#52 - Economic Tailwinds: How 1031 Exchanges Propel Real Estate Portfolios With Kyle Williams

[00:00:00] Welcome back to another episode of Passive Income Pilots. My name is Ryan Gibson. Tait

[00:00:22] is not feeling very well today, so it will just be me today on the show but we've got a great

[00:00:26] show today with Kyle Williams who is going to talk about 1031 exchange information as we get into

[00:00:34] it. We also are going to have a couple of callers into the show today, we're going to welcome a

[00:00:38] couple of people on but before we get started I wanted to give some kind of overview what's

[00:00:42] happening right now in the real estate industry and one of the things that I really wanted to

[00:00:46] focus on is this new tax change that's going through it went through the house and it's now I

[00:00:53] believe going through the Senate and potentially could be on the new presidents desk whoever that

[00:00:56] might be in November which is talking about the changes that is happening to bonus appreciation

[00:01:01] and that's as prior to the 2017 tax code change we got this thing called bonus depreciation which

[00:01:08] gave you 100% deduction of all your short term lives. When you buy a property to a cost segregation

[00:01:14] study we talked about that on episode 14 and we had another episode previously with Yona Weiss who

[00:01:20] deep into cost sex view missed that episode you can go back to and you can listen to all about

[00:01:24] cost segregation studies we're not going to talk about that today but for those that listen or

[00:01:28] understand what the cost seg is it gives you all these short term lives in your five or 15 year buckets

[00:01:33] and when bonus depreciation came around it allowed you to take 100% of that five and 15 year life

[00:01:39] and deduct it in the first year while that tax code change also had a sunset date so it's

[00:01:43] a sunset in completely in 2026 but the new tax code that's going through the industry right now

[00:01:50] will actually restore it back to 100% bonus depreciation meaning you can take more tax breaks

[00:01:56] on real estate activity and I had a chance to talk to a cost segregation expert at a conference this weekend

[00:02:03] in Orlando and he was thinking that it might come down to whoever gets elected that'll be the first

[00:02:09] thing that they signed into order and that might be coming in 2024 a levy late 2024 which would

[00:02:15] allow you to 100% bonus depreciate anything you buy in 2024 potentially now this is all speculative

[00:02:21] but fun conversation if you're thinking about buying real estate this year it might come with

[00:02:26] 100% bonus depreciation which is really neat but anyway I'm here today I've got a special guest Kyle

[00:02:32] who's actually in our studio in Seattle Washington today with me Kyle welcome to the show so before we

[00:02:37] get talking about why we brought you to the show I'm actually we've just launched a new feature on

[00:02:43] our website so if you're going to our website passive income pilots dot com and you can actually

[00:02:47] find a place where you can be on the show and so you press a button and it gives you some talking

[00:02:52] points and what to say we want to hear from you we want to hear from our listeners where do you

[00:02:56] fly what seat are you in how long have you been at your airline if you don't want to share that

[00:03:00] information you don't have to but if you want to ask a question on the show you could do that now

[00:03:05] on our website and you can just hit record right from your phone and literally record right into your

[00:03:09] phone what your question is we're going to go ahead and go to our first call in who's got a question

[00:03:14] Steve welcome to passive income pilots go ahead with your question hey Ryan and take this is

[00:03:20] Steve I love your podcast and thanks for having me on so I'm a partner at a law firm that pays me

[00:03:26] with a K1 I recently invested in a real estate syndication that also issues a K1 but with depreciation

[00:03:34] my question is this will the depreciation from this syndication investment offset the income

[00:03:40] that I received from my law firms K1 thanks again guys I've learned a ton from your show and really

[00:03:45] appreciate it yeah so Steve that's a fantastic question and one I'm sure that many of our listeners

[00:03:51] can relate to you know they interplay between different sources of income and how they might

[00:03:56] affect your tax situation you know are quite complex and we covered this on episode 14 as well

[00:04:01] when we talked about the three different types of income somebody can earn you have to income

[00:04:05] that's passive portfolio income and yes then you have income that's taxed as active income which is

[00:04:11] usually coming from your W2 in this instance Steve has a interesting question about his law firm

[00:04:17] income that generates a K1 because it's part of a partnership and Steve invested in one of our

[00:04:22] syndications that has a K1 this year and it comes with a substantial loss in year one because

[00:04:27] of bonus depreciation and he's wondering hey can that offset some of my partnership income from

[00:04:33] his law firm activities in order to get an answer because again we don't give any tax legal or

[00:04:38] professional investment advice on the show this is just from the conversation we try to bring on

[00:04:42] some of the best guests to give that advice so today what we did was we actually reached out to

[00:04:47] Toby Mathis from Anderson advisors who's a seasoned law expert and tax in legal professional

[00:04:54] and it's a familiar voice to our listeners as we've had him on our show a couple of times

[00:04:58] but Toby has actually called in and given us the answer so Toby go ahead.

[00:05:03] Yeah so when you receive a K1 from any business activity that's the pass through

[00:05:09] of that income or loss onto your return and so when you see a K1 coming from an active

[00:05:15] business like a law firm that's going to be active ordinary income when you receive a K1

[00:05:22] from a syndication then that's going to be real estate income which is generally going to be

[00:05:28] passive unless you fall in one of two categories. First category is an active participant where

[00:05:34] you're making less than 100,000 adjust a gross income every year and you can write off up to 25,000

[00:05:41] I seriously doubting accredited investors ever going to qualify for that so we're going to have to

[00:05:45] look at number two which would be a real estate professional if you're a real estate professional it

[00:05:52] means that you work in a real estate trader business there's like 10 of them everything from being

[00:05:58] a broker to managing property construction development etc and if you do more than 750 hours and it's

[00:06:05] more than 50% of your time you could qualify as a real estate professional and then prong 2 is you

[00:06:12] have to maturely participate on your investment activities so this is going to get kind of weird

[00:06:19] when you're dealing with a syndication it means you're probably going to have to do at least 500

[00:06:24] hours between you and a spouse of actual involvement in those real estate activities and we're going

[00:06:31] to have to make an aggregation election to couple them all together so I hate to be long winded

[00:06:38] but it means unless you're a real estate professional there's a good chance that 99% chance let's

[00:06:44] just say that that you're not going to be able to use the loss from the K1 from your investment

[00:06:50] against your income that's coming from your law firm so thanks Toby for that very detailed answer

[00:06:57] it really highlights the importance of really understanding the nuances of your investment

[00:07:03] and how they interact with your overall tax situation it's something it's conversations like these

[00:07:07] that really can make a big difference in the way that you think about approaching and asking

[00:07:11] the right questions of your tax on legal professionals so anyway it was excited to hear Toby's voice

[00:07:16] and have him back onto the show we actually have him planned for an April episode where we're

[00:07:21] actually going to go through the 10 top tax deductions of real estate or of airline pilots

[00:07:27] we're actually going to go through and say what are the tax 10 tax tips for airline pilots specifically

[00:07:32] as we prepared that show for you we'll really look forward to that episode airing and having Toby

[00:07:36] back on the show again today again if you want to go to passive and compile.com and give your questions

[00:07:43] you we can have you come out to the show and we love to hear from our listeners and we love to hear

[00:07:47] people give our praise and it's really encouraging to keep this going so anyway back to our guest

[00:07:52] Kyle Williams he's the senior vice president of velocity 1031 and he's a mysebro in the field with

[00:07:58] over a decade of experience steering investors through tax the tax complex air space as they say

[00:08:04] of real estate investments and sass in your seat belts everybody it's going to be a fun ride talking

[00:08:09] about 1031 exchanges today. Kyle could you just give us a quick background on your investing

[00:08:15] experience within specifically as it relates to 1031 exchanges? Yeah so I actually got out of college

[00:08:22] I went into finance and worked up trading desks for a bond from the deal out of instruction

[00:08:28] investments bonds interest rates stuff so my background was really interest rates we did some

[00:08:33] private placements for each and everything but that's my background yeah so really the the

[00:08:38] thing that I'd like to start really high level before we start getting into like tax code and 1031

[00:08:45] and all these confusing things can you just boil down quickly in real layman's terms what how does

[00:08:51] the 1031 exchange work yeah 1031 exchange is a very unique part of the tax code it allows an

[00:08:57] investor to sell an investment property and use all the equity not just the after tax exactly all

[00:09:01] the equity to reinvestions. Our job is a qualified intermediary I want to pick at that don't

[00:09:07] get deep because so basically what you're saying is that if I have a rental property and I sell it

[00:09:16] I can defer all of the taxes that I would have to pay if I buy another property and we'll get

[00:09:23] into the details as the show goes but the bottom line up front here is if you're holding real

[00:09:27] property real estate as an investment vehicle now this can't be like your primary residence or

[00:09:32] things like that but if you're holding real property that you're renting out you basically when

[00:09:37] you sell it you don't have to pay the gain you can actually tax deferred into something else is that

[00:09:42] have that right that's absolutely right and it doesn't even have to be run it out

[00:09:46] be land oh wow the land is technically investment property and so I know that there's a lot of

[00:09:50] pilots with land too they can actually exchange that and a lot of land owners have the same story

[00:09:56] oh I bought land years ago it's done up everything else but I'm not really income probably I'm

[00:10:01] not getting the tax but appreciation they can sell that to for all the taxes invest in like a

[00:10:07] duplex self-stores something like that's where they get income they get the tax appreciation so

[00:10:12] there's a lot of cool stuff you can do yeah and we're gonna go through step-by-step how to actually

[00:10:17] do this and we're gonna talk about the show but just the key takeaway is if you're a pilot out there

[00:10:21] or a listener who has property that you're thinking about selling what you really should be doing

[00:10:27] is thinking about calling Kyle yeah absolutely because you need to start this process before

[00:10:33] the property actually sells correct so we set it up once the client gets under control it's all

[00:10:40] got to be set up advance it closing because if you close and the exchange is not the 1031

[00:10:44] exchange is not set up then you can't 1031 change you can't retroactively set it up so as Ryan

[00:10:49] mentioned once you're under contract yeah let us know if you have questions before then okay this

[00:10:53] is what I'm thinking about does this make sense absolutely give me a call shoot you new yeah and I

[00:10:57] would even say it was a good pre-flight planner like I appreciate wanting to talk to you like when

[00:11:01] you're under contract but you know I would imagine that your firm helps people if even if you're

[00:11:06] thinking about selling the property it might be appropriate if you're gonna move forward with

[00:11:10] the transaction it might be okay to just contact just touch base and make sure that hey I'm

[00:11:16] thinking about doing this because you know things happen very quickly there's some timelines

[00:11:19] surrounding this investment that kind of restrict you in what you can do right yeah absolutely Ryan

[00:11:25] definitely encourage people talk to me sooner rather than late as I mentioned once you close

[00:11:30] it's too late to set up the exchange but even if you're thinking about so you probably have questions

[00:11:34] on what's this like kind of thing I've heard about how long am I gonna have to find proper all that

[00:11:38] stuff you should be calling me about well in advance it's so great okay so let's just dive into

[00:11:46] what we would consider the timelines for invest so let's go through some of the mechanics of

[00:11:52] that okay let's just say I call you you answer all my questions and then I actually put my property

[00:11:57] under contract when does the clock start ticking for the 1031 exchange after you close on your sale

[00:12:04] closing on sale is day zero after you close you have 45 days identify a new property to purchase

[00:12:10] what does that mean you have to let us know the 1031 company the qualified intermediary what you're

[00:12:15] gonna purchase it's gotta be in writing you've got to be under contract but ultimately you have

[00:12:19] 100 ways to close on what you put down okay so I've always wondered this 45 days to identify property

[00:12:26] and so I'm using your services to commensurate the transaction what do I have to prove okay so let's

[00:12:32] say I find in house a I'm selling and house b I identify what do I have to do to prove that I've

[00:12:38] identified that as my replacement property you have to be under contract or let us know in right it's

[00:12:44] gotta be a legal description or address the problem can't say rentals and Duluth minutes of it it's

[00:12:50] gotta be 123 Main Street Duluth Gotcha and a lot of listeners and Duluth good reference there okay so

[00:12:57] it's a pilot it's a place where a lot of pilots I think there's a lot of pilots at flu from

[00:13:01] North West and things like that's like the gig harbor yeah we call gig harbor peach tree city west

[00:13:06] so each city is where a lot of Delta pilots love and Georgia gig harbors is the what the west goes

[00:13:10] version of that so anyway side that aside we so you're telling me that if we identify property so let's

[00:13:17] just say I don't have an under contract I can just say hey that house that's listed on the MLS I'm

[00:13:22] thinking about putting a bid on it and I'm thinking about that being my lip replacement property so

[00:13:26] long as it has a real property address I'm good right absolutely it doesn't even have to be

[00:13:30] for sale that being said no matter where you're at in the country right now whether you're in peach

[00:13:35] tree city whether you're in Seattle it doesn't matter where real estate moves quickly so you want it

[00:13:40] be under contract within the 45 date ID period if you can you just don't take is there a limit on how

[00:13:45] many properties I can identify without driving you completely crazy yeah yeah no there's so most

[00:13:50] people we use what's called the three property rule you can identify up to three properties any value

[00:13:54] cheese if you want to do identify more than three let's say that you wanted to buy four or five

[00:13:59] rentals say you could do that under the 200 percent rule meaning you can identify any number of

[00:14:04] properties totally no more than two and a percent some sell for 800 thousand you could identify

[00:14:09] any off use to pull them to the last rule it's called 95 percent exception I call the all-or-none rule

[00:14:15] if you wanted to identify the entire city of the North Minnesota you can do that but the caveat is

[00:14:20] that you have to close on 95 percent of the value that you identified otherwise a whole change

[00:14:25] fail so for most people call and say Kyle I've heard about this identification thing how many

[00:14:29] properties can I identify well it depends on what you want to do but generally you could identify

[00:14:35] if you want to actually buy more than three properties there's other rules that will work

[00:14:39] okay that's really important so now the million dollar question I think I always get

[00:14:44] hey Ryan I own raw land actually let me do want a little bit simpler I own a rental

[00:14:50] house and I want a 1031 exchange that in by raw land is that considered like kind

[00:14:57] yeah absolutely because they're both held for investment land is always investment okay what if

[00:15:03] I want to sell a self-storage but buy a multi-family apartment building absolutely also like

[00:15:09] okay and this is one of the more common questions like that Kyle I've done a little research

[00:15:13] just like kind that confuses me how can I buy a rental from selling self-stored because they don't

[00:15:18] seem like kind they're both investment and you can really get off to the weeds water rights

[00:15:23] cell phone towers air rights 30-year leases if you want to buy a 30-year ground lease for a Taco Bell

[00:15:30] that's technically produced decent before 1031 and is like kind interesting yeah so if you have

[00:15:35] questions if you have something obscure mineral rights or something obscure we run like process

[00:15:40] all the time give me a call I'm more than happy to tell you yes this is like a big thing in the Seattle

[00:15:45] area up here that is also in some of the coastal areas or households not interesting even if you

[00:15:51] rent them out they're not taxes real property it's the slip itself so if you own like a boat slip

[00:15:57] for example that's tax is real property that's a cheat so exchange houseboat is no different than

[00:16:02] dropping an RV on a piece of land it's it's not real property interesting slip itself okay I

[00:16:08] just lot of houseboats here are the ones that you see there like really well designed that are

[00:16:11] fixed to the dock still a houseboat it depends on how their tax taxes real property they would

[00:16:17] make sure it all depends on how they gotcha okay that's really interesting yeah personally use

[00:16:22] properties don't because there's no long-term intent which is what the iris has said is it's due

[00:16:27] to attend 31 you need to hold with long-term intent for business investment use which also eliminates

[00:16:32] flips yep go flippers out there if any of you flip properties nothing wrong with it a lot of great

[00:16:38] flippers out there that do really well but you can't do a 10 30-1 exchange because

[00:16:44] there's no long-term intent to hold with business investment use your goal is to fix it up solid

[00:16:50] as quickly as possible so what we would tell flippers when they're like mr. Mrs. flipper call

[00:16:54] that Kyle can we do a 10 31 I would say slow down yeah consider buying fix up and selling buy fix

[00:17:00] up and hold put some tenants and change the direction change your trajectory if you will I won't

[00:17:07] here do just slow down that's a great point and what about property that is like short-term

[00:17:11] rentals like Airbnb's or absolutely ton of 10 31s especially since covid people sell and Seattle

[00:17:19] air is out there buying a rental in Scottsdale turn into an Airbnb a lot of people have done really

[00:17:25] well with that obviously the markets change in a place like that Palm Springs and stuff but

[00:17:29] absolutely Airbnb your B.O as long as there's not personal use more than a couple weeks a year

[00:17:35] and you're apart in rental income and everything as you should be absolutely exchange

[00:17:40] so let's get to the really cool thing about 10 31 exchange in in really a state and long-term

[00:17:44] planning so my understanding is that you buy a rent let's say you're young and you're 21 or 25

[00:17:51] whatever and you buy a rental property and it appreciates in value and you sell it and you buy

[00:17:55] three more like we talked about we do go through the identification we close it within 180 days

[00:18:00] of your settlement date and you defer the gain and you buy three properties and then you roll that

[00:18:04] into an apartment complex and you 10 31 out of those three properties and buy apartment complex

[00:18:09] and you're doing the monopoly thing right where you're going around the board you're buying the

[00:18:13] the cards and putting houses on and the performance on and all this and you get to 85 years old or 90

[00:18:19] years old they're hopefully live longer but then you pass away and you're still holding the property

[00:18:26] when you die let's take a step back and be a little bit more positive here will I ever have to pay

[00:18:33] how will I pay taxes if I eventually don't do a 10 31 so let's say I do the one rental I do

[00:18:38] the three I do the apartment and then I say you know what I'm not doing a 10 31 this time I'm just

[00:18:42] caching out what happens to my taxable liability at that point very good question so at that point

[00:18:49] your tax is basically your tax liability carries forward with you so yeah you would oh applicable taxes

[00:18:55] defer the 10 31 exchange in that scenario however what investors generally gravitate towards is

[00:19:01] this idea called swap until you drop because right now at the federal level that you can pass on 12

[00:19:06] and a half million dollars or so federally tax as part of your state per spouse which is awesome

[00:19:13] that is 24 million if you're married yeah yeah and Washington state has its own

[00:19:18] estate tax and other states have a state taxes too but at the federal level that yeah about 24

[00:19:23] 25 million in two spouses can go to their parents tax-free which is awesome so the idea of it people

[00:19:30] start peace of land or rental or something and then eventually they don't park place right and

[00:19:34] then once they pass that goes to the air's tax-free taxes die with them so that's how the investors

[00:19:39] came up with the idea swap until you drop is that you're always going to be deferring taxes but

[00:19:44] let's just say that there's a pilot out that doesn't want to do this that likes for no state now

[00:19:50] but says hey I want to retire at 68 I want to travel the world I don't want to manage those

[00:19:55] why would I do a 1031 now why would I just pay my taxes because you keep more money working

[00:20:01] than you want that's the whole point of 1031 is that when you're using all the equity not just the

[00:20:06] aftertacks that we do best say that you sell that rental for 800 thousand then you have a 25%

[00:20:12] tax instead of only being able to rent a 600 thousand you reinvest that full 800 thousand

[00:20:18] that's awesome yeah so if you look at two different choices here you're you're 600 thousand and you

[00:20:24] reinvest that is 75% LTV buys you 2.4 million in new profit that 800 thousand that you deferred

[00:20:31] in the 1031 exchange you're gonna buy a 3.2 million dollars of new profit tax-free just by doing

[00:20:36] the 1031 exchange so 800 thousand dollars difference the income on that might be 20 30 40

[00:20:43] thousand dollars a year yeah just because you did a 1031 exchange yep and think about it so let's

[00:20:48] go back in time right let's say you buy a rental property for a hundred thousand dollars you

[00:20:51] exchange that up to a 500 thousand dollar three pack you exchange that up to a million dollar

[00:20:57] apartment and eventually you get it all the way up to 10 million dollars you're like the risk

[00:21:02] here in for those that are not continuing to do the swap until you drop was I would go yeah

[00:21:07] to you die or whatever it is when you sell that 10 million dollar apartment building eventually

[00:21:12] they're gonna go all the way back to what your original basis was on that first single family house

[00:21:18] as a way to concoct how much taxes you pay so like all that deferral over the years was good

[00:21:24] because it kept your money working but now it's time to pay the piper right yeah and it's

[00:21:30] tougher us to say if someone says oh yeah I'm not gonna I don't ever want to pay taxes

[00:21:37] I will never tell anyone that this is a tax-free trade correct your theoretically just deferring tax

[00:21:42] however when they're working with their CPA which we encourage all investors out there even if

[00:21:46] you're not doing it 1031 you should all have a good seat or for the CPA figure out some estate plan

[00:21:51] figure out what you want to do long term because yeah you may want to cash out you just mentioned

[00:21:56] right then it may not make sense but oftentimes speaking of CPA so let's just talk about really quick

[00:22:01] if you're going to do this who do I need to go get who are my players on my team you mentioned

[00:22:09] a CPA and you're a qualified you're a company that provides qualified intermediary services

[00:22:16] is there anybody else I need to get them so you need to queue that's called a QI

[00:22:20] QI and you may also hear like exchange facilitator exchange accommodate or 1031 company

[00:22:25] kind of definition but yeah we're the intermediary that will take funds for the duration

[00:22:30] uh CPA is important because we are a legally disinterested part that means that we cannot guide

[00:22:35] the clients on any sort of tax issues and surle legal issues it's up to them to find their own

[00:22:41] CPA and you need to do that which is why we encourage clients to seek professional counsel when it comes

[00:22:47] you to do because there's stuff I can talk about all day 45 days you identify 180 close but like

[00:22:54] much of the tax code section code 1031 contains a lot yeah yeah so if they're like if a client calls and

[00:23:01] says what does long-term intent exactly mean there's not a definition so that's why it's important

[00:23:06] the seek receipt to come up with a definition that makes sense okay so let's talk about time of death

[00:23:13] let's say I'm that guy I buy one I buy three I buy an apartment then I buy that 10 million dollar

[00:23:17] property and god forbid I pass away and I have a trust because I plan correctly and the property

[00:23:26] then goes to my errors and my errors get the property and they say I love what dad did but

[00:23:33] I want nothing to do with this building and we're gonna sell it immediately what taxes do they pay

[00:23:39] dad brought a lot of property decades ago for 30,000 now he's got 10 million dollars from

[00:23:44] middle-state the years inherit that real estate basically the taxes would have died the swap

[00:23:50] until you drop it so at that point the errors all get the step-up and cost basis in the day that

[00:23:56] dad died whatever the value of the real estate was that that's basically what you paid so if

[00:24:04] it's worth 10 million dollars it's as if you would bought that property for 10 million dollars

[00:24:08] that day not the original 50,000 or whatever dad paid for that 10 million that's incredible

[00:24:14] so it's an incredible way to defer your taxes all through life build up a real estate empire and

[00:24:21] then literally hand it off to your errors tax-free that's amazing they say the value at the time of

[00:24:27] death is that like an appraiser that goes out as part of the estate what's what happens there

[00:24:31] yeah I've seen I've seen a lot of people get brokers opinion of values so work with your local broker

[00:24:36] that you work with on primary for example but they'll be able to tell you based on constant

[00:24:42] here's an approximate value the day dad died and your CPA will probably sign off on that say yes

[00:24:48] interesting so people actually use just a broker opinion not in like a certified appraiser

[00:24:53] yeah they definitely can use it in appraiser I've heard of a lot of this

[00:24:56] we'll just get a broker's opinion of value based on cops in the air

[00:25:00] okay that's really great let's talk about

[00:25:05] the 1031 exchange clients they're under a short time clock right and so they can really feel the

[00:25:10] pressure of having to close on something right and let's I'm just going to be fully transparent

[00:25:14] here I love it when 1031 exchange buyers are buying my property because I feel like I have them

[00:25:20] held over a barrel because they are under the gun to close or blow their transaction talk about

[00:25:27] some strategies to impiliting we call it increasing your team and also time no time right when we

[00:25:34] get into the air like what we want to do is we want to create time we want to decide if we

[00:25:38] have no time bucket or lots of time right and so sometimes we need to slow things down so we

[00:25:43] assess the situation and say hey are we on fire do we need to go out the ground right now

[00:25:47] or how do we build more time into running checklist and going through an emergency procedure

[00:25:53] we think about that that way so if you're like hey I want to sell my property and 1031 exchange

[00:26:00] like you said I want to be under contract like even before I close on something right

[00:26:05] so how can they build more time so you really can't the only time you get an extension is for a

[00:26:11] federally declared disaster that basically directly affects exchange like their property was in

[00:26:16] the disaster area the other party and the transaction died something crazy so we tell people there

[00:26:21] are essentially no extensions but yeah I'm glad you brought that up right because that 45 45 day

[00:26:26] ID period is a killer like any market in this country right now peach tree city get harbor wherever

[00:26:32] you're at the market moves quickly so that 45 days it's like some crazy time warp where

[00:26:37] it's it's like the equivalent of a passenger flying out of Vegas in a lot of

[00:26:41] shops in the summer it's shaky you don't know what's going on and you're like

[00:26:44] but you're scrambling to find something do whatever you can so that 45 day thing is just a killer

[00:26:49] so what a lot of people do is that they'll look for something like the STs for examples maybe

[00:26:55] it back we'll dive into that in a second yeah um but have a backup have something like that

[00:27:01] that was going to be open because a lot of times they make great first options at a minimum have

[00:27:07] a backup there because even if you're under contract on that rental that you love things happen

[00:27:12] all the time yeah what interesting I heard one tip that I thought was really helpful and impactful

[00:27:17] you know if you are selling your property and you plan to 1031 exchange into something else

[00:27:23] this is gonna sound contradictory not intuitive right normally when you're trying to sell

[00:27:28] the property you're trying to get the buyer to sell it as to buy it as fast as possible

[00:27:34] we actually take like the reverse approach where you actually when someone is trying to buy your

[00:27:40] property you actually write in contract extensions so if you get too close to your closing period

[00:27:48] you as the seller have the right to extend the closing timeline out giving you more time

[00:27:55] to find replacement property before you even sell your property right I always say try to get

[00:28:00] from your buyer 330 day extensions so it gives you the right to just continue building that time

[00:28:05] so you don't feel pressured in finding something right and also maybe even put in a clause where you

[00:28:10] can kill the deal and walk away if you even get to the end of your contract and you can't

[00:28:15] and you can't find replacement property right now that might give some concern to the buyer

[00:28:20] because they're spending money on due diligence and time on your transaction but hey

[00:28:25] life's what you can negotiate so whatever you can work out with your buyer to give yourself the

[00:28:29] flexibility to really expand that clock let's talk about the strategy of buying property

[00:28:38] before you do a 1031 exchange I believe that's called the reverse 1031 exchange let's talk about

[00:28:42] that yeah reverse exchange super popular right now but really what I would say Ryan it's a different

[00:28:48] type of 10 because at the normal 1031 you sign into the contract we take title we hold funds

[00:28:55] and then deliver those funds in a reverse exchange when you close on the purchase first

[00:28:59] we actually have to take title to that clock which means that you can't get a traditional loan like

[00:29:03] a conforming loan you have to have cash if you don't have cash card money which can be super

[00:29:09] expensive and not to mention the cost a normal 1031 well under a thousand dollars to charge seven

[00:29:15] or ninety dollars to do with no reverse exchange is being four five six seven times that nine

[00:29:22] times that pound cost commercial residential so reverse exchange much more expensive

[00:29:29] traditional change but if you need to close on a purchase first and you have cash there's a way

[00:29:33] to that's incredible so yeah think about that strategy too where if you've bought a property in 2024

[00:29:38] already could you still use that as assuming you pay what cash let's say I bought rental property

[00:29:44] and I'm selling a property could I still do a verse 1031 even though I've already bought

[00:29:48] that property good question you cannot retroactively do a 10th of a question ideally once you're

[00:29:55] under contract whether it's a reverse exchange or a normal change we should be working on setting up

[00:30:00] the exchange right now with the reverse exchange we file an LLC with a state and that LLC will take

[00:30:06] title to the clock so there's more complications more work that goes into but it's not something you

[00:30:13] it's interesting you mentioned the state and that made me think of is there any differences state by

[00:30:17] state for 1031 exchanges or is it got the federal level so it really is at the federal level that

[00:30:23] being said there are some intricacies intricacies state by state whether you're in Tennessee or Oregon

[00:30:30] or wherever you're out out there this is why it's important to work with the CPA because like California

[00:30:36] for example like if you've owned a rental in California and say exchanged up into Seattle which a lot

[00:30:41] of people have done you basically have to report to the state of California every year did you sell

[00:30:47] that property because they're going to claw back their taxes Washington doesn't do that yet but yeah

[00:30:53] states have clawbacks some most states you defer all the state taxes the Washington state you pay

[00:30:59] the real taxized tax you don't want to so yeah which is a yes that's three that's a graduated tax

[00:31:04] up to 3% so yep absolutely very expensive so yeah so there's some intricacies overall it's

[00:31:11] a federal tax interesting so let's talk about other options for buying real property I like to joke

[00:31:18] so sometimes pilots become accidental real estate investors so throughout their career remember they

[00:31:22] live around a military base they get a collection of these single-family homes they get close to

[00:31:27] retirement and now they have 15 20 single-family homes in random places all over the country and not

[00:31:33] places that you really like to visit or vacation right necessarily and they become a drag even managing

[00:31:39] a property manager maybe things like that but they want to get out of it but they like real estate

[00:31:44] and they want to still be in real estate so they want a 1031 exchange into something they don't

[00:31:48] want to pay the tax right but they want to free themselves of this burden of rental properties right

[00:31:55] terrible terrible termite trot toilets tenants toilets I heard someone said rot and ours recently

[00:32:03] which is renters rodents and melons nice I love it name principle but yeah they want to get out of

[00:32:09] that active management and go into something more possible yeah and we get calls like this all

[00:32:13] the time at Spartan where it's like people call in they're like yeah I'm just a tired landlord I

[00:32:18] just I'm done with these rental properties and I don't want to manage it anymore and but my bottom

[00:32:23] for a really good price and now I have this massive gain and I don't want to pay the tax either so

[00:32:29] I'm caught between not wanting to pay the taxes but also wanting to get out of this active real

[00:32:34] estate management so they look for properties to buy and they just they don't want to buy more real

[00:32:39] estate that's going to cause them more active management so what are some things people can do

[00:32:43] to still satisfy their exchange yeah so deal where statutory trusts are extremely popular and

[00:32:50] that's for a multitude of reasons one being the ease of actually owning this clients find out

[00:32:58] you're telling me that I can go passive and collect income from self storage and I don't have to

[00:33:02] make any decisions I just collect a check be kidding me sounds too good to be true but it's really

[00:33:08] not it's one of those things where it's not too good to be true people just don't know about it they

[00:33:12] could buy triple net lease properties there's a lot of options for investors who love real estate

[00:33:19] who make money in real estate don't want to pay the taxes want to do a 1031 defer the taxes into

[00:33:24] something that's 100% passive they don't have to think about it's mailbox money yeah so let's pick

[00:33:29] apart both of those things separately what start with dsts so Delaware Setsuary Trust sounds

[00:33:35] like a lot of legal paperwork that somebody did in a fancy name we don't have to get into the history

[00:33:40] of dsts but let's zoom out a little bit 30,000 foot view of what a dst is like who how do you find them

[00:33:48] what are they what what does that really mean to the investor yeah Delaware Setsuary Trust really

[00:33:53] not that complicated actually the dsts are fractional interest and generally commercial profits it

[00:33:59] could be a single property like an amazon warehouse could be portfolio of self storage for insane but

[00:34:05] you're really just trusty to manage the property and everything and you just collect you still get

[00:34:10] the tax benefit of depreciation which would be the number who's in you own investment in the state

[00:34:15] and you're going to collect income it's it truly is mailbox money for real estate because you're

[00:34:19] going to check your mailbox generally once a month just get a check it's almost too good to

[00:34:23] do that yeah that sounds amazing what are some of the downsides of dsts so liquidity that seems to be

[00:34:30] the big I think most dst sponsors would tell you we're gonna look for a four to six maybe seven eight

[00:34:37] year hold it's not gonna be something that you're gonna get out of it this is a long term hold

[00:34:43] so if you want to sell there could be barriers to selling you need to sell in two years or like

[00:34:48] real estate's the downturn I want to get out probably not gonna be able to and if you do

[00:34:55] it would probably be it it just yeah the analogy yeah and then also another thing to think about

[00:34:58] I think the downsides aside I kind of view dsts like the comparison to flying is this

[00:35:06] if you want to be an active real estate investor it's like go into rent and airport on the weekend

[00:35:10] and pulling out your airplane your own airplane doing your own flight planning stressing about your

[00:35:14] own weather and managing that airplane doing a dst is like looking at ticket on delta and we have

[00:35:21] a professional flight crew you sit in the back you enjoy faster ground speed and more buttoned up

[00:35:28] crews than maybe just a one-man band flying a solo plane yeah you're not in the jump see right you're

[00:35:33] in the back I've been joining your retirement enjoying the caviar or whatever they're sitting

[00:35:37] that day I don't think it's sort of caviar whatever it might be right on the plane and how would

[00:35:41] somebody go about finding a dst to invest in like where is that marketplace exist you have to

[00:35:48] work with a specific type of financial advisor that knows dsts because they're technically securities

[00:35:53] even though it is real property that you own you do have to work with a specific type of financial

[00:35:58] advisor that does that actually does dsts and there's I would say the majority don't

[00:36:04] don't do dsts but they're not approved on their platform financial advisor doesn't know about

[00:36:09] them whatever the cases but there's a few specialty firms more than a few but there are some

[00:36:14] specialty firms that focus on dsts and it's important to know who you're working with just like

[00:36:20] 1031s it's important to know who you're working with on dsts because I know within the dst world

[00:36:26] I haven't heard any horror stories of dsts like most almost all stories have been really good and

[00:36:31] positive dsts but some have been better than others so that's why it's important to know who you

[00:36:35] like let's talk about the triple net option you said so you said something that's really passive

[00:36:39] that you can 1031 and 2 is a 1030 as a triple net for the listeners really quick triple net is a

[00:36:45] basically if you own a Starbucks that would be or like a Walgreens Amazon warehouse

[00:36:52] be a good example of a triple net property basically you own the building in the real estate but

[00:36:59] that's it Amazon or Starbucks or Walgreens whoever is responsible for all the taxes

[00:37:04] improvements being everything that goes in with that property so you just own it really

[00:37:09] in name only and you're just collecting a check every month which can be good because if you're

[00:37:15] telling it is Amazon for example they're going to pay their rent every day that you may have

[00:37:19] a 10 year lease or 20 year lease and you know that as long as you hold this building Amazon's

[00:37:25] going to be picking it up again there's a lot of risks associated with it I don't want to

[00:37:29] make it sound like angs guarantee or this is financial advice obviously talk to a financial

[00:37:34] advisor in the sea but within the triple net then the triple net space basically the tenant

[00:37:40] is responsible for it yeah well one thing I wanted to cover and just jump back we're going to dive into

[00:37:45] one more detail on this before we we ask our takeaway question today when let's say that first

[00:37:50] rental property I buy has $50,000 of cash to buy it and I use $50,000 of debt to buy it

[00:37:58] talk to me about the replacement debt requirement in a 1031 exchange and the nuances there

[00:38:03] yeah so this is one of the one of the again another more common question I get and I'm very

[00:38:08] confusing question probably the most confusing question for clients is they say oh I've been doing

[00:38:13] research on 1051s I've read about this debt replacement thing what now I'm confused what does that

[00:38:18] mean it means that the debt needs to be replaced in the new property so if you had a $300,000

[00:38:24] loan that was paid off at closing of your sale it means you're going to have to get new debt for

[00:38:28] at least 300,000 what does that mean in layman's terms because if you're like we're trying to think

[00:38:33] of what that means exactly basically you want to do two things in a 1031 exchange buy for equal or

[00:38:38] greater value and investment so if you sell for 700,000 and have 400,000 proceeds to make after the

[00:38:45] loans paid off and what what would is it all or nothing on the equity side do I have to

[00:38:51] find replacement at or above or can I do like but hey I'm gonna get hit with some tax but yeah good

[00:38:56] question that's called a partial issue super common and this happens all the time especially

[00:39:02] with pilots like but you have this duplex you're selling for 750,000 and growing it forever it's

[00:39:08] all equity you want to take a hundred thousand dollars out and pay off junior college education

[00:39:13] that's fine you'll still defer the 650 what have you that $100,000 you would pay tax so

[00:39:21] you'll never think that it's gonna blow up the whole exchange but for those of you who don't want

[00:39:25] to pay any more tax and you have to if you take money out will be taxed yeah make sense now

[00:39:31] last question and I really appreciate you coming into the studio today Kyle one thing that you're

[00:39:36] one key takeaway that you have in regards to one piece of advice from today's conversation about

[00:39:42] people that are just getting started in real estate one piece of kind of tax

[00:39:47] in regards to the tax benefits what would that one takeaway be for you yeah with investment

[00:39:51] real estate I can't stress this enough it's not directly related 1031 but find a good CPA

[00:39:58] like you would be would kill you right if you knew how many people with five 10 million dollars

[00:40:04] in real estate do taxes themselves hey maybe not even turbo tax they're just free handing

[00:40:10] a CPA a good CPA to work their way I agree I could give advice to anyone on this call 1031 or not

[00:40:17] work with a good CPA it's not to say that doing church there's nothing wrong with turbo tax

[00:40:22] there's stuff that you or I even though we've been doing this you would still be people out there

[00:40:27] miss that's the CPA's joke great great advice Kyle really appreciate you coming onto the show

[00:40:32] you're now grant you're now part of the show alumni so we will call on you if listeners have

[00:40:37] questions and speaking of which I wanted to highlight that if you're listening to the show

[00:40:42] and you have a question you can go to passive income pilots.com forward slash question and you

[00:40:49] can ask a question and we will air it on the show or not if you don't want to that's okay we

[00:40:53] can just ask it for you and that and we'll bring in Kyle to get some great guidance and wisdom

[00:40:59] on that on a future show so Kyle there's a lot of options when it comes to picking a 1031 exchange

[00:41:05] company why should I go to velocity 1031 yeah it's a great question not all 1031 companies are

[00:41:13] created we're super responsive that's really where I hang my hat and I'll leave you my contact

[00:41:18] information later in the show but I really enjoy outreach clients with clients talking to clients

[00:41:24] about their 1031 questions us as a company we're insured uh but most importantly what we do is

[00:41:33] when funds close after your sale they go directly into a trust account we set up on the path

[00:41:39] so unlike many other firms we don't come in go our funds now it's really important distinction

[00:41:43] because you mentioned earlier that people can get in touch with you and I think that's a huge

[00:41:48] service where there's a no obligation to ask you a question so like you've made yourself very

[00:41:54] available to talk to clients and ensure that they can get in touch with you regarding their transaction

[00:42:00] which I think is like a fantastic service like it's it's no obligation if you have a question even

[00:42:03] if you don't go forward with it people can reach out to you which I think is great let's talk about

[00:42:08] the insurance really quick because I think this is something that doesn't really get talked about

[00:42:11] very much so when you use like 10 the velocity 1031 you guys back the transaction with an insurance

[00:42:18] policy absolutely there's errors and emissions if we're going to make a mistake it'll be bon if

[00:42:22] something happened to the company but what's really cool is that we send funds directly from s-score

[00:42:28] into their trust and so when clients are like how do I know that your trust account number that we

[00:42:33] set up and you can verify will be on the settle so we're not going to tell you hey your funds are

[00:42:38] going into a trust account and they're commingled with everyone else's funds they're actually on

[00:42:42] the settlement saving that's how we verify and that's a proof to you these funds are going to

[00:42:47] work directly from s-score into your trust account and never to us into a general account or

[00:42:52] sweep account that people yeah and I'll tell you personally like you guys your clients have worked

[00:42:57] with us so many times and I know that working with velocity 1031 has been absolutely seamless

[00:43:02] and so I can speak with firsthand experience that you guys are really buttoned up shop and I've

[00:43:06] met your founder or yeah did you do and he's been into the office and so I'm just very

[00:43:11] comfortable with with working with you guys so thank you for that another thing we do is really

[00:43:15] cool is that we have a portal where clients can view their accounts 247 unprecedented

[00:43:20] yeah totally the 1031 industry by and large is very archaic and some of you may know this

[00:43:26] so what we've really done is just turn the industry on its head and make sure that everything

[00:43:31] is client focused you have a portal funds are safe at all time the commingled just little things

[00:43:37] that you would think are common since in the industry before we wrap things up I wanted to ask Kyle

[00:43:42] how do listeners get in touch with you learn more about your company so if they're thinking about

[00:43:47] a 1031 exchange how would they get in touch with you yeah so my direct contact information

[00:43:55] anyone on this call is free to call text email me anytime especially if you just have general

[00:44:01] questions there's something that I didn't get to on the show something you asked for

[00:44:05] there give me a call or ship an email my direct line is 425 247 3307 and my email is very simple

[00:44:13] it's just Kyle the velocity 1031 dot your brave leave it in your number on the show

[00:44:19] I like it Kyle thank you so much for coming on and thank you listeners for tuning in

[00:44:25] until then we'll see you on the next episode