***Anything you hear or see on The 1031 Show™ or Impact Bites™ should be taken as educational and should NOT be taken as individualized or actionable advice. Take anything you hear or see, and discuss it with us or your financial professional to determine how it might fit into your personal financial situation.***

Why You Need a Planner for your 1031 Exchange

Wally Smith:

We can talk about exchange properties a little bit. If you have a duplex that you’ve got yourself–and maybe it still has a mortgage on it, maybe it doesn’t. If you’ve got a mortgage, you’re responsible for that. It’s recourse debt that’s going to come on to you. You have to keep it repaired. You have to keep it insured. You got to get the people to pay their rent on time, so somebody’s got to manage that property. Contrast that, Erin, with what we ultimately need in any 1031 is you’re exchanging out of one property into another. How does that work?

Erin Crowley :

Correct. That’s one of the things that you really have to remember, that when you’re doing a 1031 Exchange: it’s about property, and exchange on property–as I said before–it’s a continuity of investment. You may have a half million dollar property now…the IRS allows you to defer the taxes if, after 180 days, you still have half a million dollars worth of property. Now it may look different. It could be active before, now it’s passive. It could be land and now it’s a strip on that property somewhere, or a Delaware Statutory Trust or rental property, but there still needs to be a transfer of property. It needs to be an exchange of property for property. And the overall rule is you need to take all of your net proceeds from the property you’re selling–or the relinquished property–and have equal to or greater than debt into another…

…and have equal to or greater than debt into another property. It could be a basket of properties; it could be one property; it could be 12 properties; it could be 20 properties. It’s really amazing all the different opportunities you can have, but as you said, planning is such a big part of it, because there’s a timeline. Of course, the IRS–somebody said the other day that–the IRS’s middle name is revenue. So they’re looking for you to pay the taxes. They’re not going to make this easy.

So you have a time–and as we’ve talked about before–it was 180 days from a closing of the one you were selling (the relinquished [property]) to the end of buying. If you’re buying several replacement properties, you’ve got to complete the closing of the last one in 180 days. That’s a pretty short time considering real estate doesn’t move at the speed of sound. The first 45 are the most crucial because that’s when you have to tell us [and] identify what you want to buy.

Wally Smith:

They’re pretty specific rules on the identification.

Erin Crowley :

Very specific, very, very specific. So having a plan, having something in mind… It can be buying and selling real estate is a frustrating proposition. It could be lucrative or it might not be, but it is extremely time consuming and like I said, it’s wrought with frustration. So it’s nice to have people like you out there who can kind of be a guide along the way, especially when they’re trying to go from something active to something passive, and then maybe something different than what they’ve experienced.

Wally Smith:

And you know, we have a number of realtors that we’ve developed good relationships with and we’re certainly always willing to talk to more realtors. It’s a confusing topic, so it’s not unusual for a realtor to give us a call and say, ‘hey, I have a few clients who I’d like them to learn more about this. Do you have a class coming up?’ And we do periodically. We put them on when there’s demand for them, but we find that, oh, every four or five weeks or so we’re putting on a class…and they’re not fancy. It’s lunch at a local restaurant or sometimes we’ll have it be in a library in the evening.

The point isn’t the entertainment, the point is getting the information across…and we want to really educate people: what are the deadlines? A lot of folks have heard about a 1031 exchange. They heard it’s complicated, and so they keep away from it. But even though there are specific deadlines and guidelines and things you have to follow, they’re well known and we can follow them very closely, and with the help of folks like yourself Erin, and folks like us, we’re able to make sure you go through that process properly.

Erin Crowley :

Yes, certainly. That’s my role: to make sure I give the guidance. I don’t give advice on taxes. I don’t give legal advice, but I give a lot of information on the process, the rules. The good and bad of a 1031 exchange is there are a lot of gray areas. The timeline is set in stone. That’s very rigid, but there’s a lot of gray areas. So it’s very important to have a team, a good financial advisor, a good accountant, a good attorney, and a good qualified intermediary, and a good realtor.

Wally Smith:

And of course we have all of those as well. We are happy to refer out to qualified attorneys–those who are experienced in the process–and CPA’s. So we’re not going to leave you in the lurch on that.  What was the old commercial about staying in a Holiday Inn Express last night, so you can do brain surgery? No, we know what we do, we know we don’t do and we refer you out to the right folks.

Erin Crowley :

Exactly.