Hello everyone
and Welcome to another episode of Selling Greenville
your favorite real estate podcast here in Greenville,
South Carolina, I'm your host as always
Stan McCune Realtor right here in Greenville
South Carolina
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today I'm very excited to have a guest on the show
I have John Boyd the founder and CEO of Banker Exchange
they handle 1031 exchanges all over the country
although they are a Greenville based business
soJohn
welcome to the show and thank you for coming on
great thanks Stan
it's a pleasure to be with you today
absolutely and you know
I've had a lot of clients over the years
that have done 1031 exchanges
I have a very tragic story of my own
where I didn't do one and should have
because I was not
intending to purchase another property
and then the absolute perfect
like once in a lifetime property became available
as soon as I had sold another property
so 1031 exchanges are
are something that's happening in this market
it's not just something that big
commercial brokers and commercial investors are doing
I see a lot of mom and pop 1031 exchanges
but I'm guessing a lot of people may well
a lot of my listeners are pretty educated
but there might be a few that either
don't know exactly what it is or
or don't have all the specifics down
so
what's your elevator pitch on what a 1031 exchange is
great question Stan
the 1031 is a real estate strategy
used by investors with trade
business or investment property
to defer the taxes on the disposition of that property
and the repurchase
or purchase of an alternate piece of property
and in terms of what that looks like
explain or maybe let's just do an example
can you give an example of the
of what sort of capital gains taxes an investor
selling real estate in Greenville
might have to pay obviously you're
we're not an accountant
we're not giving financial advice
or accounting advice or anything
and it all depends on a whole lot of different things
right the
the income they're bringing in
there's a lot but can you just give like
an example of what could be theoretically possible
so there are there are multiple taxes that you pay
on the disposition of a
piece of real estate that has appreciated
we call that gain
the first and foremost is if it was a
if it was depreciable property in other words
you've taken depreciation on that property previously
you have depreciation recapture
and there's one rate for that
it can run as high as 25%
the second tax
that we encounter is the federal capital gain tax
and that's at the federal level
you can have anywhere from 0%
up to about 20% in federal capital gain tax okay
the third that you will encounter and is just
and just to be clear are
are are all of those taxes so far
well that that one tax was on the
what was depreciated during the ownership
the second tax the capital gains tax that's on
that's not on the entire sale
that's on specifically on the gain
that's specifically on the game
okay and then South Carolina
if you're a resident of the state of South Carolina
tax filer
where the property is located in South Carolina
South Carolina is going to assess a tax
on your profit there as well okay
and that
is a little bit lower runs about 3.5 to 3.96%
and then the fourth tax
was introduced by President Obama
and that was the tax on net investment income
and that's 3.8% so all told
you could be looking at
40 to 50% if you're in a high-tax city
if you're in a city that has also
has a city tax or you're in a high-tax state
such as New York or New Jersey or California
those rates can climb even higher how many
how many states
are currently imposing their own capital gains on
on these sort of real estate
you know that's a great question
there's a handful of states that don't have any cat
that don't have any state income tax at all
but pretty much all the other states
do impose a state income tax
so that number's42 43 okay alright
so
what happens to all of those taxes that you listed out
when someone does a 1031 exchange
and I think
you know
we'll get into a little bit more of the specifics
on time frames and what not
but essentially
1031 exchange when you're selling a property
and then you immediately purchase another property
to replace it
and obviously there there is some paperwork involved
and that's where a company like Banker Exchange
which is a 1031 exchange intermediary
that's where you guys become involved to ensure that
that all is handled properly
and that people don't do
things in a way that they're gonna end up getting tax
blindsided by a tax on the back end
but what exactly happens to those taxes
when the 1031 exchange is done
well that's a great question
so 1031 is a deferral mechanism
it's not forgiveness
so those taxes actually get the proverbial
kicking the can down the road
so those taxes are deferred
until you ultimately dispose of
the last piece of replacement property
purchased in a 1031
so you do have the ability to link 1030 ones
you sell property 1 or you dispose of property 1
you buy property 2 in an exchange
you dispose of property 2 acquire property 3
and those taxes all along are getting deferred
and then ultimately
if you if you dispose of the final property
let's say property 3 in a sale transaction
those taxes become due okay
the one exception to that
or one of the exceptions to that is a
a technique that a state planning lawyers use
and that we help with
it's called swap till you drop okay
and under current estate tax law
if you die owning appreciated real estate
your estate gets to Mark those
that basis up to the fair market value
on your date of death so for instance
I've done exchange for 25 years
and I die with $1 million worth of deferred gain
okay and on my day to death
my heirs get to step
the fair market value of that asset
up
to the fair market value the
the asset
the asset being the very first asset that you sold
the last property the last property okay
because that's the only one I own at that point okay
and so the last piece of property I own gets marked
up to fair market value
and all those deferred taxes get wiped out
so it's a pretty good
it's a pretty good technique for the errors
it does not the greatest technique for the taxpayer
right so then if the
I understand that so if
if
if the heirs so so let's
let's play this out so the heirs inherit this property
let
let's let's say they inherit
you know
10 condos you know
for instance a little
a little 10 condo complex
and thethey receive it from their parents
and their parents had done
let's say if they started with
they bought a 50,000 dollar shack
you know back in the day and then they did a
the 1031 exchange and bought a
a nicer house and then they turned that and they
they sold that and then did a 1031 into a quadruplex
and they sold that and did a 1031 and
you know to this condo community
and that purchase was let's just say 1.5 million okay
with the final one
so they start at 50,000
now they're all the way up to 1.5 million right
so the basis is
explain to the listener what the basis would be
at this point well
so your basis in your replacement property
carries over from your relinquished property
so let's start with that 50,000 dollar house okay
chances are that they have taken
depreciation on that house
during the time they owned it
pretty standard allocation 20% for the land
80% for the building okay
so that residential house would have been depreciated
over twenty seven and a/2 years
and very likely
by the time the parents have passed away
and passed it on to the kids
it's fully appreciated so
we've taken $40,000 worth of depreciation
on a 50 thousand dollar house
okay now
let's assume that there was no additional money put in
each time they traded
they traded up but they didn't add any equity to it
okay in the form of either cash or debt
so their basis in that condominium complex
that they've purchased that eightplex is $10,000
its fair market value is a million and a half
so in that transaction
there's $1.49 million worth of gain
that would be taxable it's properly structured
it's gonna get wiped off the table
so so then they pass away
their heirs inherit this little condo complex right
and now explain
pick up where you left off on the
on the basis side of things
and explain how this works for them
so they would get a step up in basis
so their fair market value would be that
million and a half dollars
to the you know to the to the heirs
they could either sell it at that point
and if they sold it for a million and a half dollars
there's no gain if they sold it for a million 7
50 let's say 9
12 months down the road
they sold that property for a million seven 50
there's a 250 thousand dollar gain
so all the gain up until the day to death is wiped out
and who determines the fair market value
I'm sorry I'm sorry
I'll come back to that question
what was what are you gonna say
let me point something out
it's very important that this transfer be
go through the estate or the probate process okay
and not be what we call a deathbed bequest okay
there's nothing sadder for it
for somebody to call into our office and say well
I inherited this from my mother
and there's an asset
with $2 million worth of deferred gain
and I said well
did you inherit it from your mother
or did she give it to you
deed it to you before she passed away on her deathbed
okay that 5 minutes can make a world of difference
because if she gifted it to you before she died
your basis her basis becomes your basis right
yeah okay
but she waited until she died
and it went through the estate process
then you get to step up in the fair market value
and your basis is now a million and a half dollars
that's a that's a that's a really great point
because some people might think oh
I can avoid the probate process and and all of this
by just doing you know
a deathbed sort of transaction but
but yeah
if you've got if you got all that deferred taxes no no
no don't do it again
not accounting advice but don't do it yeah
it's very
important that you have a very qualified tax attorney
and you know
state attorney that your will is properly drafted
and that you have a super competent CPA
or somebody from a tax preparer standpoint
that you're relying
so the question I was going to ask before was um
when when that person passes away
the heirs receive that property
who determines the fair market value
how's that determined well
it's best determined through an appraisal
that way you have a third party disinterested
you have a disinterested third party
making that determination
so we always encourage clients
no matter what's gonna transpire
what kind of transfer that they have an appraisal done
and so it sounds like that's not a requirement
is that just like a CYA kind of thing
like if the IRS comes knocking at your door
it's it's you're covering your basis
you're you're covering
you know in the event you got examined
and you got questioned about the value
you're basically covering your backside
got you okay real estate's a little bit different
you know
than liquid liquid investments like stocks and bonds
they have a readily market they have a ready market
you can look up at the end of any day yep
if somebody stood in front of your house with a sign
like we do on with the stock market
you'd be probably
mortified at how the price went up and down throughout
you know a month long period of time as
you know more people will come interested in buying
or fewer people will come interested in buying
buying prices would go up and prices would go down
sure well
that's that's kind of what Zillow's doing right
they're kind of planting their
their sign in front of all of our yards and
and telling us what their
what their estimate thinks is happening every day
they think it's worth
so obviously
1031 exchanges are an immensely powerful tool for
for real estate investors
in particular who are
you know
not wanting to pay those horrible capital gains taxes
and me having paid them before and I flip houses
that are not eligible for 1031 exchanges
which perhaps we should address that here in a second
why they aren't
but it
it's not a fun tax to have to pay
but I'm curious is do you think that there is a risk
cause I've heard some talk about this in the past
is there a risk of 1031 exchanges going away of
of you know
an administration getting rid of them
well first of all
I don't think they're going to go away
in their entirety
I think they're too much of a powerful tool
for wealth building for the citizens of this country
who probably need that tool
to secure their financial future okay
keep in mind that the non
taxable transaction has been around since 1921 okay
this is not a new concept okay
and there were a couple things that gave rise to that
one was in 1921 we had what we call direct exchanges
if I had a piece of property that you wanted
and you had a piece of property that I wanted
we went down to the lawyer's office and we traded deeds
and there were two things
there were two things that were
that are imperative to assess attacks
okay there's
there's one thing is you have to have a valuation a
a a way of valuing the transaction
well
if I give you five acres and you give me five acres
and this 1921
what's not running around in every town in 1921
there's not an appraisal running around
telling you what something's worth
okay
you and I came to an agreement on what our properties
were worth and and
and decided it so No. 1
there was a there was a measurement issue
okay that gave rise to this
and No. 2 there's a wear with all to pay
because you and I were in the exact same position
after the transaction
that we were in before the transaction
okay now did we have a gain
no we were in the same position before and after okay
but technically we had taxable transactions okay
but
neither one of us had any cash from that transaction
so neither one of us had to wear with all
to pay whatever tax may be assessed
okay so I think what we'll see is
we may see a tightening up of the definition okay
we've already seen certain assets go away
I think it was the Tax Cut and Jobs Act in 2,017
that took away 1031 exchanges on all classes of assets
other than real estate
there were two words inserted into the code in 19 2,017
and those two words were real estate okay
it used to say assets held for trade
business or investment interesting okay
so you could trade cattle
you could trade horses you could trade sports contracts
you could trade aircraft
and we did a fair number of aircraft exchanges
prior to that hmm okay
there was one qualified intermediary out of Boston
whose entire business
was trading aircraft for the big boys wow
okay I can
I can see how
among a certain demographic that would be a
that would be a a great tax strategy
oh it was and so
but the National Association of Realtors okay
is a very very powerful lobby and they got
they were able to negotiate for 1031 to be left in
the code
interesting and
and you
and so what kind of tightening do you think you'll
that we could see and
and maybe we need to before you answer that
maybe you need to address what's
what properties are eligible for
for a 1031 exchange cause I already
I already kind of reference that flips or not
so we can start with that right
and that that'll lead into your
your buy fix and flip model
so Section 1031 applies to any property
any real property used in a trade or business
or bought for investment
okay and it's your intent at the time you acquire it
if it's your replacement property
or it's your intent at the time you dispose of it
if it's your relinquish property okay
and so it's really trade business or investment
now 10 31 the regulations exclude certain assets
they exclude your principal residence okay
that gains
covered under a different section of Internal Revenue
Code 1 21
it excludes partnership interests
like if you buy an interest in an LLC okay
it also excludes property bought for speculation
or property bought for resale
we'll come back to that
and it excludes vacation and second homes
okay and it's interesting
because I live in a market where
we're not talking about vacation
second homes we're talking about vacation in third
fourth or fifth homes
okay I operate out of an office right outside Aspen
Colorado
and my main the main office is there in Greenville
as you alluded to
but I have the privilege of working out of
Colorado about 8 months out of the year so
the tremendous number of vacation is second homes
with a tremendous amount of appreciation okay
but they don't have the benefit of 1031
unless they can change the
the characteristics
of that property before they sell it okay
now addressing your buy fix and flip investor okay
when you buy a property and your intention is to buy it
fix it and resell it
you're buying that property for resale okay
so you are specifically excluded from 1031
and we have a lot of clients who are who are in that um
that that that business of buy
fix and flip
what we see is they have some that they buy
fix and flip and they have some that they buy
fix and hold
and what we encourage them to do
is put them in separate entities
your bifixing flipper in one entity
and your bifixing holder in the other entity okay
because you're buy
fix and hold or you know what I like to say is buy
fix lease and dispose okay
you can buy it you can fix it up
you can lease it and your strategy is maybe the
maybe my tenant will want to buy that house
12 or 14 months down the road okay
maybe they have financial problems
maybe there's something you know
there's there's an economic reason
they can't buy a house today
but they're not bad people okay
and so if you buy it you fix it
you lease it and then you sell it
that property would qualify but if you just buy it
fix it and flip it
then that's not qualified
that's not qualified
so you said something earlier that piqued my interest
you said you gave the example of the vacation homes
are not eligible but then you said an unless
they change something with regard to the property
the characteristics
the characteristics what what would that entail so
there's a revenue procedure that was issued in 2008
it's revenue procedure 2008
16 and it came about because
real estate investors are owners
we're coming across an interesting problem and I'll
I'll share an example well
they were having a lot of problems in my house 2008
excuse me
they were having a lot of problems in 2008 so yeah
well but but the issue was here here was the issue okay
you bought a house on Lake Talks away
or you bought a house on Lake Summit okay
you were one of the first people up there okay
you're 90 years old now
you bought it when your kids were little
you've owned this house for 50 or 60 years okay
you bought it when your kids were little
but your kids grew up and moved away
and you didn't go up to that house very much
as a matter of fact
you haven't been up to that house in 10 years okay
it just sits there okay
but you never really thought about selling it sure okay
and nobody uses it
okay maybe your kids go up there two weeks a year sure
yep okay is that a vacation or second home
or do you own that piece of property for investment
yes and that's where we were running into problems
is people were saying well
I don't use this house
enough to justify owning this house okay
I can give you a different a a a more
kind of toxic example but and so the question was
is that person eligible for 1031
okay
and the IRS got tired of fighting about it in court
and so what they said is okay
here's what we're gonna do
if prior to you disposing of that house
you've changed its characteristics
by renting that house for two weeks
in each of the two
twelve month periods prior to the sale
at fair market value to an unrelated party
and you have restricted your personal use
to the greater of two weeks
or 10% of the time that it's rented
we won't question whether it was trade
business or investment property or not
we will give you a free pass and we will
it's called the safe harbor we won't
we won't contest that it was trade
business or investment property
we won't go try to make the argument that it was
a second home or vacation home
interesting okay but that takes
that takes two years of planning
what about a lot of people yeah
that that yeah
that's a yeah you
you can't just make that decision
you know a couple months before you're about to sell um
what I I've heard some people talk about over the years
you know
if you got a property like this
you can you can spend time over there
you know working on the property
and and
you know perhaps some people take advantage of that
but what are the rules with
with regard to that overnighting out of property
if you're doing work on it
days you spend doing maintenance on it
and again this is an accountant question
not a qualified or a meeting question
but the days that you spend over there
doing work on the property
don't count towards your personal occupancy
okay now
what that doesn't mean is
if you have 20 steps going up the out
or 14 steps going up the outside of your house
okay that you get to spend 14 days there
because every morning
you get up and you paint one step
okay that's where the abuses come in yeah
and it's it's very hard to know
it's it's
it's difficult and remember
the burden of proof on examination is on the taxpayer
yep and people say well
how would somebody know that I was there okay
well the power Bill goes up
and the water Bill goes up when the
when the house is occupied okay
those are third parties that can say yes
they use
you're not going to carry your water in a jug
and you're not going to run a generator
power your house
okay
but everybody in our generation carries a cell phone
and they have the ability to triangulate that
cell phone position they say well
you know we got your cell phone records
and you were pinging off of these three towers
and these three towers
tell us that you were at this house right here
the IR the IRS has a lot of tools at their disposal
if they need to use it exactly
and so does the department of revenue for that matter
they they're
I I
I don't personally know anyone over there
but they've been nasty to me in the past yeah
so so let
here's kind of I
I actually didn't intend
I didn't plan to ask this question
but I'm just kind of curious
do you see any future with like
bitcoin or crypto or anything like that
with regard to all of this
with regard to buying selling 1031 exchanges
is that is that something is being talked about in
in your industry at all you know
we're I
I haven't heard any conversations about
you know
when somebody comes in and wants to buy a house
with bitcoin
so but I can see
I mean any
anything is
you have negotiable collateral sure
I mean literally
I mean you
you can come in and say
I want to buy your beach house
and I want to give you my yacht down in the Caribbean
okay well how easy is that 1031 exchange to do
well the qualified
intercessor is going to take this yacht in
and he's either got to find you
either as the exchanger
or have to find a seller for your replacement property
who's willing to take that yacht is consideration
or the Q
I's got to monetize that yacht and sell it within
the tight time frame within the hundred eighty days
so you have the cash to go buy the real estate
that you want
bitcoin being a little bit more liquid
I could I could see that conceivably
becoming a consideration in future exchanges
there will be it'll present some challenges early on
but over time it'll get easier and easier
so I know you can do a partial exchange
so you know
let's say that you sell a 500,000 dollar property and
and you know
do an exchange
and then the next property purchases say 400,000
you're you're not you you know
I guess in the ideal scenario
you're purchasing a more expensive property
that way you get the entire
tax hit of
of the various taxes that you discussed deferred
but if you purchase a cheaper property
you're still gonna end up paying some of those taxes
correct that's correct
so that's called a partial exchange
they happen a couple of ways
one of them is intentionally
we've had clients come into our office
who were selling property
and they were literally land poor okay
is they had a high net worth
but they had no liquidity
and they had no other assets other than real estate
and the husband sat there and he said
you know
here's what I'm gonna do he said I'm gonna buy this
this this and this and I looked at his wife and I said
what do you want and she said
I want a new car
and I want to take a trip around the world
there you go
and I looked at him and I said
we're gonna take an exception
you're gonna pay some taxes on this money
but
we're gonna make her happy too okay
because he really did need to go buy another 4
five six or 7 million dollars worth of real estate
even though it would produce a nice income sure okay
diversification is a good thing
particularly
when you're talking about our financial assets
and so yeah
partial exchanges are possible
that's a that's an intentional
that was an intentional partial exchange
but if you get into your exchange
and you're gonna buy three properties
you've identified 3 properties
and one of them falls out for some reason
fails inspection burns down
it gets washed away in a flood
you name why it why it's not there anymore
it's not available to be purchased
and you can only buy two of the 3 properties
you identified
then it's not typically what we call an unintentional
explain that cause we've been kind of
and I like how this conversation is gone
we've kind of
rather than just dumping it all on the listener
at the beginning
you've kind of explained in in at different state ages
the the different parts of the 1031
why don't you talk about that
identifying a property piece
cause I don't think we covered that yet alright
so when you when you engage in a 1031 exchange
there are two time frames that you have to be
cognizant of one of them is your identification period
and one of it is your exchange period
and both of those time frames start
on the day you transfer the relinquished property
so let's say okay
and your identification period expires
on midnight of the 45th day
following the transfer of the relinquished property
and your exchange period expires at the earlier of
the due date of your tax return
including extensions
or the hundred and eightieth day
following the transfer of the relinquished property
so what does that mean okay
forty five days is forty five days
but the hundred and eighty days if you close after
it's about October seventeenth or 18th
depending on if it's a leap year okay
if you want to get your full hundred and eighty days
you've got to file an extension to your tax return
talking about an individual investor here
who's required to file by April 15th
okay
because if you back up from April 15th 180 days prior
like October 17 okay so if you close on December 31st
your exchange is gonna expire on April 15th
unless you file an extension to your tax return okay
now those dates are absolute those 45 and 1
80 we're gonna assume you've got the 1
80
those are absolute
it's the only place in the Internal Revenue Code
where there are no extensions
if a deadline falls on the Saturday
Sunday or a legal holiday interesting okay
so there have been times where I took
I literally took an identification in person
okay at 11 o'clock at night
standing at the corner of Washington Street
and Stone Avenue
okay there's a convenience store there okay
and I knew that the convenience
store would have cameras so
if I needed any proof that
that transaction occurred prior to midnight
I had it interesting okay
so what what is this so sorry
go ahead so within the 45 days
you have to transmit your
identification to your qualified intermediary
okay
or someone else who's a party to the exchange
who's not disqualified
we won't get into that that's a a much deeper dive okay
but okay in our office
we require you to
to transmit the identification sheet to our office
but that's not that's
that's a tighter rule than the regulations put forth
and in terms of what
what sort of properties people can identify
what are the rules there okay
so they can identify
any property that's going to be used in a trader
business or held for investment okay
so virtually
any piece of real estate can qualify for 1031 exchange
okay if you live in a house
and if somebody's selling a house in Collins Creek
okay and it's their primary residence
but you're gonna buy that house
to turn it into a rental
that's perfectly acceptable
sure okay and it's important to know that
it refers to the nature or character of the property
not the greater quality so
what that allows you to do is
you can trade raw land for single family residential
you can trade multi family residential for
self storage self storage for office buildings
office buildings for raw land
so it doesn't matter what asset class
you're coming out of or going into
as long as it's for trade
business or investment purposes
so you got 45 days to identify up to three properties
that you might want to purchase
once that 45 days we'll talk limitations
we'll talk limitations
so you can identify three properties of any value
so
if you dispose of a million dollar piece of property
you can identify three properties of any value
if you identify more than three properties
the fair market value of everything that you identify
cannot exceed 200%
of the fair market value of what you gave up
so if I sold for $1 million
okay my limitation is 200% or 200 or $2 million
but only if I'm gonna identify four or more properties
okay
and you could part in theory do the exchange and
and purchase multiple of those four properties yeah
there's no limitation to the number of properties
you can purchase
so do the how does that work
do those all have to be purchased on the same day
can it be done over time now
it can be done over time I did a transaction
it was the late 90s some folks
sold a piece of property to a large retailer
for them to build a store
and they went from being landowners to
they bought about 35 or 40 individual
single family homes
oh wow in the community they lived okay
and they did that all within 45 days they
they identified them all within 45 days
they purchased them all within 45 days
they purchased them all within 45 days wow
but they didn't have to purchase them they
they they could have followed the 180 day rule for the
they could have
the challenge that they were facing is you
what were what were they gonna buy
and were they gonna violate the 200% rule
sure
so they went ahead and got everything lined up and
had it ready to close and I was literally I mean
I the closing attorney would call me and say
we're closing today and I'd say okay
and just I was sending documents literally
about every other day
I believe it that that's crazy and when it was over
it was
it was two 3 or 4 inch binders full of documents I
I believe that well yeah
y'all must have had an office party
when that one closed so it was well
it was crazy
I don't doubt it what percentage of of people to
who you know hire you guys to
to help them perform an exchange
don't end up ever finding the right property
don't end up actually doing an exchange
you know it's a relatively small number of people
I would put that number probably at 5 to 7% okay
and a
and a total and maybe less than that and a total
frustration is what we call it
when an exchange doesn't work
we call it a frustrated exchange and so
you know probably three to five
maybe as high as 7% now
some of those are intentional
and I know that sounds crazy
but because of the interplay of various
internal revenue sections
somebody that disposes of a piece of property
let's say in September okay
of 2024
that's gonna have a giant tax Bill and they're like
I don't wanna pay my taxes in 2024
I think the rates are gonna go down in 2025
is there any way for me to kick this transaction
this tax liability from 2024 into 2025
so
as long as I have a bonafide intent to do the exchange
they haven't touched their money in 2024
they don't get their money until 2025
because of the section of the Internal Revenue
Code on installment sales
okay that says if you don't get paid
you don't have to pay the taxes
that's that where with all the pay that we talked about
hokay
if they don't get their money from their qualified
intermediary until well
we said August so that's 8 8 + 6 is 14 in February
the qualified intermediary sends them their money
when is that tax transaction taxable
well under the installment sale rules
they can make an election to have it taxed in 2025
or in 2024 interesting
so if they've got
if they've got certain factors going into their
personal income tax return
that they might want to kick that
tax into the next year
it makes sense okay
so that yeah that's interesting
now I'm I'm curious about you
you mentioned the word frustrated
with regard to the people that
that don't end up that wanna complete a 1031
and it just doesn't work out
how do you ever get the sense
that some people are just kind of
settling to purchase that next property
just to defer their taxes
and not really happy with the next one that they get
or do you
do you not really get that sense from where you sit
the answer is yes
I think there are people that make bad decisions
they make bad economic decisions to avoid the taxes
and
I mean what I tell people is
don't let the tax tail wag the dog
okay it's great advice
you know the taxes are yeah
the taxes are high okay
but the loss of capital is even higher sure
you know if you
you know
the if you lost all of that capital
because you made a bad decision okay
and an over leveraged property
and we saw a lot of this you know
in 2008
there were a lot of our properties that people bought
that either they got lost because of foreclosure
cause their loans got called
and they didn't have the wherewith
all the to pay them off or they were in a syndication
they bought into a pool
an asset that was owned by multiple individuals
and that asset got foreclosed on or
that's the real big one got full
closed on by the lender because it was over leveraged
and they thought their cash flow was secured
at the end of the day they
they didn't lose
they lost all their money
not just the tax yeah
that's
that was a rough time as I
as I went to before you know
I can't you know we
we try to look at the overall picture
you know when somebody comes to us and says
you know what do you think I ought to do
and sometimes they ask me
and sometimes you know
they don't care for my opinion and that's okay
what are some of the challenges that people run into
when they're trying to do a 1031 exchange
besides the obvious of
the challenges of identifying a property and
and what not that you know
in within a 45 day period
well when you're in a tight market
where you have a lot of buyers
and not very many sellers
you know and prices get bit up and it's very
rapidly moving market that presents some challenges
that's for
and the 45 day identification period
trying to find something okay
now you don't have to have it under contract
it doesn't have to be listed
okay but 45 days comes very quickly
yeah it does
particularly if you close
I mean think about if you close in December
well I'm thinking more about first part of June
to the middle part of June
hmm okay
because in any exchange transaction
there's multiple parties there's the buyer
there's the seller there's the buyer's attorney
the buyer the seller's attorney
there's the buyer's broker
there's the seller's broker
so really there's six people okay
the qualified intermediary
they don't care cause we don't go on vacation
okay
there's always somebody in our shop to take care of
closing the deal if it's got to be closed
sure okay
and we're only needed at the
at certain points in the transaction
but can you imagine if
you're trying to negotiate a deal
and get a contract signed
if you close your relinquish property on
you know June 1st and you've got people going on Vaca
you got six different vacations to navigate
you've got the fourth of July weekend
which is gonna be you know
people are gonna be shut down for that week
or they're gonna be on vacation for that week
and so what we find is
and you got weekends okay
so in a 45 day period you know
there's probably six of those days or more
eight or 10 of those days
it'd be seven weeks times two
probably 10 to 14 of those days
are weekends yeah okay
commercial brokers don't really work on weekends
if you're looking at buying a commercial residential
residential brokers do for the most part
the good ones do at least yeah
my girlfriend is a residential broker in Aspen and yes
means she works mornings afternoons evenings
Monday through Sunday yep
it's a you know it's a
it's a 24 7 job if you're on the residential side
so that's the big I mean
those are some of the biggest challenges
finding something that you like finding
you know and I would tell people don't settle I mean
under no circumstances
do you settle for something you don't want
you know some people say
how about
can I park this and then sell it two years from now
sure you can
but you're taking some market risk doing that yeah
absolutely you know what we see a lot of times
particularly in a hot market is
there were some strategies that were approved in 2000
by the IRS
we actually did our first exchange in this structure
in 1995 okay
but it's called the reverse exchange
and if you're fearful that you're gonna have problems
with your replacement property
there are structures that allow you to
control your replacement property
before you sell your relinquish property okay
it's called a reverse exchange and
it's got some pretty tight time frames another yeah
what what are those time frames
I am curious to hear that well
you still got you still got 180 days
so in those transactions
I I said you didn't own the property notice
I said you take control of the property
you control the property so
you engage what's called a exchange
accommodating title holder
we use the acronym eat
and that eat takes title to that property
and can hold that property for 180 days
so by the hundred and eightieth day
you have to have sold your relinquished property
and acquired your replacement property
from the exchange accommodating title holder
and there again that's a tight time frame yeah
sure usually you see those transactions when a buyer
you know the buyer on the relinquish property
might need two or three more weeks to get their loan
in gear
but you don't have two or three more weeks on the
purchase of your replacement property
because you've negotiated
you know a firm closing date with your seller
he's got to have his money
to go do something else with it
or you've got a loan
commitment on the replacement property
that's going to run out and you got to buy it
yeah or you're gonna yeah
you're gonna be subject to increase rent
loan rates and subsequent reduced cash flow
I could be I could be wrong
but I believe if that
so my office used to be on Pleasantburg Drive
it's now where the guest and Brady attorneys
main offices they
they they purchased our office on Pleasantburg
and we moved over to near the mall on Woods Crossing
and I believe my company did a tenth
a reverse 1031 when they did that yeah
I believe Danny did
we've done a lot of work with Danny over the years
yeah
no doubt but I'm pretty sure that was a reverse
I met Danny when Danny was in high school
playing basketball how about that
Wade Hampton
I guess it was Wade Hampton maybe that's that's great
yeah yeah
I was a freshman at I was a freshman at farming
how about that
he's he's he's great and
obviously I love being with C d and Jennifer
companies and yeah it was
it was just interesting to see that whole process
because they told us you know
it was
it was a long time and coming that it was gonna be
you know moving offices and what not
and then I I think I heard Danny maybe told us
or maybe I just heard through the Grapevine
they were doing a reverse 1031 so
that that was actually the first time
I'd actually heard someone say that
they were doing it
and and I found that pretty interesting do
do you run into any misconceptions that people have
when it comes to 1031 exchanges
oh yeah
there are a couple
number one is that it's difficult to do okay
and for the uninitiated it can be difficult
and our job as your qualified intermediary
is to navigate you through that
to walk you through it
and make it as simple as possible okay
the one thing we do is
we don't assume you know anything okay
unless you've been a client two or three or four times
okay I've got
I've got clients that call me and say
I don't have to
I can assume that they know a certain amount of
information sure
yep the second is
that it's expensive okay
and relatively speaking it's a pretty good deal okay
you'll find you know
I would just you know shop
shop for Q I's
and don't always take the bottom basement okay
because oftentimes there are
indicators
maybe you're not getting the experience that you need
maybe they don't have the knowledge that you need okay
and so those are really the
the two and the other is that you
there are no partial exchanges
some people think it's an all or nothing proposition
and that's not true okay
now to expand what we spoke about earlier
when you do a partial exchange okay
the first money that you reinvest
is a reinvestment of your basis
so when you go to closing and you sell
there's really two buckets that you're working with
one is your basis and one is your profit
okay and when you go to buy replacement property
whether it's 1 two three multiple properties okay
the first money that goes into those properties
comes out of that basis bucket
and it's only after you've emptied that
that that basis bucket
do you start taking money out of the game bucket
and so at the end of the transaction
whatever's left
in the game bucket is going to be taxed
sure that makes sense
so I've got a few more questions here
and I know you're busy I'm I'm gonna let you go
you guys are all over the country is my understanding
how many states
there's only about five or six states we won't work in
but our business is concentrated in the southeast and
and really heavy in South Carolina and Western
North Carolina okay
what would you say with that knowledge
with your knowledge of being
not specific to Greenville
even though you're a Greenville based company
what's unique about the Greenville market
when it comes to 1031 exchanges
as opposed to other markets
is there anything that stands out
you know I mean
a couple things we've seen
you know the market stayed vibrant
I mean you've got a booming market there
people moving in like crazy
it's No. 4 No. 5 on the Best Places to live
you know you got a great downtown so it's
it's really it's a little bit insulated
and we've seen this through
I don't know how many cycles
I've been through three or four
you know we don't get the
we don't get the the toss that we see in other markets
you know
it's a little bit more stable okay
so interesting
but that's you know
it's been that way forever and ever I mean
we we're not in a LA or San Francisco or Miami
where when things go fall apart
they fall way apart right yeah
not that we're not gonna get there but
I mean that's really the the thing I mean
great place great place to be you know
great I mean I
you know
and I still have a house in Greenville and you know
I've been there when I started
when I started Firm University
they told us don't go downtown
go down to the basketball game
watch the game
get in your car and come back get out of there
there's nothing good that can happen downtown
after dark yep
it's crazy okay
I mean literally nothing was downtown
and I've been fortunate to be
involved in a lot of the things that went on downtown
I mean
it's hard to go down any major artery in Greenville
South Carolina
and not see a project that's been touched by a
1031 exchange the banker exchange
I bet yeah
that's that
that's not hard to believe
how long have you guys been in business again
we did our first exchange in April of 1992
92 so coming up on 30
getting ready third coming up on our start of 34th year
I guess yeah
that's fantastic yeah
I was
I was six years old when you did that first exchange
and so you know
and I still
remember a lot of the details of that first exchange
why why did
why did you get into this
what what prompted you to get into this business
well I was
I was peddling stocks and bonds at J C Bradford
which is now part of UBS
down in the Hyde on a main street
and a friend of mine called me up and asked me
who he'd been my roommate
he was an attorney in a CPA
working for a local CPA firm
and he
he asked me he said
would you be willing to hold $75,000 for three days
we'll pay you $2,000 to do it
and I knew about 10 30 ones
we'd studied them in school
but very briefly and
I said sure
and I said
who would have done this for you if I hadn't done it
he said there's nobody in town
there's nobody around that does it
and so
that sounds like a business opportunity
well you know
when when somebody's not doing something
you have to look and say are they not doing it
cause there's no money in it or sure
they're not doing it because nobody understands it yet
and so I mean if
if you want to open a buggy whip manufacturer tomorrow
that's probably not something you want to do sure okay
yeah cause there's no market for buggy whips anymore
right all right
and so that's that's kind of my point was I was
I and I've been
I've had several businesses
that we've been fortunate to start
and we've been on the front end of the curve
and so
you know this one
it's been a lot of fun helping people defer taxes
and also helping them build wealth and
you know watch Greenville grow and
and thrive absolutely
I mean I can remember when Five Forks did not exist
yeah it's just farm country out there
pardon
it was farm country out there for the longest time yeah
I can remember
when I did the deal that allowed the Bilo to be built
at Five Forks I built a
a Ford dealership
it's not even a Ford dealership anymore
I think it's been torn down something else is out there
but I mean it was crazy
it's crazy I mean
Greenville and and I did a lot of work on lake here
we you know
with the developer of lake here
we dear friend of mine
and he just he called me up and say
we're having an auction you better be ready
and sure enough it would
you know we get five or six transactions at a time
out of his office I bet
so couple
couple more questions here and then I'll let you go
is there
so obviously we're in an uncertain time economically
I guess we're recording this
we're recording this on April 2nd
which is
Trump's declared Liberation Day
when it comes to tariffs and
and all of that is
is any of this affecting 1031 exchanges in
in in a positive or negative way
any of the uncertainty
or high mortgage rates or anything like that
well mortgage rates affected a little bit okay
truthfully we're
you know we've seen vibrant growth in our business
over the last five years
you know
there was a
what I would call an anomaly that occurred during Covid
where the number of transactions went through the roof
and I can't explain to you why
maybe it was people buying resort property
and buying beach houses
and traveling and finding places they liked
but we were extremely busy
almost too busy
if there is such a thing in 2020 2021
but you know here's I I take a worn buffeted approach
okay we're gonna make money
no matter who's in the White House
there's an opportunity
no matter who's in the White House
absolutely and you know real estate is is one avenue
you know the tax deferral
and one of the things we talk about in our seminars is
you know
the greatest friend to building wealth is time
and the greatest enemy to building wealth is taxes
that's accurate I I fully agree with that and so
you know
if we can if we can control the tax piece of it
then we're ahead of the game 100% so you know
are we I go back to we're a little bit insulated
now with that being said between 2008 and 2,011
I can probably count the number of deals we did total
on both my hands
so when we say we've been in you know
we've been in business 35 years you know 33 years
you know
but for the four years where nobody was in business
doing anything the great Recession
it was it's been good
how did you stay in business during that time
and was that just everyone just had to cut back
that's a that's a story for another podcast
but all right well
the 10 give us give us the cliff Notes
well the
so the 1031 business catapulted me in in two in 2000
2001
catapulted
us into the real estate syndication business
we started a company called tic Properties
and we sold fractional
interest in institutional assets to 1031 exchange
investors hmm
interesting matter of fact
the very first asset that we sold we still own
but we did 33 syndications during that period of time
between 2001 and 2008
we built a vibrant property management business
it was we were fully fully vertically integrated
we could buy it finance it
distribute it operate it
lease it manage it and sell it all in our shop
wow and so when the market turned not
not many sponsors were in that position
so when when the market blew up
we stopped syndicating new deals
but we happen to have a nice management portfolio
that was about about 9 million square feet
it was about 18 investors we were servicing
and so we had some recurring revenue from that
that was able to carry us through
that slow period of time that's great yeah
I love to hear those stories
you know I graduated college in 2008 so I
I entered thethe adult workforce
into the into that great recession
and it was interesting
it was a very interesting experience
but I love to hear stories from
from companies that weathered that storm
cause it was quite the storm particular
in particular if you're in real estate
or real estate adjacent industriesm
alright
last question and I think you're gonna like this one
what would you say to someone who doesn't think
they need a 1031 intermediary
they can just do it themselves
well first of all
it's a necessary evil okay
I don't agree with the fact that
they created this cottage industry
with this section the Internal Revenue Code
I think there were there
there are always easier ways to do things okay
but unfortunately they've
they've drafted the code the way it is you know
and one thing is
is the taxpayer during the exchange process
cannot take actual receipt of their money
nor have constructive receipt of their money
and so
if you're not going to use a qualified intermediary
there are a couple of other safe harbors
that are much less popular
and much more burdensome if you will
and so
the qualified intermediary is the easiest way to go
to accommodate your exchange
so I would
I would simply say I wish you the best of luck haha
what sort of pricing can people expect when they're
when they're doing a 1031 exchange
you know
you're gonna see pricing all over the board
depending on you know
what what folks do
I mean I can speak to our pricing
I don't really speak to other people's pricing sure
you know for a traditional exchange
that's a forward exchange that involves you
one piece of relinquish property
and up to two pieces of replacement
property or three properties in total
it's 15 dollars that's a flat rate
if you decide that you wanna wait till the last minute
and you wanna inconvenience us
they're gonna put you at an expedite fee on that
just because they've got to change their work day
to be able to accommodate
your procrastination yep
for a reverse exchange
you're probably looking at a base fee
and we try to avoid those every
every chance we get because
there's a question about whether
they're even money makers
to be honest with you
because the amount of accounting that has to go in
the tax return preparation that has to go in
and so
but a reverse exchange is going to run you about $5,000
and then on top of that the 15
the 15 dollar exchange fee
okay
and then if you've got a situation where you need to
make improvements to a piece of property
to meet your exchange value requirement okay
to get to that
you know
the amount of money you need to spend to fully defer
you're looking at typically that $5,000
plus 1% of construction cost
that's great great
great breakdown of information
and I really enjoyed this discussion
so John thank you so much for coming on the show
thank you for imparting all of that
I mean that's
that was a tremendous
I've been to classes on 1031 exchanges
but just being able to pick
your brain was really helpful for me
so thank you so much well
we've got some more coming up
we've got some more
at the Greater Greenville Association
Realtor will be in there
check the calendar but I think it's
late April early may
okay and then we also just wrapped up
Banker Exchange
was one of the sponsors of the South Carolina
Rocky Mountain real estate
real estate summit out in Aspen
Colorado so we've had
a group of it we had attorneys
we had some clients
we had some real estate brokers come out
enjoy three days of continuing education
and three or four days of
winter activities in the Great Rocky Mountains
so and that's been scheduled for next year
the weekend of February 7th
so
put that on your calendar
come join us yeah fantastic
yeah there's a lot of realtors that listen to the show
so if you wanna go to a banker exchange
class
look at the GJR calendar
you got plenty of time to do that
and yeah
I've seen you guys and and yeah we'll be in
I'm in I'm in Greenville one week
I'm in the Midlands one week
I'm in
Hilton Head and Myrtle Beach the same
back to back
and they're all between April the 20
April 22nd and may the 7th
I think all right
so well sounds great
well John
thank you so much
for my for our listeners
that was John Boyd I will put
contact info for banker exchange in the show notes
along with my own information
of course if you need a realtor in this area
just let me know my information in the show notes
and please like
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