Have you done a 1031 Exchange? Let's talk!

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Have you done a 1031 Exchange? Let's talk!

Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes

Hey BP Nation! I'm writing the world's best post on 1031 Exchanges. Maybe I'll put it in my next book. But here's the problem: 

I need you. 

You see, I need some good stories to go with the post. So, if you've done a 1031 exchange, let's talk. 

Let me know in this thread if you've done one, and wanna tell your story in an upcoming blog post. Include any info you want here. 

Thanks!

Podcast Guest on Show #92
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Rick H.
Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
11y

I've completed a number of them.

In one case, I acquired a property in the East Bay, CA town of El Sobrante. Used this property for a portion of the cost to acquire my ranch near San Diego. This was very lucrative and made a deal possible that a few years before would never dreamed possible. Moral: it costs no more to have big dreams than little ones.

In another, I helped a friend acquire a valuable beach parcel in Maui in order to facilitate his acquisition with my 1031 money. He later onside he back, and got to build a magnificent home overlooking the ocean views. I've never visited it (amazing, I know). 

In another, I was a TIC partner with a couple other folks in a 34 unit apt building in Costa Mesa, CA. The seller had inherited the complex and lived in one unit. She discounted the sale price due to her belief that a neighboring tenant was stealing her shoes that were left out near the front door each night. Takes all kinds to steal shoes.

In another case, I helped a friend by exchanging his high-rise building in downtown Long Beach, CA. Also helped him do a number of soeculative land deals. Sadly, he lost all that he gained by ignoring market signal and refusing to improve his real estate knowledge by investing in his education. Some will, some won't...

Also helped other friends acquire and dispose of assets by acting as the accommodator when no conflict was present. Learned a lot. 

One thing I learned was that there is a bit of exposure and I'd rather pay an experienced accommodation like Jack Shea to provide the service.

Another thing I learned was that I have no use for all these women's shoes :-). 

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  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    11y

    I've completed a number of them.

    In one case, I acquired a property in the East Bay, CA town of El Sobrante. Used this property for a portion of the cost to acquire my ranch near San Diego. This was very lucrative and made a deal possible that a few years before would never dreamed possible. Moral: it costs no more to have big dreams than little ones.

    In another, I helped a friend acquire a valuable beach parcel in Maui in order to facilitate his acquisition with my 1031 money. He later onside he back, and got to build a magnificent home overlooking the ocean views. I've never visited it (amazing, I know). 

    In another, I was a TIC partner with a couple other folks in a 34 unit apt building in Costa Mesa, CA. The seller had inherited the complex and lived in one unit. She discounted the sale price due to her belief that a neighboring tenant was stealing her shoes that were left out near the front door each night. Takes all kinds to steal shoes.

    In another case, I helped a friend by exchanging his high-rise building in downtown Long Beach, CA. Also helped him do a number of soeculative land deals. Sadly, he lost all that he gained by ignoring market signal and refusing to improve his real estate knowledge by investing in his education. Some will, some won't...

    Also helped other friends acquire and dispose of assets by acting as the accommodator when no conflict was present. Learned a lot. 

    One thing I learned was that there is a bit of exposure and I'd rather pay an experienced accommodation like Jack Shea to provide the service.

    Another thing I learned was that I have no use for all these women's shoes :-). 

    4Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    Two of my best buildings were purchase from a 1031 seller. Those guys are great to buy from :)

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y

    Hi Brandon,

    I've administered in excess of 125,000 1031 Exchanges during my 31 years in the 1031 Exchange Qualified Intermediary industry.  I would be happy to help in any way that I can, just let me know.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    2Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    11y

    I just completed a 1031 exchange with Bill Exeter's group. The seller of the properties I exchanged into is also using Bill for her 1031X. 

    Thanks Bill!

    1Reply
  • Chrystal England
    Hayward, CA · Member since 2014 · 17 posts · 23 votes
    11y

    I'm a CPA, Broker, and former IRS agent in San Francisco's large case division. I've done several of these including partial 1031's, multiple property 1031's, having a property built as part of a 1031, and have investigated the rules of a reverse exchange, but generally finding their costs far outweigh their benefits in cases where you want to purchase a replacement property prior to selling your planned relinquished property. Additionally, the new tax rules surrounding converting an investment property into a primary residence with the intent of excluding all of the capital gains someday have really put a damper on my previous tax planning strategies for rental properties. In general, 1031's are one of the last legal tax shelters in existence and they are wonderful. However, the more interesting part of this tax strategy is in figuring out how to permanently defer the gain vs the temporary deferral that the Internal Revenue Code offers only up to the point where you finally divest of the property and must pay the piper so to speak... I think investors are ready for such a book title as... "Life after a 1031 deferred tax exchange-now what?" Which I'm happy to collaborate on with anyone who is up for that with me. Cheers!

    1Reply
  • Chrystal England
    Hayward, CA · Member since 2014 · 17 posts · 23 votes
    11y

    Also I forgot to mention in my prior post here that one of my 1031 exchange transactions was also audited by the IRS while I was an IRS agent in San Francisco. Of course I was not concerned in the least about that transaction being audited, however, that was a particularly more complex transaction than most. Specifically, the relinquished property was an apartment building, and there were 2 replacement properties I had to purchase in order to use all of my gain. 1 of those replacement properties was a single family home, and the other involved raw unimproved land where I had a rental house built and I needed to use the full value of the newly built home in order for the 1031 to work. The replacement property that I was having built was completed and we closed escrow within 45 days of closing on the relinquished property. The IRS auditor said it didn't qualify as part of my exchange and tried to disallow a portion of the exchange as he was only using the value of the raw land in his calculation. Obviously he was clueless about 1031 exchanges and I appealed and won. I also recall others in my office trying to disallow exchanges and I was constantly having to explain why the exchanges were qualified... Pretty amazing stuff!

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Brandon Turner

    In my book which you have is the story of my first IRS Section 1031 done in 1987.  The President of "one of the largest and long established multi-generational real estate companies in the area" called me into his office to explain 1031.  his first question to me was "Is this thin legal?" 

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Brandon Turner

    PS that's Chapter 13 in the book.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y

    @Brandon Turner

     In the mid 90s 1031s were so foreign to the the rank and file investor that folks would ask all the time what a "qualified intermediary" did.  Our response was that if we told them we'd have to kill them - later on we hired a PR firm and business improved!!

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y
    Originally posted by @Jon Klaus:

    I just completed a 1031 exchange with Bill Exeter's group. The seller of the properties I exchanged into is also using Bill for her 1031X. 

    Thanks Bill!

    Hi Jon,

    You are most welcome!  Enjoyed working with you!

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
  • Matt Sauls
    Rental Property Investor · Redlands, CA · Member since 2014 · 36 posts · 14 votes
    11y
    I am also in the final stages of completing a 1031 exchange with Bill Exeter and his group. I traded one California house for three Memphis houses. The Exeter team has been fantastic for my first exchange. They've been the smoothest part of the entire process.
    0Reply
  • Sri Ram
    Rental Property Investor · West Palm Beach, FL · Member since 2015 · 30 posts · 6 votes
    11y

    I have done multuple 1031 exchanges. Both on personal names and LLCs.

    0Reply
  • Carole G.
    Investor · Durango, CO · Member since 2008 · 163 posts · 59 votes
    11y

    We have done one 1031 exchange. The person handling the exchange was good, but we had a hard time finding desirable properties in the time frame, so that became very stressful. I would avoid selling with this method in the future unless I had a way to tie up a property before I sold mine.

    1Reply
  • Joe Edgar
    Austin, TX · Member since 2015 · 21 posts · 14 votes
    11y

    I have done many 1031s and I am worried about the current laws being considered.  If passed it will more all of our knowledge useless in this regard.  The Pres. budget currently has a cap designed within.  We all should be watching. 

    0Reply
  • Drew Denham
    Grand Rapids, MI · Member since 2014 · 174 posts · 27 votes
    11y
    Hi all, I don't really understand this 1031 exchange. Are you just deferring the capital gains? A friend told me you roll the profits into a similar property (let's say U made 50k) and then sold the second property (profit 10k) - so you would pay capital gains on 10k?? Is this true?
    0Reply
  • Serge S.
    Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
    11y

    Not sure if you are following but its starting to seem likely that 1031 exchanges will be limited: 

    https://firstexchange.com/ProposedTaxIncreasesforRealEstate

    I can imagine the adverse effects this will have on RE, particularly large multifamily.

    0Reply
  • Richard Flanders
    Investor · Clinton, TN · Member since 2015 · 5 posts · 2 votes
    11y

    My first sale was a 1031 exchange. The idea is that you sell one (or more) properties, and use that money to purchase one (or more) like properties to avoid the tax on the first one(s). It can be done in reverse as well, you can buy first and sell later. Some of the rules to be aware of are: The folks on the titles all need to be the same, meaning you cannot sell one in husband/wife name, and buy in husbands name. It must be both on both transactions. Also, the fact that you are doing a 1031 exchange MUST be in the contract(s). The other party, although not affected in any way, must be notified in the contract to sell/buy. Next, you cannot handle the money. You have to hire a qualified intermediary to take the sale money and pay it to the folks you are buying the house(s) from. Also, there are time limits. You have 45 days from the date of the sale (purchase) to list the properties you might use in the exchange. You have 6 months to close since the sale (purchase) to close.  Those are most of the big items. Talk to a Qualified Intermediary for any additional/changed rules.

    0Reply
  • Drew Denham
    Grand Rapids, MI · Member since 2014 · 174 posts · 27 votes
    11y
    Thanks Richard Flanders Do u eventually pay the tax then? What's the real benefit ? Keeping the money U would use to pay taxes?
    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Drew Denham

    I talked about 1031 on Bigger Pockets Podcast # 82.  In addititon to never paying taxes during your lifetime, you can then use the "stepped up basis" and your heirs get the property and the capital gains taxes that have been deferred during your lifetime can be

    WIPED OUT.

    In addition you can combine it with the $250,000, $500,000 capital gains exclusion on a personal residence by converting an acquired 1031 property after using it as an investment, think rental, then make it your personal residence. (Which you can do once every 2 years.)

    1Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    11y
    Originally posted by @David Krulac:

    @Drew Denham

    I talked about 1031 on Bigger Pockets Podcast # 82.  In addititon to never paying taxes during your lifetime, you can then use the "stepped up basis" and your heirs get the property and the capital gains taxes that have been deferred during your lifetime can be

    WIPED OUT.

    In addition you can combine it with the $250,000, $500,000 capital gains exclusion on a personal residence by converting an acquired 1031 property after using it as an investment, think rental, then make it your personal residence. (Which you can do once every 2 years.)

     How long does it need to be a rental before you make it your personal residence, David?

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jon Klaus

    I don't think there is an exact period of time in the code.  But I would say 2 years. (I'm not an attorney nor CPA.) 

    You do a 1031 into a potential future residence.  You rent it for 2 years or so, maybe its in a place you would like to retire, like sunbelt, HI.  It has to be in the US.  Then after you rent it out for a period of time, then you move in and live there at least "2 of the last 5 years" as prescribed by law, then sell and get either $250,000 capital gains or $500,000 capital gains tax free.

    Then rinse and repeat. 

    0Reply
  • Ron Shepherd
    Investor · Lancaster, PA · Member since 2015 · 9 posts · 2 votes
    11y

    just completed one for a client who purchased 6 properties to replace one,  went down to the last week on the final property

    0Reply
  • Mike Watkinson
    Milwaukee, WI · Member since 2015 · 5 posts · 3 votes
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    @David Krulac

    It was my understanding that they closed the loophole allowing you to use the primary residence exclusion for built in gains related to investment use years ago. I believe that all of the depreciation taken over the life of the asset is recaptured and taxable at the max section 1250 rate (25%?), with the pro rata portion of the capital gain attributable to the investment period, as opposed to the primary residence period, being taxed at the capital gains rate. 

    @Jon Klaus

    There is a 5 year holding period after a 1031 transaction before the property will qualify for the primary residence exclusion. This can be overlapped with the 2 of 5 years, but both requirements need to be met. Two years of subsequent investment use is not required to qualify for 1031, but it is the time needed for safe harbor treatment if the IRS were to challenge your motives. After all this, you can still only exclude the amount I mentioned above.  

    1Reply
  • Mike Watkinson
    Milwaukee, WI · Member since 2015 · 5 posts · 3 votes
    11y

    @Drew Denham

    In your example, if you had a gain of $50K and $10K on the sale of the first and second property, respectively, you would be taxed on the total gain of $60K when you sell the second and don't do another like kind (1031) exchange. The benefit is that you don't pay taxes on your gain until you cash out allowing you to leverage the funds for a better property.

    This is especially nice since you are going to have taxable income for the recapture of the depreciation expense you've written off to shield your rental income over the years which has reduced your basis in the asset.

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Mike Watkinson

    Nice catch on the 5 years, I knew that but forgot that change.

    On the combination of 1031 + 1250, I thought that there was talk of a change, but I didn't think that it ever passed.

    0Reply
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