Advanced 1031 Exchange Strategies

welcome to the commercial real estate show I'm Michael bull thanks for joining us to lead learn and laugh well today we're gonna look at the latest trends related to 1031 exchanges you know the 1031 exchange has been a great tool for commercial real estate investors over the years and we've got a special guest here today Ricky Novak CEO with strategic 1031 exchange advisors Ricky thanks for joining us absolutely Michael happy to be here and Ricky is a tax lawyer he's a 1031 exchange advisor and he's been doing it for a long time and in Ricky you know like I said it 1031 s have been used a lot then the market turned we didn't see a lot of them now we're seeing a lot of 1031 is coming back you're seeing on a large large scale what type of volume are you seeing now yeah Michael it's amazing if you look at where the market was much like commercial real estate in general 1031 was down about 90% if you go all the way back to 2010 the last time I was on the program you and I talked about how volume was certainly growing and and and it continues to grow the the volume of activity we're seeing looks a lot like it did in 2005 and I think there are some really good reasons for that you know particularly we've had a significant change in the tax rates so if you look at where long term and short term capital gains are today if you look at the fact that a lot of states have increased their state rate if you look at the fact that you have the 3.8% investment income tax that was put on the books we suddenly are in situations where clients that are selling assets they've owned for less than a year they're facing tax rates oftentimes in north of 50% even if they've owned the asset for longer than a year you know you're still looking at rates that are generally above 30% so all of a sudden because of the tax environment we're in a lot of people are using exchanges again oh that's a good point there because tax rates are higher than they were no five absolutely I mean you have higher rates and then on top of it you know you look at other reasons why maybe the exchange volume was lower you know there were a lot of people that ended up having NOLs and so those NOLs were on their books those those losses that if they sold an asset added again maybe in 2012 just as the market was starting to get better they maybe had losses that could offset those gains but most taxpayers have eaten through whatever losses they may have had so now when they're selling a property they're subject to that gains tax which certainly has a lot of people worried yeah and what types of assets are you seeing most active in your exchange clients today you know it really is trending the general market you know if you look at commercial real estate particularly the multifamily sector has been very hot people have been selling assets at historically low cap rates so certainly we're seeing a lot of activity in the multifamily space also single tenant net lease assets so you're Walgreens dollar generals things of that nature seeing a lot of those assets trade a lot of exchange activity there and we're seeing it throughout the different types of assets within those classes meaning you know the trend was first the core assets kind of the class-a assets then it trickled down into Class B and we're even seeing low B high C activity in the net lease space we're seeing you know regional credit we're seeing even local credit begin to trade so a lot of exchange activity there if we stepped out of commercial real estate for a minute we're also seeing a lot of land could be commercially zoned could be raw land a lot of land being exchanged as developers are now again looking for land to develop and then finally a lot of second home vacation homes so people buying and selling Beach property Mountain property are doing exchanges as well yeah yeah that's interesting we've seen the same thing with activity on the net lease and apartments just being wild you know it's just a lot of activity it's good to see for everyone and and today we're going to talk about some strategic 1031 exchanges and kind of get deep for the experienced commercial real estate investors out there but before we go there remind us of the basics dates and items related to a delayed exchange sure so so the basics are always important and people need to refresh their memory on them every now and again the key in 1031 is you have to buy like kind proper so the definition of like-kind in the real estate space is going to be you know office you know warehouse industrial retn retail multifamily land all of these retail assets or real estate assets are deemed to be like kind to each other so it's a very broad definition of like kind the keys it has to be held for an investment it can't be an asset that you're primarily using for personal use so for your business that's correct it can be a business asset so if you're using it in the trader business it works as well so understanding what qualifies within the 1031 understanding the way the math works you know just generalizing you have to buy a property that equals or exceeds the sales price of what you're selling and should you fall short of that number you're gonna pay tax on the shortfall as far as your debt in your equity all of your cash equity needs to be rolled forward into your new replacement asset so if you sell a property for two million dollars that has a million dollars of debt on it you know ignoring your closing costs for the moment when you go buy your replacement property you're gonna roll that 1 million dollars of net cash forward and then the million of debt you were relieved of you need to replace with new cash new debt or any combination of the two and you have to get all of this done in a very short period of time from your date of sale you have 45 days to identify what you plan to purchase and 180 days to close on it so it's very important that that clients pay attention to those timeframes yeah and those timeframes can be very important and one of the mistakes that we see that folks may want to avoid is trying to use that 45-day identification period to identify a property maybe have it under contract but if you haven't done your due diligence yet you don't be in a situation like if you're working with us and we represent you and we after we get in too deep into the due diligence we're recommending that you don't buy it and you've already identified it so you really want to get properties under contract well in advance of that 45 identification period don't you yeah I mean I think there's a couple of things that we can talk about you know as far as what you can do to mitigate those challenges that come up with 1031 you know certainly the timing is important I mean especially when it comes to debt you know going through the lending process today takes a lot longer than it used to so you have to keep in mind that you're going through pre-qualification that's something you need to do before you ever sell your relinquished to make certain you can qualify for debt and you're going to be able to find it so so that's an important topic and then as you note it you know jumping on the replacement property early in the game you know going out working with a firm you know having somebody help you with that process there's nothing that precludes you from even putting the property you want under contract your replacement property under contract before you sell your relinquished property so those are some some good tools and I think after the break we can get into you know some other tools that you can use as well yeah those are good points and you know and in this market where core assets or stable assets even aren't considered core there can be a lot of demand for leased assets so when buyers are trying to put 1031 exchanges are trying to get their relinquished property they don't have it sold yet and they're getting their replacement property they're making offers they can make offers but sometimes I may get into challenges where the sellers are like no you're it's contingent on you closing that you know that your money is not at risk yet from your buyer yeah I'm just not comfortable so you know they've also got to compete in that market place don't they well and that's a challenge right there there's a limited amount of inventory there hasn't been a whole lot of development in the last several years so you you have a greater pool of real estate buyer out there you know between private equity funds individual tax payers family offices there are a lot of people that look at real estate as a hedge within their portfolio and so you have a lot of people that are fishing in that same small pool and it's really limiting the assets that are available so so getting you know into the game early and starting to look for proper replacement property there's never a time that's too early to do it because as you said if you look at the ID you know rules you can identify up to three properties of any value whatsoever so within that 45 days you have to at the end of that period be able to submit that identification letter to the intermediary saying here are the three potential replacements well if anything happens you know one of them somebody else gets it under contract one of them you can't negotiate the the price that you're willing to pay and then the third one you you get into the due diligence process and you find out there is a roofing problem and you're not comfortable well if it's day fifty and all three of those potential replacement properties are now not targets for you anymore you've got a problem because you're not going to be able to complete your exchange you don't want to be in that position okay and what if you identify a property your identification period is past and then you're not gonna buy it is there any mistakes to avoid they're related to to the funds and that in the timing it's important to understand you the the qualified intermediary so firms like her are salt and you know serve as a qualified intermediary so we're kind of an independent third party that's there to help guide the taxpayer through the rules and the rules are put in place by the IRS and by the the US Treasury so as you're looking at those rules you have to be aware of the fact that once the funds come into the QI account for the first 45 days those funds can only leave the account for the purposes of paying earnest money on identified property or foreclosing on identified property so if the the taxpayer identifies three potential properties and then on day seventy five realizes that they're not going to close on any of them they're in a position where under the rules those funds have to stay with the intermediary until day 181 so understanding those rules around the funds are important because it's not a very liquid situation and then if they go to an intermediary that would give them sooner than that that may put their exchange in in the problem area so we're gonna get to that we're getting to more tips so stay tuned I'm Michael Ball this is the commercial real estate show the commercial real-estate show is brought to you in part by your friends at bull Realty when your business requires proven performance visit Borel t-dot-com or call 800 480 bull welcome back i'm michael ball and this is the commercial real estate show i do check out our new website at commercial real estate show dot-com there are videos there there are blogs there there are radio show podcasts there a section on commercial real estate faq so check it out at commercial real estate show.com well today we're talking about 1031 strategies with Ricky and Novak and Ricky we talked about before the break you know the QI the qualified intermediary following the rules and some of the repercussions of not following the rules tell us a little bit more about that yeah Michael it's so important that you have a Qi that actually follows the rules so those rules are there for a reason and and there have been instances in the past where the intermediary has chosen not to follow the rules and has kind of been a what is referred to as kind of a friendly accommodator meaning they'll just do whatever the client wants them to do that may include backdating ID letters it may be releasing funds whenever the client wants the funds to be released what you do is you run the risk of should the IRS ever look at those activities they could not only invalidate that particular 1031 exchange they have the right to invalidate the exchange work that the QI has done in total so the risk is if the QI is doing some sketchy things for you and doing it for others everyone becomes at risk so it's just not a really good practice certainly I can understand why the taxpayer would want that because it allows them to at least in their mind complete the exchange but the risk that you take on is so significant and the Qi cannot be also your broker or your attorney right right the Qi needs to be a true disinterested third party so they can't be an agent in any other capacity and that goes down to your accountant your banker as you mentioned your broker your attorney so you want someone who's truly arms-length you want someone who's very knowledgeable you know the interesting thing about the 1031 world and intermediaries there aren't really federal rules that oversee it meaning outside of what's in the code in the regs there isn't a governing body that oversees everything Qi s-- currently do so you really want someone that you can trust and that governs themselves appropriately okay and some folks doing 1031 exchanges have had challenges in the past or maybe they're just nervous about it putting large sums of money in an account and and they're afraid they could lose that how can they protect themselves there you know there are a lot of alternatives you know the first thing is do some diligence on the QI you're thinking about using you know don't be afraid to ask for some references whether it's for former clients or for other licensed professionals so maybe ask the QI you know are there any attorneys or accountants you could refer me to who have worked with you in the past also look at what the policies and procedures are does the Qi have ëno insurance do they have a crime bond that would protect you in the event they tried to you know run away with your money and then also look at their policies around what they do with the funds read your exchange agreement um those agreements essentially you're signing your life away that says the Qi has control of your money they can do whatever they want so look and see what the Qi is proposing to do you want your funds held in highly liquid safe accounts so things like business money market accounts you also can use qualified escrows and qualified trusts that's where typically a bank steps in as a third party administrator and funds can't be moved unless both you and the Qi send and signed documentation to the bank to have those funds moved it's a little bit of an added expense but it adds some some peace of mind and then finally you know you know looking specifically at our firm you know one thing that we do is we allow our clients to select the bank that they want their money held in so you know with the financial crisis we've been through a lot of clients just sleep better at night if they know the money's held in their bank and so we'll tell our client great put us in touch with your personal banker will set up the qi account at your bank so that you know where it's being held so just you know we'll ask a lot of questions do your diligence make sure your qi is is structured in a way where they're looking out for your best interest okay and we talked about if you identify property you closed on your relinquished property you identify some properties and you don't close that you really have to wait and you decide not to close to the 180 first day to get your money back what if you'd never identify properties sure good question so if you elect not to identify property so you don't closed on anything within 45 days and you don't present a rep a letter you know the the the letter to the QI then on day 46 your exchange is deemed to have failed and so at that point in time the QI should release your funds back to you okay okay great and what are some other mistakes Rick you mean you've seen a lot of 1031 exchanges in your career from the not only that you're involved in but a lot of other folks were involved in well there's some other mistakes the folks should avoid you know one of the biggest challenges in 1031 like we talked about the timing right and we talked about identifying your replacement property and starting that process early one additional way to avoid the challenge or the mistake of just not finding appropriate replacement properties call me is there you go call Michael bull it yeah it was a great plug when you run the show you get to do this yeah you might want to consider a reverse 1031 exchange so in a reverse exchange you actually are acquiring meaning taking title to your replacement property before you sell your relinquished property now this is important because we've seen a lot of situations where sellers well I don't want to sell that asset till I find something well if you really want to find some go buy it now and so tell us that processing that the buyer that's buying that the replacement property first they can't really put it in their own name right that's correct so what happens is your intermediary then serves kind of a dual purpose not only are they serving as your intermediary they're serving as what's known as an accommodating title holder so what's going to happen is your Qi will go out and set up an LLC and we'll use that LLC to acquire the targeted replacement property now that LLC doesn't have any money so what's going to happen is the Qi you know through the eighties gonna look back at the taxpayer and say okay whatever the purchase price is let's say it's a two million dollar asset banks willing to lend a million and a half on it the bank's going to make the loan to the accomodating title holder the additional equity that's needed in order to close on the property that's going to be loaned from the taxpayer so you've got this LLC borrowing 1.5 million from the bank 500,000 from the taxpayer it's going to use that capital to go close on the replacement asset and now it's going to hold it for the taxpayer and now you're under the same 45 day and 180 day gun in the exchange meaning you have 45 days to identify what you intend to sell as part of the exchange and then buy the 180th day you're going to have to acquire the property from the LLC in order to complete the exchange so and if you've got an asset that's easy to sell that you're relinquishing that would seem a very very safe thing to do like some of these triple net single tenant assets are easy to sell but as you as you explained it in that case that person doing that 1031 has to have that cash they have to have that money to do that right so so the financing element the on the acquisition side is critical because you're not going to have the cash stemming from the sale of whatever property you're intending to sell so being able to provide the necessary debt and equity to close the deal is going to be critical you know when you look at the overall structure you mentioned a very important challenge and that is you know what happens if for any reason you're not capable of selling the relinquished property so if you if you know and I promised other than 1031 I wouldn't use any code sections or anything like that here on the program so I'll try to limit it but there is a revenue procedure that came out in 2000 that really walked the taxpayer through how to complete a reverse exchange and if you follow those rules explicitly then you receive a safe harbor deferral benefit meaning the IRS is guaranteeing you to defer that tax liability one of the issues a lot of people talk about is completing a reverse exchange within the 180 days can you go beyond 180 and the answer is yes there have been situations where taxpayers have gone beyond 180 days and the reason it's taken so long is they've not been able to sell the relinquished property I've had problems doing that those are called non safe harbor exchanges the preference is to structure the exchange because structurally a reverse safe harbor and a non safe harbor a little bit different so you're willing to think about whether or not you can sell that property within 180 days on your way into the exchange okay well thank you we're gonna have more tips from Ricky I'm Michael bull this is the commercial real estate show we'll be the commercial real-estate show is brought to you in part by Florida International University with fi use fast track system you can earn your masters in real estate in just 10 months without interrupting your career visit FIU online comm to learn more that's FIU online com welcome back i'm michael ball and this is the commercial real estate show today we're talking about 1031 exchanges with ricky novak and ricky one of the issues that come up with 1031 exchanges is when we're selling properties and we've got multiple partners and you know two of the partners want to exchange into a property and and two don't what are some tips related to that situation yeah that's probably one of the biggest challenges we see because often times real estate is held in an LLC that's taxed as a partnership and you have different partners and different partners often want to do different things so you know in an ideal world if the partnership wants to do the exchange and all the partners are on board then life is pretty easy when the partners don't all want to do in exchange that's where you have a challenge so an example might be you might have a partnership with three partners and those partners all own a one-third interest in that partnership so they're even you know kind of pro rata partners and two of them want to do the exchange and one of them does not in that scenario it's actually pretty easy you would take the one partner that doesn't want to exchange and prior to your closing you would deed out an undivided interest so you you become a tenant in common so now the partnership would own a 2/3 undivided interest in the property the non exchanging partner would note on one third undivided interest and now the partnership can do a 1031 exchange and the one partner can cash out and there's no risk there there's no challenges and they obviously have to do that before they close but and and I guess we better do before they go under contract to sell that property but should they also do it some time period before that right in that particular fact pattern you could make that change the day before closing you know I would recommend you I'm a big proponent of dotting the is and crossing the T so clearly I had would recommend amending the contract in that case so that the contract follows what actually occurs where you may have a timing issue would be let's take that fact pattern and let's change it slightly let's say that one of the partners wants to do an exchange and two of the partners do not well if they're pro rata partners what's going to happen now is you're gonna have a significant change and what that partnership looks like if two do not want to do the exchange and one does if we do this this tendency in common what happens now is the one remaining partner that wants to do the exchange he only owns one-third interest so not to get too deep into tax law but you essentially have liquidated that partnership the same thing would happen if two of the partners want to do in exchange one of them does not and the two that do want to do in exchange want to do their own separate exchanges so in any fact pattern where you're going to have it greater than 50% ownership change in that partnership you've liquidated that partnership in the eyes of the IRS and why that becomes problematic is that the partnership has held the property and establish that it's an investment asset or has established that it's been used in a trade or business when we transfer out and we make this liquidating distribution out to the two partners that want to do an exchange right so let's say we terminate the partnership we distribute out to all three partners so they all become tenants in common now the argument at the IRS level has been wait a minute these partners are different taxpayers than the partnership therefore I want to see the partner re-establish that this asset is held as an investment or used in their trade of business well if you do it the day of closing is that really long enough to establish something an IRS as are you know so your question becomes are their timing challenges and the answer is in a perfect world you would do this drop these are referred to as drop-in swap transactions because you're dropping partners out and allowing them to and do an exchange so in a perfect world you do the drop at least a year out okay so here's my question to you Michael bull when is the last time a client called you a year before they wanted to sell some real estate and said Michael I want to sell it what should I do you know I like it when they do it but the very sell day you know I like it so that I can say look let's help you ask that manager let's help you do the leases let's help you get everything ready so please do call me you're in advance but no they don't do it so Ricky let me ask you this so three of us are three individuals we're gonna buy a property together we want to have the greatest flexibility when we sell that property one day in case some of us want to exchange and some of us don't how would you suggest we set up the entities to create that flexibility so you know their one option is to just look at what you can and can't do okay the fact pattern we just talked about notice that it didn't say you can't do it the issue is you're taking on a certain degree of risk if you do this planning kind of the day of closing I'll tell you but probably 80% of the clients we talk to are willing to take those kinds of risks that under an audit the IRS may have a question on what they've done but it's clear within the code and regs that nothing says you can you can't the best thing to do is to pre-plan to be thinking about things think about your exit long before you decide to put the property on the market so as you mentioned it would be great if clients would call and say I'm thinking of putting this property in the market what might we consider doing you're usually going to hold a property in a partnership because from a lending perspective lenders like partnerships much better than tenancy in common relationships if you want flexibility have the three partners each buy an undivided interest in the real estate let them be tenants in common let them have a management agreement set up that way when you buy the property that would be the best way to do it and create flexibility the challenge is going to be is the lender going to be comfortable with that yeah well hopefully they will if they're comfortable well we'll get to that in the next segment I'm Michael Ball this is the commercial real estate show stay with us Ricky Novak we'll share more 1031 exchange strategies we'll be right back the commercial real-estate show is brought to you in part by France media France media provides exposure to the world of commercial real estate visit France Media inc.com or call for zero four eight three two eight two six two welcome back I'm Michael bull and this is the commercial real estate show today we're talking about the latest trends related to 1031 tax exchange --is and we have Ricky Novak here in studio one with us talking about exchanges and Ricky one of the things that become more common and I guess they've been around a long time our construction exchanges before we get into it who might a construction exchange work well for well we see a lot of construction exchanges for what I would refer to as your merchant builders these might be groups that are building single tenant and at least assets where historically they've really kind of just flipped those assets and paid the tax on them and moved on down the road also it's a great opportunity for someone that finds a great target replacement property maybe they sold an asset for eight million dollars they find a great replacement asset for six million but it needs a couple of million dollars of work to it so a construction exchange would work well okay and tell us how construction exchange works so much like the reverse exchange the QI is serving as an accommodating title holder so what will happen and you can do these as a forward construction or even a reverse construction where you can buy and start building before you sell but essentially what will happen is the QI will come in it will acquire the replacement property which will include dirt and any improvements that exist on the dirt and then the QIO there through the accommodating titleholder will continue to own that asset while the improvements are being made now the accommodating title holder doesn't want to be responsible for completing any of this work so what's going to happen is we're going to turn around and enter into a construction management agreement with the taxpayer so they can oversee that construction process and handle all the day-to-day operational decisions associated with that construction okay and we talked earlier when you gave the example of the reverse exchange and now with the construction exchange where the accomodating title holder is really title holder and in your example you said that you know maybe they're getting a loan for 75% of the purchase price our lenders comfortable with that situation of loaning on a property that is not really in the eventual buyers name well that they have been for a couple of reasons first and foremost the asset is still being pledged as collateral which is clearly something that the bank is going to want additionally even though we are the borrower under the terms of the bank loan ultimately the guarantor of the note is going to be the taxpayer which is who they anticipate it to be the you know the guarantor from the start so if you look at from the bank's perspective they're getting the asset as collateral they're getting the guarantee that they want it we have found that probably 95% of lenders are comfortable with these transactions everyone small we get a bank that says haven't heard of it and our outside legal counsel isn't sophisticated enough to tell us yes or no so we're gonna pass okay give us some more examples of construction exchanges I'm I guess you could also use them if you were buying an apartment complex and it needed to be renovated or maybe you're exchanging something that the value of the property the replacement property is something or slightly less than the property you've sold but you know it needs some improvements right that that's always a great time to use a construction exchange because now the value of those improvements are going to count as part of your replacement value so at the time that the intermediary wraps up the 1031 exchange they're gonna transfer the asset that they've been holding to the taxpayer and so for replacement value purposes it's the cost basis from buying the property plus the amount that's been spent on the improvement so one of the issues you clearly have is timing if you're doing a facelift to a shopping center the question is how much time do you need so we try to help counsel clients to really pay close attention to your timing if you're selling and Mychal quite frankly this is where you know firms like yours play a great role in advising clients if you're selling a property June the 1st and you know that you need to do improvements to a potential replacement property they're going to take four months you have to make sure you close the replacement property in fairly short order so you can start on those improvements it becomes an even greater challenge when you're construction exchange is completely ground-up go back to the concept of a merchant builder who's in today's world if you're building the Walgreens and selling it within a year chances are you're paying over 50% tax so for a merchant builder if they can instead hold the property for maybe a year in a day and then exchange it in exchange into buying a new per piece of dirt and doing improvements the biggest challenge is from the day that that dirt is acquired you only have 180 days to get the improvements done so it's really lining up timing having the replacement property ready to close in very short order after you sell your relinquished property having your permits in place so you can start construction immediately thinking through those things are critical okay well set in good points well Ricky you've done a lot of exchanges you talked about construction you've talked about reverse what are some things other things that we haven't mentioned yet that exchanger should be concerned about or watch when they're doing a 1031 where do you see the most problems occur or potential issues sure so another area where we definitely see some challenges is sometimes when you sell real estate it's actually part of a business sale right and so in the commercial real estate world hotels convenience stores are examples of that so oftentimes when someone is selling those types of assets they're also selling the business so a question is should you structure that as an asset sale meaning you're going to break down the sale of the property into real estate personal property goodwill going concern inventory or are you going to sell the stock in the LLC or S corporation that owns the real estate you have to think through those things because oftentimes when you look at it if you're going to exchange into other businesses it really may scent make sense to do a 1031 and so understanding how to allocate value amongst those different asset types the real property the personal property etc if you allocate value to goodwill go and concern our inventory those are taxable they're not exchangeable so if you're selling a hotel or a convenience store obviously you would want the majority of your value to be allocated into the real property of the personal property so planning a business sale is really important and you've got to think through it and we always say that's where you want the accountant play a role as well yeah that's a good point and there's also a business side of that sometimes we see companies sell their business and they didn't handle it to maximize the value of the real estate so I think also just looking and selling that real estate separately well stay tuned we'll have more from Ricky Novak I'm Michael bull this is the commercial real estate show the commercial real estate show is brought to you in part by real crowd real crowd lets you invest directly into shares of cash flow in real estate with low investment minimums and the ease of investing online visit real crowd comm slash radio that's real crowd calm slash radio welcome back I'm likable and this is the commercial real estate show do you have a commercial real estate question well we hope you do we hope you send it to us each day I answer a commercial real estate question with a quick video it's on YouTube it's on the Twitter channel ask Michael Boyle you can also find it at the new commercial real estate show web site at the tab answers and if you haven't heard the website yet well it's CRE show.com today we're talking about 1031 exchange strategies with Ricky and Novak and Ricky can foreign investors investing in the US or US investors that want to trade into properties that are outside the u.s. used 1031 exchanges you're probably one of the biggest misconceptions out there is people don't realize you can use 1031 at an international level and so the two examples you have are really the the right ones if you are a u.s. investor and you are investing in real estate outside of the US you can do an exchange the key is to remember that your exchange always has to be us to u.s. property or non-us to non-us you can't mix and match so if you're a u.s. investor and you happen to invest in an apartment complex in Germany and you're going to sell that German property you can't exchange and buy replacement property back in the US and the u.s. is defined under the tax code for exchange purposes as the United States the 50 states plus some US protectorates so Guam American Samoa US Virgin Islands are a couple examples so USD u.s. non-us to non-us is something to remember on the flipside if you are a foreign national but happen to also be a US taxpayer then you can also do a 1031 exchange and the interesting thing is you may live in the UK you may be selling a property that you own in the Netherlands you may be buying a replacement property in Italy so it really technically has nothing to do with the United States you don't live here the real estate isn't here but if you're a US taxpayer you're subject to US taxation so you could actually do a 1031 exchange in that situation obviously there's been a big flux of foreign investors in u.s. real estate a lot of money coming out of China a lot of money coming out of the Middle East coming out of Europe so clearly this is something that people should know about yeah that's interesting and then some folks are interested in buying homes or buying second homes what are the rules they are related to 1031 exchanges has to be held for for investment right and that's the key is it has to be held for investment and it also has to not be used primarily for personal use you will never find someone that buys a beach house and says oh it was not an investment everyone buys it because it is an investment what the IRS says is we want to make sure it's not primarily a personal use asset if I had to list the greatest of gray areas it's defining exactly whether something is being used personally or being used as an investment so the facts and circumstances are very important there's some guidelines that are out there from the IRS there there's case law there's a revenue procedure that will grant again a safe harbor most clients aren't following that safe harbor so then you just have to look at what have they been doing I tell clients you want to be safe put your property into a rental program rent it for at least a year don't really overuse it personally and likely you're going to have an investment asset right so if you know you it is a second home that you're trying to exchange into and that's what you're gonna use it for then it's just not going to work it you know if you're audited the IRS is likely going to tell you they disagree with what you've done again there's nothing that specifically says you can't you just take on that risk should you be audited right and it seems like a pretty big risk you think about the penalties and then the interest that maybe they do that several years later and it could be costly well final quick closing tip for a listeners you know the single most important thing that I can tell someone is to be proactive in this process you know shameless plug for our wonderful host Michael bull work with someone that understands 1031 work with a real estate broker or agent that really understands you've got to be planning well in advance so you have the greatest flexibility in what you can do if you're proactive you'll have much greater outcomes than it well said Ricky thanks for joining us always good to be here for more information from Ricky visit se8 n31 dot-com I'm Michael bull until next week be sure that you always lead learn and laugh and join us for the commercial real estate show the commercial real estate show 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Keywords: Internal Revenue Code Section 1031, Trade (Organization Type), 1031, 1031 exchange, Real Estate (Industry), Real Estate Broker (Occupation), Real Estate Investment Trust (Organization Sector), Exchange-traded Fund (Literature Subject), Real Estate Development (Project Role), Commercial Property (Industry), CRE, Commercial Real Estate Show, Michael Bull, Bull Realty, Ricky Novak

Id: bdyqseFrrak

Length: 38min 52sec (2332 seconds)

Published: Mon Jun 16 2014