Explaining The 1031 Exchange With Bill Exeter

Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larson. You can get your free copy of our book@nextlevelincome.com just click on the book link. Today's show is sponsored by the Multifamily Investor Nation Summit. Coming up on January 21st through the 23rd. It's a three day information packed event for multifamily investors with over 1,000 attendees and over 50 speakers. You'll hear from experts about finding deals, raising capital, underwriting strategies, selecting markets and so much more. You can hear me as well as dozens of other speakers during the event. Go to multifamilyinvestournationsummit.com that's actually M finsummit.com to grab your ticket. Use promo code next level in all caps. That's next level in all caps to get $100 off. Whether you're new to multifamily investing or a seasoned investor, you don't want to miss this event. Join us in January. MFInsummit.com on today's show we have Bill Exeter. Bill is the founder, president and Chief Executive Officer of Exeter 1031 Exchange Services LLC. He's headquartered in San Diego, California. He's also CEO of Exeter Trust Company headquartered in Cheyenne, Wyoming and their affiliate companies. Mr. Exeter is in the company's national corporate headquarters office in sunny San Diego, California. Bill, welcome to the show.

Thank you. Great to be here.

Yeah, great to have you on. I've enjoyed some of our previous conversations and as I was planning our upcoming shows, I thought I got to have Bill on. You know, I want the audience to hear a little bit about your background. And you know, we have, we've had guests on that are in their early twenties, all the way up the spectrum. And it's a real honor to have somebody with your history in the industry on the show. So if you don't mind, share with the audience kind of some of your history and how you ended up in this business here.

That's always a funny story. You know, it's funny. You don't go to college and say, I'm going to be a 1031 exchange guy, right? So I actually was a controller of a commercial bank up in Los Angeles. And the developer, the chairman of the board who was a developer, said, we're going to start a qualified intermediary. Back then they called them accommodators or what have you. And outside counsel said, do not the escrow subsidiary run it. We think it's a problem. So he threw it at me and I had no clue what it was. That was back in the early 80s. So 36 years later, here we are. My career did kind of a left turn, kind of stayed in banking for the most part, but differently. So we've done 1031 exchanges now for 36 years, but it has always been a trust company operation as well. So it's kind of non depository banking, if you will.

Interesting, interesting. I'm just curious, why is your trust company headquartered in Wyoming?

Good question. A number of reasons. One is California getting crazier and crazier from a political perspective? The regulatory oversight is absolutely ridiculous. So that was one issue to look at. Number two, we trust laws that were updated a lot more frequently that were better for the consumer. And so we started looking around and narrowed it down further and further until we picked Cheyenne, Wyoming. Flew out, met with the regulators and just loved what I saw. I mean it felt like a real partnership, which was the first time I've ever experienced that. So decided that is where we put it. It kind of got us out of California from that perspective and got us into a state that really wanted us there and had some trust laws that help our clients and what have you. So it worked out really well.

Yeah, I hear a lot of things and that can be the topic of an entire other show. But I want to talk about so 1031. So our group has recently exited a property going through a 1031 exchange. And in my book I talk about how we did a 1031 exchange selling a property. This was about five years ago. It was a little single family property and I think I put 2000, $3000 down when I bought this property, sold it, rolled it into a seven unit property here in Asheville. And I now get cash flow in excess monthly that I put down and I haven't paid tax on any of the gains in that property. And a lot of people are surprised. They're like, well how can you do that, Bill? You've done over 125,000 1031 exchanges. So could you walk us through how, how the 1031 came to be and who is a benefit for sure?

Actually when you said that, it just triggered a thought that next year is actually the 100 year anniversary of the 1031 exchange. So it goes back long, long time. It's not only a tax planning strategy, it's a building strategy, but it's also kind of an economic stimulus program if you will. Truly designed to encourage investors remain fully invested in real estate. So it keeps liquidity in the market, helps people reposition or repurpose. Especially coming out of COVID 19 or I'm not sure we can say we're coming out of it. There's going to be a lot of retail space that's going to have to be repurposed and it's very difficult if you sell and have to pay taxes. So the 1031 exchange really allows you to sell your current property. And so let's use your example, you sell a single family. Now if you had to pay 20 to 30% of your profit in taxes, that makes it very difficult to trade up into the seven unit you were talking about. So with the 1031 exchange in your case, you could sell your single family and you pay no federal and no state taxes. So it really keeps all of your money, your profits, your equity in your pockets and you can reinvest that which allows you like to build trade up into a seven unit. So it really allows you to trade up into more units or multiple properties or larger assets might be increase your cash flow without getting killed on taxes.

Yeah, no, it was, it was eye opening to me. I knew about the 10:31 exchange when I was selling the property and when I was selling it I didn't fully expect to do it, but I had this opportunity pop up and I thought oh. So I kind of moved quickly and frankly I can't remember who I used at the time to do that. But as I talk about in my book with the multifamily side, which is probably about 80% of what we do at next level income, it's a big part of the strategy. If you aren't paying taxes on that income and you have say a 50% gain coming out the other side of a project five years in keeping that money working for you. I do an illustration in my book. I mean over a 20 year period at reasonable rates, Bill, I mean you're talking about doubling the amount of money that you end up keeping at the end of a 20 year period. So I'm sure maybe you could. Do you have an example of anything like kind of market that sticks out in your head with the, the amount of tax people saved on a 1031 exchange.

I mean our transactions have ranged from 10,000 to. I think the largest you've done so far is 340 million. And the amount of tax were saved is amazing. But you hit the nail right on the head. A lot of folks look at this as just A transaction tool. I'm selling real estate, don't want to pay tax. Like I mentioned, it's a wealth building strategy. So every time you sell investment property through 1031 Exchange, you keep exchanging over and over and over. It keeps all the money in your pocket, which means you can leverage that and you just build your wealth that much faster. And if you compare one family who always sells and pays the tax over 40 years to a family who always 1031 exchanges and defers the tax over 40 years, the family that 1031 S is going to have a net worth that is vastly larger than the one who always paid the tax. So if you're a buy and hold strategy person, that really allows you to keep exchanging over and over and over. And then when you pass on, whoever you leave the property to will get that step up cost basis, which means your capital gain tax goes away, your depreciation recapture tax goes away. We have a morbid sense of humor. We call it swap til you drop.

I've said it myself. Yeah. And it's.

Well, no, that's strategy.

Yeah, but it's hard, but it's predictable. Like it's gonna, it's gonna, it's gonna, at the end, it's gonna work. No, and look, I talk about that in my book. I say how you can, you can basically delay paying taxes. We're not, you know, we're not doing anything untoward. The irs, as you said, it's a stimulus. And that's how I see it. When I, when I took a course by a former IRS agent back in college, the reason I took it was because I read something somewhere, it was probably rich dad, poor dad. And he said, the IRS has these rules to tell you where to invest your money and what to do with it. I thought, well, why would I not go talk to an IRS agent, figure out what the rules are. It's a lot easier when you play by the rules to keep more of your money. Yeah. So no, it just again, you can buy bigger properties, you can keep more money in the economy, you can, you can do that. Some people may be listening though, Bill, and saying, well, if I got to, well, how do I ever get my money out of the real estate if I'm always doing a 1031 exchange?

Well, that's a good question. You know, a lot of the information you'll see on the websites or brochures and what have you make it sound like you have to trade equal or up in value. You have stall your equity and you have to replace Your debt. They say that because that most people want to defer all their taxes, but you don't have to do any of that. So maybe you sell for 500,000 and you reinvest 400,000. You trade down a little bit. You would only pay tax on the amount you don't reinvest. And so that gives you the ability to do a couple of things. One, you could pull cash off the table when you need it. Most of us are real estate rich and cash poor. So you create a little cash position. You pay tax only, you pull out and it allows you to plan how much to trade down by so you can control the rate of taxes you're going to pay. That's one way to pull cash out. A lot of folks will just refinance and pull equity out to create a cash position. There's really no way to pull cash without either getting additional debt or getting hit with taxes. But you do a little bit every now and then. It's not quite so painful.

Yeah, and that's. I actually didn't know about that when I did my 10:31 exchange. I didn't know you could pull a portion out. What we ended up doing was we rolled the entire amount of the proceeds over. I think I even added a small amount to get to closing. And then after two years, it was a commercial property. So we refinanced and we were able to pull all of our. Actually more than our original equity out during that refinance. So that's what. Again, there are multiple strategies. And I tell people if you're paying taxes on your real estate investments, you're either doing it consciously or you're doing something wrong.

That's true, absolutely.

So is there. You mentioned you've done some. I'm sorry.

I was going to say sorry. You see a lot of folks too, when you're younger, they tend to look for growth strategies. So they're exchanging into properties that are going to grow in value and probably produce cash flow. And then the closer you get to retirement or in retirement, then the strategy normally is, I just want cash flow. I'm not necessarily worried about growth. There's obviously all sorts of strategies out there, but that's one way to take a look at it.

Yeah, no, I love that. Again, that's one reason why I call multifamily the holy grail, because you can get a little bit of both and you can push more towards the cash. You can push more towards the growth. You mentioned you have done transactions ranging from several thousand to. Would you say $340 million. At what point does it not make sense? Do the cost exceed the benefit?

Good question. Generally, the costs never exceed the benefit in most cases, unless it's really small. The $10,000 transaction was funny because we actually recommended the client just sell it, pay the tax and not worry about it. Some margin there where it just doesn't make sense per se.

That's a small thing.

I would rather pay you than pay the irs.

I got to respect that. I got to respect that.

It's like, okay, good point. So it's really a. There's no magic number. Generally, 1031 exchange fees range typically from 750 to about 1000 to maybe $1200. So, you know, that's the range you look at and then you compare to what taxes you would pay. And if you're going to pay 2,000 or $3,000 in taxes, I'd probably just pay the tax and not worried about the 45 day deadline. And each person's got a different threshold. They just have to figure out if, you know, is there a threshold, $5,000 in taxes or what have you. Other than that, there's really no magic numbers. Whatever the investor's comfortable with.

Yeah, well, I have to agree with that investor that I'd rather pay you 2 than the IRS. Well, I'd rather not pay either of you if I can help it, but that's right. So you mentioned the 45 day window. If you could walk us through the mechanics. So let's go back. So I'm selling a property and I come to you, I say, hey, Bill, I'd like to execute a 1031 exchange. I want to be tax efficient here. Walk us through what that looks like on a timeline and mechanics. So if anybody's listening says, okay, this sounds like it makes sense, I want to take advantage of it.

Sure. And I guess the first thing I would say is if you're going to remain in real estate, you should try to do a 1031 exchange in most cases. And if it, if you can't find property or it doesn't make sense, what have you, then let it fail. And there's no penalty for a failed exchange other than you pay your tax.

Okay.

Now some people go in and go, I just don't want to deal with it. Or they just go into it and they pay junk just to defer the taxes. And sometimes you just pay the tax. So. So part of that, you take all that into consideration while you're going through the 35 and 180 day period. So using the example that you outlined in your book, you sell the single family property the day that home sells and closes. And this closing is the trigger point. So when it closes, that triggers your 45 calendar day identification period. So you've got exactly five days to identify what you're going to acquire. Then after the 45 day period, you have an additional 135 days to complete your 10:30 exchange. So that means you're closing on whatever your acquisition properties are going to be. So it's a total of 180 days. And one of the statements out there often is it's 45 plus 180. It's not. It's a total of 180. The first 45 days is your identification period and you have an additional 135 days after that.

Gotcha. Now if I'm selling that property, I can't touch that money as it goes through. How does that all work and how do we make sure that we're complying with all the rules that the IRS has on that?

Good point. Because that brings up kind of an ancillary point, which is you have to have your 1031 exchange set up before closing occurs. Is when the closing occurs, whoever is listed as the seller in that transaction has the right to receive the proceeds. So if the 1031 exchange is not set up prior to closing, then the seller, the taxpayer, has the right to the proceeds. So even if they say don't disperse the funds, I'm going a 1031 exchange, that won't work because they still have the right to receive the proceeds. So when you set the 1031 exchange up and put that in place, the transaction, the purchase and sale agreement, if there's any escrow instructions, they are assigned to us as the qualified intermediary. So when the closing occurs, we have the right to the proceeds, not the client. That way the, the taxes are deferred. So that's the most important part is make sure that 1031 exchange is in place prior to closing.

Gotcha. And then you hold those funds for that up to 180 day period until that the other property is identified and closed upon. Is that accurate?

Exactly. Yep. And so the closing occurs, they're going to send out the closing statement. It'll have a net proceeds number that's wired to us. We'll deposit that in qualified trust account for the individual that's doing the 10:31 exchange.

Yeah, when I did it, I've had a lot of closings and it was pretty seamless and pretty easy from my perspective, it was no big deal. Now, you made a comment, you said the money has to go into that account. Is there something called a reverse 1031 exchange where you can kind of do it after the fact?

There is, in fact, especially in today's market where you've got fast paced market bidding wars, multiple offers, etc. The reverse exchange allows the investor to buy first, which means you actually can close your acquisition first. Then you have 180 days to close on the sale of your current property. So it sounds easy, but that's more complicated, there's more involved, there's more costs involved, etc. Personally, if I'm doing an exchange, I would do a reverse exchange every single day of the year because it takes a lot of the risk of the 1031 exchange you close on your property. You know you've got it. So you don't have to worry about, what if I can't find property? But the downside is your equity is still trapped. So how do you go buy replacement property when your equity is still trapped? So that's the problems you have to solve up front. Yeah, if there's a lender involved. Lenders are not terribly thrilled with the reverse 1031 exchange because we have to take title to one of the two properties, either the one you're selling or the one you're buying. So that's where the complexities come in in terms of structuring the transaction. Depending on lenders and all of that, it could be a lot more complicated. The fees are typically anywhere from five to say, $10,000. On a reverse exchange, we're at 68, 50 for a plain vanilla reverse. But it certainly takes a lot of the risk out of your 1031 exchange because you actually close on the property.

Yeah, that doesn't sound so bad if you're buying a few unit building or a single family residence or something like that. But when you're buying a $22 million apartment building, it gets a little more challenging, I imagine.

Absolutely. Market especially is tough. You've got the space market, low inventory, multiple offers, bidding wars and COVID 19.

Yeah, no, absolutely. It's been a wild year. We just closed on two transactions here in the last month and yeah, I didn't know if we'd do anything this year when Covid hit, but so we are hearing a lot of things going through the election cycle here. As this podcast airs. We're going to be rolling into 2021. What are you hearing? What are you Seeing Bill, when it comes to the 1031 exchange, I remember hearing Joe Biden talk about it a little bit here during his campaign.

Absolutely. Certainly on the agenda for the new administration coming in, the first thing to remember is that almost every single administration back quite a while has submitted some type of suggested or proposed change to 1031 exchanges. There's only one or two interesting that didn't. So a lot of people focus on whether this is a Republican or a Democratic thing or what have you. And it's not. Everybody's trying and we've managed to explain the issues in the past and talk most of them out of those changes. So really, it's an educational problem today. So the current administration has done the same thing. They're proposing to. I would say they're probably describing it as significantly reduced 1031 exchanges. I think for most intensive purposes, it's probably eliminating most 1031 exchanges. And what they're proposing is that if you make more than $400,000, you don't qualify for a 1031 exchange. If you make less than $400,000, you do. And so most people are saying, well, less than 400. So it's not a problem. The problem is you sell real estate. In one particular year, your adjusted cost or, sorry, your adjusted gross income probably just went over $1,000. So you may not normally make over 400, but when you sell real estate, it's very easy to go over that $400 limit and not be able to do a $10,000 one exchange transaction. So that's really the issue. Fortunately, we still have a lot of unanswered questions today, but the way it looks, Biden will be the president. It looks like most likely scenario, the Republicans will retain the Senate and the House is still under the Democratic control, but the margin has shrunk a little bit. So I think what we're going to have is nothing. Yeah, I think President Biden will probably introduce legislation to increase taxes and probably try to eliminate 1031 exchanges. And the House will probably pass it and the Senate will probably kill it. So we're probably going to have a good check and balance that'll solve the problem. But regardless of what happens, we need to continue the educational process. We've been reaching out to congressmen that have known relationships with Biden so we can educate them on why the 1031 should not go away and what the benefits are and what the devastating impact would be. They did.

Yeah. And you know, there's a lot of, a lot of property owners In Congress.

Absolutely.

So. But yeah, you hit on. Yeah, it's almost like the founding fathers thought about this when they developed the system of checks and balances that far back. So it's fun teaching. It's fun teaching my young 8 and 10 year old boys about this. So, Bill, I know you guys do more than 1031 exchanges. I want to get into that, but I also want to talk about other types of exchanges. So there's not just 1031 exchanges. I was in the life insurance industry. And there's also 1035 exchanges. Do you all do any of those? And can you maybe speak a little bit towards what the other types of exchanges are? And people may be saying, oh my gosh, what else can you exchange? Can you exchange cars, planes, life insurance? What else can you exchange out there?

Absolutely. So the first thing to note is that we've been talking about 1031 exchanges, and 1031 exchanges apply to anything that's rental, investment or business use. What a lot of folks don't know is the Tax Reform act of 2017 eliminated the ability to do personal property exchanges, which is anything that's not real estate. But that was at the federal level. Some states, like California. California is in conformity with the January 1, 2015 status of 1030 exchanges. They did not update anything past that. So in California, you could still do a personal property exchange. You defer the state taxes, but not the federal taxes.

Interesting.

1032S and 1032 exchanges are the exchange of really your stock and certain closely held corporations. Okay, 1033 exchange, now 1033 exchanges. There's still a lot of people who've never heard of them. 1033 is really coming to play where there's a natural disaster or an imminent domain seating. So natural disaster, fire, flood, hurricane, tornado, what have you, partially or fully destroys the property. You file an insurance claim, you get the check. That's considered kind of sale proceeds. Basically most people turn around, take money and reinvest by repairing or rebuilding the property. That's a 1033 exchange. They Interesting, but they should. The other areas where we like to talk about it is the eminent domain. So if, like, if your listeners are considering pretty and they're negotiating with some type of government agency that has eminent domain authority or taking authority, they could ask the government to actually threaten and say, you know, if you fail to sell your property, if you fail to close, we're going to take your property through eminent domain. They qualify for the 1033 exchange and that gives them up to anywhere from two, three or five years to reinvest, depending on what category they fall into. So some great planning opportunities there.

Interesting.

And going back to one of the questions you asked about how do you cash out with a 1033 exchange? You can actually pull cash out and not get hit with taxes. There's no tax boot for not reinvesting the cash in a 1033. The 1034 exchange was actually repealed in 1996. It was replaced with after the 121 exclusion. So today if you have primary residence and you've lived in it for two out of the last five years, you get 250,000 or 500,000 tax free. Well before that you could do a 1034 exchange. You sold your primary residence and if you reinvested and traded equal or up in value within years, you could roll over your taxable gain. So that was true. Kind of a rollover provision. And then you mentioned 1035. That's the exchange of annuities. You can exchange annuities for annuities. You don't need a qualified intermediary to do any of those other exchanges. So 1032s, 1033s, 1034s and 1035s do not have any type of third party intermediary to administer.

Interesting. I'm loving it. I'm sure you just blew some people's mind with all those numbers. But you can check out Bill's website as well. I'm going to give you a chance to go through that. So Bill, I know you do more than just 1031 exchanges. Like I was saying earlier, I teased it a little bit if you could share a little bit more about what the Exeter Group of companies does, what other services you provide, and then obviously where everybody can take a look and find you if they've heard something that may benefit them.

A number of years ago we went through a couple of year process of regulatory review and approval and once we went through that, approved as a trust company. So Exeter Trust Company is headquartered in Cheyenne, Wyoming. That does a couple of things for us. One is we are now one of the only qualified intermediaries that has direct both licensing, regulatory oversight and audit by a government agency. Most of the QI failures in my 36 years experience could have been avoided if there was government oversight. So we went down that path to better protect the clients. It also gives us the ability to roll out other products. So we rolled out self directed IRAs. Our focus there is not what typical banks or brokerage firms do. Our focus is Alternative assets we love here want to use the IRA to buy real estate, buy mortgages, deeds of trust, tax lien certificates, et cetera, LLCs, limited partnerships, they can actually do that through their IRA and it's the same RA, they just roll it over to us. As a brand new IRA custodian, we do title holding trust or land trusts. Very few people really understand those. And so we act as the TR for the land trust. When someone needs a corporate trustee to do that, we do specialty holding escrows. So if there's a large real estate transit that gets close, maybe there's some kind of a cash holdback and the escrow or title company will say we're not permitted to do that under regulatory authority because there's no real estate transaction, there's no title insurance, we can certainly handle those type of escrows. And then we just offer general custody services as well as a client just wants non retirement funds or assets to be held and accounted for and summarized in a statement, we can do that.

Awesome. So what's the best place to track you guys down if people are interested?

Good term, track us down. You can get us a number of ways. You can call me direct. Our San Diego headquarters number is 619-239-3091. Again, that's 619-239-3091. You can email us@askxeterco.com so it's a S K at E X E T e r c o.com or go to exeterco.com and ask for Mark Turok and he'll take care of you. He's our business development officer down here in the Southern California area.

Mark is the man and you guys are terrifically responsive. I really enjoy that about you. One question we always ask our guests on the show, Bill, and I'm excited to hear this from you, is if you can go back to your 25 year old self and give yourself some advice, what would it be?

Phew, I can think probably a lot. It's funny, if you knew today or back then what we know today, be in big trouble, wouldn't they?

Oh yeah, absolutely. No. People are like, hey, if I can give you money or go back in time to be 18 again, what would it be? I mean, take the time every time, right?

Absolutely, take the time. I think from my perspective, I was in banking back then, I learned a lot, but I didn't put a lot of the things into action personally that I should have. So my advice to me back then would be get off the bench. And do something when you're 25.

Love it. Take massive action, as Tony Robbins says. Absolutely love it. Bill, I've really enjoyed this conversation. Like I said, we got a little in depth in a couple different things. Please, if if you have something out there that you're looking to sell, looking to take advantage of some of these tax advantages, reach out to Bill and his team. Like I said, they're fantastically responsive. You might have heard about the self directed IRAs. Yes, you can take your IRA and invest in real estate. Reach out to Bill to learn how. Thank you for listening today. If you enjoyed the show, please hit like subscribe and get our free book@nextlevelincome.com Bill, thanks so much.