KERI: Hey guys! It’s Keri TV. I am back again with my special guest, Dave White, because we have a very special topic today to talk about, a very complicated topic, that makes people a lot of money. Stay tuned.

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KERI: Okay. Dave, Dad, what is a 1031 exchange? What does that even mean?

DAVE: 1031 is an IRS code. That’s for investment properties. That means, if you’ve got an investment property and you sell it, and it’s going to be a tax liability, 1031 allows you to defer the taxes.

KERI: When you buy another property, right?

DAVE: As long as you buy another investment property. You can actually defer them for life. When the owner passes away and the children get the building, they don’t have to pay the taxes, because the building is sold at the stepped-up price.

KERI: Wow, that’s really nice. Basically, it’s a way to save money on taxes when you are purchasing property and reinvesting, because you could be paying a couple hundred, three or four hundred in taxes on your income for some of these properties, right?

DAVE: Right, but not when you’re purchasing your first one. When you already own a property and you want to buy another property, because you broke up maybe a million dollars of equity in the property, what’s the use of that?

KERI: If you’re paying a lot of taxes on it.

DAVE: Because you sold it, you should be paying twenty percent tax, ten percent to the government, and another five percent to somebody else. You end up with about fifty-five percent of your money.

KERI: Right. So the government put in this great tax code so you could actually take the money that you’ve earned, that’s grown in profit, and put it into another building. That keeps increasing your wealth as an investment owner. Who qualifies for a 1031? Anybody who owns property? No.

DAVE: Anybody that has a rental property.

KERI: An investment property. Okay. So not your primary residence. You can’t 1031 a primary residence, but you do have the tax-savings there, two-fifty to five hundred, based on being married or single. So, an investment property. What type of investment, is it going to be a condo, a house, or a multi-apartment?

DAVE: It can be anything that’s a rental property. If you sell your condo, your house, or your boat, the boat you’ve been renting out, you can buy another property. It’s called like kind.

KERI: Okay. What’s a like kind?

DAVE: That means, if you’ve got a rental property and you buy another property or business, it has to be a rental property. You have to make income off of it.

KERI: Okay. If it’s a condo, can you buy a condo or a house?

DAVE: Or a building.

KERI: You can buy anything. Okay. What about the price point?

DAVE: Price point. You have to buy, if you sold the place for a million, you have to buy something for at least another million. If you don’t, then, let’s say you bought something for eight hundred. They call that other two hundred boot and you’d have to pay taxes on the two hundred.

KERI: Okay. So the booty gets taxed. If you do find something that’s not the same price you’re selling for, you can still put part of it into the 1031 exchange.

DAVE: You can.

KERI: Okay.

DAVE: The biggest thing with the 1031 is, the whole reason people do it, is to get more property and increase their inventory. If you sell a property for a million, you’ve probably got eight hundred thousand in equity. Well now, having to put down thirty percent, you can go out and buy three properties.

KERI: You can buy three properties.

DAVE: Right.

KERI: Okay, this sounds like a great idea. If anyone’s watching and you have investment property, it might be time to give us, Dave, a call, about those investment properties. Talk to me about the process. To even start a 1031, how complicated is it during escrow? What do you do?

DAVE: 1031 is not complicated at all.

KERI: Okay.

DAVE: Actually, when you open escrow, you send a notice.

KERI: You’re getting very granular.

DAVE: You send the buyer of the property you’re buying a notice that you’re doing a 1031. You call a 1031 accommodator. That’s a special company. Because when you close escrow, the money has to go to the accommodator.

KERI: Basically, when you’re purchasing your next property, all you need to do is agree with the buyer and seller that there’s a 1031. It doesn’t impact the buyer. Then, you hire an exchange accommodator. We love Phil Antonin.

DAVE: We do.

KERI: Exchange resources. He’s the best. Those people are the best. Then, they facilitate the transaction. It doesn’t impact escrow at all, but all the funds and the proceeds don’t go into the seller’s bank account. It goes into the accommodator’s trust. Then, they use that to purchase the next property. That’s so they make sure the owner’s not pocketing any money, of course.

DAVE: Here’s the thing. Once it sells, you cannot even put it into your account for even one day. If you do, you’ve blown the 1031. The good thing about the 1031 is you get forty-five days to nominate your property.

KERI: Oh, that’s a good question. There’s a time frame with 1031s. Can you talk to us about that?

DAVE: Definite time frame. From when you close escrow on the property you’re selling, you have six months to close escrow on your new property, but you only have forty-five days to nominate the property you want to buy.

KERI: Okay.

DAVE: You can also nominate up to three properties, and out of those three properties, you still only have to buy one of them – or you can buy all three. If you nominate any more than three properties, than you have to start buying more of the properties. You cannot just pick and choose. There’s a few things you have to know about it.

KERI: Basically, we’ll call the property that you own now 123 Banana Street. Banana street closes today. 123 Banana Street. You have forty-five days from today to identify three properties.

DAVE: Right.

KERI: Of those three, you have to close on one in six months.

DAVE: Right.

KERI: Which you normally close on right away.

DAVE: Yeah, you can generally close in four to six months, but I know people who’ve had them come right down to the last day when they’ve closed.

KERI: Exactly. Now, talk to me about if somebody can’t identity another investment property in that forty-five days. Are there any options, usually, with buyers? Do we find flexibility sometimes?

DAVE: The only time they’ve found flexibility was when the California fires happened in the last eighteen months. They said, well, because you were involved in the fire, we’ll fix it for you. It’s the government you’re dealing with here. They are very strict.

KERI: They’re very strict.

DAVE: Forty-five days. You can’t do it on forty-six. It’s got to be forty-five. You have to close in six months.

KERI: So, an idea to anybody doing this, build into the contract with the buyer possible extensions to close, in case you’re worried about finding something. You’ll have to find a buyer that’s okay with that, but that is an option to kind of give you a little bit more time. The buyer usually won’t allow more than one, two, or three extensions, but it is a good way to do it.

DAVE: It’s a great way to do it. Sometimes, we write in the contract, if we even like the offer, that we’re only going to close when we’ve found our replacement property.

KERI: Yeah, that’s a great idea. Obviously, this is a pretty complicated process and you need experts, but it’s also one that makes you a lot of money, and that’s why we love buying real estate in 1031 exchanges.

DAVE: They’re the best.

KERI: They’re the best.

DAVE: It’s all we can do.

KERI: How many rental properties do we own? Or you own?

DAVE: Oh, about eight, I think.

KERI: Eight now.

DAVE: We started off with one, and we 1031 to 1031 and we 1031.

KERI: This is income property mobile right here. If you have questions, this is your guy. Thank you. Thanks for watching today, and we’ll get back to our fifteen lessons next week. I’m sure Dave will be on the show again soon.

DAVE: Hey, I’m looking forward to hearing about your 1031.

KERI: Mh-hmm. Bye!

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