particular sale transaction.  If used correctly, it is actually a wealth building strategy to be used over the long run.  Keep deferring taxes, keep your money working for you instead of the government, keep building wealth and increasing your cash flow.

Steven Hamilton II · Answer

Joshua S..

These guys put it perfectly.  If you have any questions about 1031 exchanges that shouldn't be a problem  What are you looking to do with this property?

-Steven

William Bannister · Answer

Thanks David , Its been over a decade since I went to the seminar on 1031 tax  exchanges and didnt want to try and give the time lines and be wrong on the matter since I am not practicing real estate tax law.

David Krulac · Answer

As William Bannister has said it is complicated and unless you follow the regs to the letter, the 1031 can be disallowed.

1.  You must identify the property you're acquiring with in 45 days.

2.  You must settle on the acquired property within 180 days, not six months, as sometimes six months is more than 180 days.

3.  You can't touch the funds from the relinquished property, and these funds must be held by a qualified intermediary.  The QI can't be a relative, a business partner, your attorney, your CPA, etc.  One famous real estate investor uses his neighbor as the QI, for a very small fee.  Sometimes he even acts as the QI, himself for the neighbor.

I've been doing 1031s for 26 years, and the most recent exchanges were handled by a QI, who is a CPA, but not my CPA, for less than $2,000, sometimes a lot less.

The out of pocket expenses therefore should be less than $2,000 and make a 1031 exchange feasible anytime you tax bill would be more than $2,000, if you didn't do the exchange.  With the short term rates as high as 39.6%, it doesn't take much to get a $2,000 tax bill.

"Like Kind" as defined by the IRS means any real estate that is used as an investment.  You don't have to exchange apartments fro apartments, you can do hotels for vacant land, strip center for timber land, etc.  The only real estate that would NOT qualify would be your personal residence, your vacation home, or your second home, since these would all be for personal use not investment per se.

So how do you do a 1031 as a wholesaler.  well maybe you can work out an exchange between somebody that has one proeprty for sale, who would accept at least partial payment in the form of another piece of real estate.

William Bannister · Answer

What you want to do when you get that call is to ask the 1031 client seller..exactly what type of real estate are the looking for and whats the dead line. 
   In my opinion every starting investor that plans to hold property for net worth or retirement should study this strategy and what it can do for you to grow your business. 
  1031 starker exchange

William Bannister · Answer

There are a lot of possibilities if you know how to use a 1031 exchange. For example you can also do a reverse exchange as well. Im not sure how you can use this as a wholesaler but who knows I have seen some pretty interesting deals in my time especially just from visiting sites like this and reading books on the matter of real estate deals and watching brokers and investors.
  BTW you can take money out of a 1031 exchange it just means it will be taxed appropriately and its whats called "boot recieved".

William Bannister · Answer

1031 a smaller building to a larger building to avoid paying taxes. Lets say I have a 10 unit building I own free and clear I have had for 20 years and dont want to pay an arm a leg in taxes when I sell but I want more cashflow then what I have now. If I sell my 10 unit then using a 1031 x change I buy a 30 unit and now I have the extra cash flow I want.
   This is one way to do it. There are time lines involved and irs will want you to have whats called a qualified intermediary to handle transaction so when you sell property your not putting taxable proceeds into your pocket without paying taxes on them. The qualified intermediary usually a cpa firm that does these exchanges regularly handles your transaction and then you buy into your larger property and move to that place you would rather be. The deal is you trade out for like kind real estate! The other thing is this its a complicated transaction that requires planning and understanding. 
  Qualified intermediary will charge 750 to 10k to do these transactions so it better be worth your while. Doing a 50k home forget it most likely. 
  This all said its a great way to grow your portfolio or maybe get out of one geographic area and into another without getting killed on taxes.
   For more research on this matter look up Starker tax exchange

1031 Exchange?

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