Invest Like A Pro With 1031 Exchange - Aristotle Kumpis

What's up everybody? Welcome back to the New and Experienced Investor Podcast. We have an amazing guest in studio with us today. Super excited. I'm Alex Barnett. I'm one of your hosts. I'm the new guy.

And I'm Joe Homs. I guess that makes me the experienced guy.

That's right. We're gonna need a lot of experience today, Joe, because we're talking about 1031 exchanges. Now, is this Just a way for the rich to keep getting richer, or is it a tool for the small man to build wealth? We're gonna find out. And let's ask the man himself, our guest, Aristotle Compass. What's up, man? How you doing?

Hey, Alex. Great to be here. I'm doing great. How are you guys?

Thank you so much.

Yeah.

Yeah. Why don't you jump right into it? Introduce yourself to the audience. How'd you get into real estate? What are you doing today?

Sure thing. Yeah. So, um, uh, name's Aristotle. I work for Excel 1031. We are a 1031 Exchange Qualified Intermediary. We'll get into that, what that means later for people who don't know. I might— so my background is I've been in real estate for about 16, 17 years. I started selling commercial real estate here in California. I got my license. I was just telling you about the company down the street here that, that I got my license from. And that kind of— I worked for a company who sold real estate license packages and I got inspired. I got to get my license. I kept on Hearing people call in and get their license, they're like, "I'm going to do this. I'm going to do that." I'm like, "You know what? Sounds pretty cool." Let me back up a little bit, actually. So my parents, my father, and all his siblings—they own a lot of real estate. And growing up as a kid, I would always see my dad driving with me in the car to get like to go get rent. But I didn't know what that meant when I was you know eight years old. I had no idea. We would go these different places. He'd hop out of the car for you know twenty minutes and come back. No idea what was going on, right? But here we are now. Shakedown.

Yeah. Go ahead. Yeah.

It's a shakedown.

Yeah. Shakedown. Yeah.

Yeah. The landlord shakedown.

Yeah. In fact, you know, my dad used to carry a almost like a building club. It was like a leather mallet, you know, inside of his car. Yeah. And I always used to play with that. I'm like, what is that thing? You know, I had no idea what it was until I got older. I'm like, man, that might you could pump someone in the head if they're not paying rent. You know. Been there, done that. Yeah. Yeah. So anyway, so fast forward, I get really interested in real estate investing or just real estate, I should say, in general. And I sort of got my license, started working for a commercial broker here in Orange County, and kind of got my feet wet. And then I started seeing people buying properties, and especially out of state. That interested me kind of quite a bit. So I ended up starting buying, buying my first rental property in Tennessee. Still own that today, actually still have that property. Kind of sentimental to me still, because I've had it, it was my first rental property. And then from there, just started buying more property. And then at some point, I got into 1031 exchanges. And that's what I do now. Because I'm an investor, I understand what investors are wanting to do or what they should be doing, and how they should be hopefully deferring their taxes and not paying taxes when they sell their investment property right then. And so I take my passion with real estate investing And I help people understand the 1031 IRS code, and we can hopefully get into that in a little bit.

Real quick, um, do you know why your mom and dad named you Aristotle? Because that's an unusual name.

Well, my father's name is Aristotle.

Okay.

So he named—

You're the second.

Yeah, well, you're the junior. Yeah, I guess.

Okay. But do you know who Aristotle Onassis was? Of course. Okay.

Yeah, of course. He was a billionaire. Oh yeah. Yeah, in fact, somebody actually— I was calling a client today, first time calling this client, and they said, are you related to Aristotle Onassis? I said no. The guy said, well, you know, if you were, you probably wouldn't be calling me on the phone. Yeah, yeah. So, but no, I wish, but no, absolutely not. But okay, more so, people always say, oh, like the philosopher Aristotle. You guys know who he was, right? Yeah. But believe it or not, some people don't know who Aristotle is, a philosopher. They— who? Never heard of him.

Yeah, for those of you who are young, then don't know who Aristotle Onassis was, um, he was married to Jackie Kennedy. Did you know that?

Yes.

You did?

Yeah.

Oh, you're old.

And he had boats and, uh, yeah, yeah, all that stuff. Logistics guy.

Yeah, yeah. So anyways, that's, that's a side note here. So let's get back, let's get back to the topic.

Okay, yeah. So the government recently has been, you know, had the 1031 exchange, or I guess the Biden administration, let's say that the Biden administration, they're saying that they're calling the 1031 an indefinite interest-free loan from the government and said real estate is the only asset that gets this sweetheart deal. Are they wrong?

No, they're not actually. So do you want me to explain to your audience who, what a 1031 exchange is? Please.

Absolutely. Yeah.

So if you don't know, you've got some paperwork in front of you. But if you don't know that the IRS Code 1031 has been around for over 100 years, it originally started with farmers trading land. And I guess at some point they said, hey, we should not have to pay any kind of taxes when we sell this since we're just swapping the land out. Hence the code was born, the 1031 code. Kind of not to go off on a tangent here, but there's a 1033 code and there's a 1035 code, if you guys know what those are. So there's all different kinds of codes. We got the luck of the draw, called 1031. But what this is, is this is a— the IRS allows someone who owns a property that's used for investment or business purposes, they allow you to sell that property and purchase another property using those proceeds, using a 1031 exchange, and defer the tax. So basically, there's no tax, capital gains tax that they have to pay at the time of the sale. It's deferred. Into the next property, and so on and so on. So now eventually when you cash out of the property, then you'll have to pay that capital gains tax. But for the time being, if you're going to sell an investment property, and I'll talk about in a second here, like what, like, you know, because there are some, there are some guidelines in terms that people have to follow in order to do a 1031. But, but, but when it comes to a 1031 exchange, If you're, if you're going to sell an investment property and you're just going to buy another rental property or investment property with the proceeds, it makes sense to do a 1031 most of the time. There are some times where it might not make sense, but don't cash out and buy another rental property, do an exchange because you can defer those gains.

Okay. And so bringing it back to, you know, the politics and bringing it under fire, you know, it's always probably it's the Democrats saying this. Is this because the wealthy have used this You keep exchanging and then whoever is exchanging passes away, the next generation gets a step-up in basis and now the taxes are gone, right? That they owe. Is that, am I correct in thinking that?

You are exactly correct. Yeah. So what Alex was talking about is, so if you keep 1031ing over and over again and then you, once you pass away, if you, That property goes to someone like an heir or something like that, kids or whatever, they, and they decide to sell that property, they will not pay your capital gains tax, which is pretty awesome. So it's definitely a wealth generational tool if you want to call it that. Yeah, you're right. So let's say someone sells a property or someone passes away, their son inherits the property, they end up selling it 30 or 60 days later, they're only going to pay taxes on what the market value of that property is. Which is great. Um, what if I had, you know, $800,000 of gains in the past? Doesn't matter. My son would never have to pay for that. Pretty amazing.

Wow. Why do they hate it so much then?

Who?

The Biden administration.

What don't they hate?

Yeah, that's true. Joe, I'm sure you could weigh in on that.

Well, they hated it because what you just said, that they think it's for the rich.

Right.

You know, but it really is not. It's for everybody. It's like every law. In this great nation of ours. It's, it's for everybody. You just need to know how to apply it.

Yeah, absolutely. And I, I read Tax-Free Wealth, which is a really, which is a really good book. And he kind of just brings the whole point that the tax code is actually written to get investors to, you know, build the real estate and develop. And so that, that's the reason why these, they wanna call it loopholes, but it's literally the, the tax code is written like that. It's not a loophole. It's just if you know how to use it or not.

You know, the step up in basis is amazing. It's only amazing to the heirs. There's only one person that it's not amazing to.

Well, that guy's in heaven though, Joe, or a girl. So that is amazing.

Yeah. I don't think so.

Depending on what you believe, or you can come back as a squirrel or whatever you believe.

Oh, my dog chases squirrels. I'm not gonna come back as a squirrel.

You come back as Hamlet.

As a dog, yes.

But you know, the other person that actually— who doesn't like it, or who— I think what you were talking about is the IRS. Of course they don't like this because when you sell a property, they're not— they're not collecting that tax from you. Correct. So that's correct.

Why don't they have enough?

They do.

They do. But I don't know about—

I don't know about you guys, but I don't want to pay any more in taxes than I have to. I don't think anyone wants to.

No. Well, pay your fair share and we won't have a problem. Okay. Okay. Whatever that means. Especially being in here in California. Yeah. California needs a lot more taxes in case you haven't heard.

Oh, we just got the new gasoline tax. Right, exactly.

And we, we know where it's all going. It's definitely not going to the roads or the schools or anything like that. Um, okay. So, I mean, some people call this a loophole. Um, when you are first Explaining this to someone? Is it— are you usually getting in touch with them? Are they getting in touch with you when they have like a property, they don't know what to do with it, and then you're pitching them this? Or how does that go usually?

Great question. Usually they're contacting us to— I would say like at least 60% of the time, 70% of the time they're contacting us because they are selling a property or they're getting ready to sell a property. And they said, hey, my agent Told me about this 1031 thing, and I don't know, I kind of heard of it. I've read some stuff, but can you walk me through? And so what my role is, part of my role is to, um, do a cost analysis to see if it makes sense for them to do a 1031, right? Because there are chances where maybe it doesn't make sense for them to do one. As much as I would like to earn their business, I want to make sure that, that they qualify, or maybe they don't qualify, and I can tell them that. I'll give you a perfect example. Uh, just a few days ago, um, someone said, hey, I was a joint tenant in this rental property that my mom and I owned. My mom passed away in April or March, I think is when it was. And I need to do a 1031 exchange because he probably hears rental property capital gains, right? But he actually does not need to do a 1031 exchange because his mom was on title with him. And so that's a benefit there. But, but yeah, but I was able to kind of help navigate him through that and be like, hey, no, you don't need to do one. Now, I'm not a tax accountant by any means, right? He did speak with his tax accountant after we spoke. He said, hey, you're right, Aristotle. My accountant said the step-up basis will take into effect and I don't have to do an exchange. So I always tell people, talk with your accountant because I'm not a tax advisor or an accountant, but I know the 1031 code and I know kind of how to evaluate stuff. And so I can help people navigate that.

Perfect. Now, are you, And we can get into this next, but I know there's a certain, there's a certain step that you got to do it and there's a, there's a timeline and a clock that you got to watch that a lot of people mess up. Are you like a custodian? You help facilitate that, or how does that, how does your role work?

Yeah, great question. So I mentioned earlier that we're a qualified intermediary. Some people call us a commonator. That's another word for us. So we do a couple different things. We, first of all, we hold your proceeds. Your funds when you sell your property, so you don't touch them. The moment that those funds—if you sell your rental property—the moment that those funds get wired into your bank account, you can no longer do a 1031 exchange. That happens too. Some people will call me and they said, "Hey, I just closed my property a week ago. I want to do a 1031 exchange." Can't do that. Yeah, you can't. You can't go retroactive or anything like that. It's just once it's done, it's done. So we hold the funds. We hold the proceeds, so you don't touch them. And then when you're buying your replacement property, we would wire those proceeds to your new replacement property, right, per your instructions, escrow and title and all that stuff. We are also making sure all the documentation is correct. This is a big thing. We send out an exchange agreement and you have to look over that, make sure— we also make sure that the title of the property matches the purchase contracts. We verify all that stuff. What's really cool about our company, we have an attorney that works for our company. And he double checks everything for accuracy and everything. So we have professionals that work with on our team. So we're doing multiple things. We're holding the funds, we're making sure that the agreement's set up the correct way, and then we're making sure that you follow the guidelines. I think you were talking about the guidelines here, right? Do you want me to go in depth on—

Yeah, let's do it.

Okay, cool. So kind of the rules haven't changed. I get people that call me and said, I've done an exchange 20 years ago. Are the rules the same? Yep, they are pretty much the same. Nothing's changed. A couple of things here and there, but nothing major. So this is what trips people up a lot. So let's say, Alex, you sell a property, you're selling a rental property and you close today. All right. From today, the day closes, you'll have 45 calendar days to identify your new property. And do you know what that means? Identify? Do you know?

I just have to have it picked out and submitted. To somebody? Yeah, to us. Okay. Yeah, exactly right. Exactly right.

So we send you an identification form electronically, and you would list the addresses of the properties that you want to buy. Address or addresses. You got to do that within 45 days. You don't need to close on the property within the 45 days. You just have to identify it and say, "Hey, I found a property," or "Here are these three properties. I want to I want to potentially purchase one of these properties." All right. Most people will identify the property on the list that we give them once their offer gets accepted. That's what most people do. We do have people all over the place, right? Because they're like freaking out. They're like, 45 days. Ah, like I'm going to list a property here, a property there. And so but you just have to narrow it down somehow, right? There is no way to extend that 45-day period. Now, here's the thing. That identification period, it's not like it's a timer that the IRS puts on us. It's more like I should have told you earlier, earlier kind of explain this a little bit better, but more like an extension of the IRS. A qualified intermediary. Whatever the rules that the IRS has is what we interpret or we put out and interpret to our clients. So what the 45-day— that's in writing. We keep that. It has to be signed by the 45th day. Right. We keep that in case we get audited because we do get audited from time to time from the IRS.

Mm-hmm.

And if they find that we're extending all these timelines and all this stuff, then we would be in big trouble. So we have to make sure that you're following the guidelines and that we're following the guidelines. Then from that 45-day— I'm sorry, then the day that you close as well, you'll have an additional— you'll have a total of 180 days to close the property. So 45 to identify. And then if you want to think of it, another 135 days to close that property or properties. So 180 days total for the entire process. The only way that that can get extended is if you're in a natural hazard area or like, let's say, like the LA fires that happened last year, last January. If you were living in that area, even though you were selling a property in Texas, you were doing an exchange, but you live in that area and you were affected, you were displaced, you would have a 120-day extension. Yeah.

How nice of them. Yeah. I did an exchange and closed at day 179.

Geez, Joe, that's not like you. Why? Tell me about it.

It was— I was exchanging from a new build that I purchased and sold in a few months. Back then, we used to do that. Because the builders sold it to me at $125,000. They hadn't built the place in January. And then by October, I purchased the place. And then I put it back on the market and sold it for $175,000. So I had a $50,000 increase in equity.

And how about how long of a period was this?

8 months.

8 months. Yeah. Yeah. And so, uh, from there I went to the 1031 exchange and I bought another new home.

Ah.

And they were dragging their feet to close it. And it was literally, I'm calling day 179, are we ready to close? And they closed it day 179.

Wow.

But you know that I would never normally do that. It's not my fault, but You know, I thought I was going to lose that exchange.

Let me ask you a question on that. Okay. Did you ever get audited for that, like down the road?

Never.

The reason why I ask is because most accountants and CPAs, they will want you to have hold the property for about 2 years before you do an exchange. Okay. What you did is called an aggressive exchange.

Whoa. So I was aggressive. This was— I want to say 30 years ago. So maybe they weren't being as aggressive as they are today.

And the price point was like $180,000, you said?

Yeah.

Yeah. So like on a lower price point, they might not care so much. Yeah. Um, but if it's a million dollars—

It was almost— what you're saying is it was almost like a flip. Exactly. And they didn't like that. No. Yeah. And I've learned since as well that, um, they would like to see it rented out for a year. As well. Yeah, at least a year. But, uh, it worked. Maybe I was with one of those companies, not yours, obviously.

They're not around anymore.

Yeah, that, uh, let me do that.

Go ahead and nod at us because we're not around anymore.

Yeah, but let me do that.

So, but that brings up a good point. Uh, another, um, part of the guidelines is that, yeah, um, 2 years is better to own and do an exchange on a property. So if you sell, if you Buy a new property and you want to exchange that, hold it for a year to 2 years minimum. You know, that's kind of what they recommend. Yeah, it's funny because in the IRS code there is no specific date in there that says you have to hold it for so long. Okay, so it can be challenged though, especially in California. It could definitely be challenged. And if it's a million-dollar exchange, I got a million-dollar property, which is like every property now.

I had a really, really good, excellent CPA. Good. Just, I mean, amazing.

Maybe he worked, maybe he kind of, you know, did some magic for you.

I don't know. No, I'm my own CPA, so that's why I'm saying that.

Oh, yeah, yeah, yeah.

I was like, who is this guy? I do my own taxes.

Right.

Yeah. If anybody's going to get in trouble, it's me, and my CPA's not going to turn me in, so I'm good.

Yeah. This is where they kept all those files in an actual file cabinet too, so no one's coming after you anymore.

That's right.

Yeah. Okay.

Yeah, they've lost a lot of that stuff, haven't they?

Yeah, yeah, exactly. It's in some bunker somewhere. What about, people always ask this, primary residence. Can I, can I 1031 my primary residence?

That's a great question. And the answer is you can exchange a portion of it, right? You know about this. All right, you know, okay.

So— I just wanted to see if you knew about it. Oh yeah.

Yeah. So, you know, so if the property is used— is if a portion of it is being used for business or investment, you know, you can exchange a portion. So let's say you have a— throw a couple of examples. Let's say you have a 4-bedroom house, you and you live in it by yourself, but you, you know, you occupy 2 of the rooms, one for living, one for office. Then you rent the other 2 rooms out, right, to just random strangers on Craigslist or something because you maybe do that. That, that percentage of the house, let's say it's a 2,000 square foot home. Now, your accountant might say that house qualifies, 50% of it qualifies for rental. 50% is 2,000 square feet. So 1,000 square feet you can exchange. So you can exchange that portion if you need to exchange it. You might not need to, but if you need to, you can do that. Another example would be, I met a real estate agent about a year ago. And his spouse, his wife, owned a daycare business out of the home. And I believe he said that his accountant told him it would be like 50% of the house. It's a lot, right? It was. And they had a huge gain. The only reason why you want to do this is you guys are agents, so you guys know this. But, you know, you can take the homeowner's exclusion, right, for the first $500,000 of gain.

Right.

But a lot of people usually don't go above that. But if they do go above that, And you have a business or something, then yeah, you can exchange that. Let's say you have a million-dollar gain in your primary home. You've owned it for 30 years and it's gone up so much, and you're like, "I don't want to sell my house right now because I'm like I'm going to have a huge gain in there." You have a couple options if they're not renting the rooms or anything like that, or business. A home office doesn't really do that much, just so you know. Home office is like 10 to 20 percent. Doesn't really do a lot. The best thing to do in that scenario is if you have someone, a client who wants to sell their home or needs to, but they just don't want to because of the capital gain, they could just rent it out, you know, move out of it, rent it for a year to 2 years, and then sell it and then do an exchange at that point if they really wanted to do an exchange. That's what I would do if I had a home. I agree. I'm— if I'm like, you know, I'm 48, but like when I'm like 80 years old, I don't want to be renting my rooms out to some kid just to get, you know, just to exchange. I would rather just move out of it, rent it for a couple of years, and then sell it that way. So.

Correct. And that's what I was going to say. I think that's the best choice is to move out. Rent it for 2 years and then do the 1031 exchange. And you still get the 121 exclusion, which is the $500,000 you were talking about. Right. So you have best, best of both worlds in that scenario.

Good point. Yeah. I forgot to bring that up. Yeah. So you do get to take the exclusion plus you get to do an exchange.

Correct. Yeah. That's great. Correct. Yeah. I just saved you a bunch of money.

That's great. Yeah, I know. That's—

Unless you want to live with a bunch of kids at 80.

Eh, we'll see. Start a band.

There's so many different variations too. I ran into another client who wants to, um, he has a rental property in Colorado, I think is where it was, uh, or where it is. And he's trying to be creative. He's like, I, he's like, I own, um, he owns like a metal fabricating business or something. I don't know what he does, but it's a small business. And he's like, could I buy a home, a property up in San Francisco? Like, that's where he lives. 'Cause he's trying to find this like really unique warehouse to buy, but it's just It's taken like years. I can't find this small industrial, like almost like a flex space, I think is what he's looking for, but he can't find one in his price range. So he's like, what if I buy a home with like a barn on it or something like a, like a second property or something on it? And I use that for my business. Absolutely. You can 1031 into that.

Nice.

Yeah. Yeah. And you know what? Sorry to interrupt you, but while you're talking about that, um, you always hear, uh, like-kind exchange. Can you explain what that means?

Sure. Yeah, absolutely. Like-kind exchange, according to the IRS, means anything, any property, real property that's going to be used for business, business investment, or trade purposes. So the way, the way I think about it is that you can exchange pretty much into anything except a primary home. Right. And a second home, like if it's going to be like your second vacation home. Now, if you're going to rent it out like a short-term rental, that definitely would qualify.

Yeah.

You know, but if it's going to be used for a primary, no.

So I can sell a condo and buy a 50-unit complex?

Absolutely.

Okay.

Yeah, yeah, yeah. There's really— you can buy vacant land. That's another thing people don't realize, that you can sell vacant land and exchange into a single-family home, or sell a duplex and buy a piece of vacant land, and you can actually build on that land too. I don't know if you know about these different exchanges. We could talk about The different exchange types. There's something called an improvement exchange. You ever heard of that before?

Mm-hmm.

So this is where you— let me back up here. So we have what's called the delayed exchange or forward exchange. That's when you're going to sell the relinquished property, 45 days, identify your new property, and then close on it, right? That's the regular exchange people call that. Then you have what's called the reverse exchange. You're aware of that. That's when you're going to buy your replacement property first and Then you're going to sell your relinquished property. This works great if you have like a unique property or— give you an example. I have a client right now. He owns 3 rental properties. He wants to buy 1 brand new property. He's like, I'm not going to be able to time the selling, the sales of all these 3 properties. Do a reverse and then take your time. You have 180 days to sell those 3. An improvement exchange is where you are going to buy like a piece of land and build on it so you can actually use the proceeds of your exchange And build on it. Now, in California, that doesn't really work well because you guys know how long permits take to get in California. That wouldn't work well. But in Texas or Florida, maybe it might take 30 days, 60 days to build on some land. You can do that. And then there's a reverse improvement exchange where you're going to basically do the same thing, build on land, but you're going to buy, you know, buy the property in reverse.

So, yeah. Wow. How big of a difference monetary-wise is a regular exchange versus the reverse?

Glad you asked that, because I'm sure you've heard it's expensive. A reverse exchange can be expensive. Do you want to— you want me to tell you what we charge? Is that— or no?

That's fine.

Yeah, I can tell you what we charge. So we charge a flat fee, right? We're pretty simple. Doesn't matter what the sales price of the property is. For the forward exchange or the regular exchange, we charge $1,250. A flat $1,250. That covers the sale of the property, property, and up to 3 replacement properties. The reverse exchange is $8,500, a flat $8,500. People say, whoa, why is it— why is it a big difference? Well, a couple of reasons. We first have to create an LLC on that for the replacement property, because what happens is when you buy that replacement property, before you close on it, we actually go on title. of that property. Because remember, you can't touch the proceeds, you can't do anything, you can't be affiliated with that replacement property. So we as a QI, qualified intermediary, go on title of that property until you sell your relinquished property, and then we transfer that property back to you. So, you know, $1,200 or $1,500 to create the LLC, that comes out of that amount. But it costs almost $1,500 or more to dissolve an LLC at the end of the year. So we have to pay for that.

California.

Yep.

California. Yeah. Most accountants are going to charge almost $2,000 to do that. And then we have filing fees and all kinds of other stuff that is in there. So we don't make a ton of money on reverse exchanges, honestly, because there's a lot of fees we have to pay to do everything.

Is there a way of you just transferring the LLC to me?

You mean instead of—

Instead, you're basically saying you're selling that Into dissolving it, you mean?

Yeah.

Um, no, no, you can, you can keep it, but then, um, but then you have to dissolve that, right? Somehow at some point, because it's gonna be like XYZ Main Street is what the address would be on the LLC typically.

Yeah, I like that.

You like that? Yeah. Yes, that's where people use your name, LLCs, right? At the street address. Yes. Um, so yeah, you can do that. And is it going to be deducted out of there? Probably not. You know, it's not going to save any money if that's what you're asking.

Okay.

Yeah, we don't, we don't deduct and itemize things like that.

Okay.

But great question though. But yeah, you can keep the LLC if you want to. Most people don't, but okay.

Yeah. Yeah. I'm just kind of thinking back to the timeline and I know a lot of people are just— they can't make decisions, you know what I mean? I mean, coming from the flipping world, it's like you see some people, they're like, white or white, I can't decide. And then, you know, it gets pushed out. Can you go over maybe some deals that you worked on where people just, they had a big tax savings coming and they did one or two things to just completely screw that up and then now they're left holding the bag? Does that happen?

Well, it can. Yeah. So that's a good question. There's really one thing you can do to like a failsafe. Mechanism, I call it, or a fail-safe vehicle that you can exchange into. So let's say you identify a property and you're like, hey, everything's going good. Maybe you identified it at the last moment and then you don't have much time to identify anything else, right? And you're going through the motions. All of a sudden the property comes back with the inspection appraisal. You're like, oh man, I really don't want this property, right? So you're like, well, if I ditch it, then I'm going to— my exchange is going to fail and I'm going to pay capital gains tax. So what I recommend, if people, if they're really struggling to identify something, are you guys familiar with the Delaware Statutory Trust?

Yes.

Okay. So that is a great way to roll your proceeds and defer your taxes if you just cannot absolutely identify anything. And for those who don't know what the DST is, or DST, Delaware Statutory Trust, not the deferred sales trust, because that can be confusing. There's a deferred sales trust. Delaware statutory trust is a vehicle where you are a fractional owner in a large commercial property, right? So, so you can take your proceeds, you can be a fractional owner of an Amazon warehouse if it's available, whatever, or a medical building or a 300-unit apartment property.

Mm-hmm.

And it's 100% passive. A DST is. So you don't have to worry about managing it. They manage everything for you. But the downside for a lot of people is they say, well, can I get my money back out right away? Can't. Usually stuck for like 5 years. 3 to 5 years is the average for DST. But if you have like a million-dollar gain, let's just say, for example, do you guys know roughly what the capital gain tax is in California? If you were— if you sell a property in California, regardless if you live here or not, but if the property's here in California and you sell it, do you guys have any idea what the capital gains percentage would be like if you have to pay taxes on that?

Um, federal is 20%, isn't it? Federal?

It depends on your income. 15%, 20%. Yeah.

Okay. Yeah, I, I didn't know that California would even charge.

Yeah. Oh yeah, yeah. So, so there's actually 4 different levels of taxes in the capital gains.

Bastards. Whoa, I got Joe fired. Okay, how would it— break it down, break our hearts right now.

So the, so the average capital gains tax, if you do not do a 1031 in California, is anywhere from 30 to 33%. Okay. Yeah. So you do the math. If you have a million-dollar gain, you're looking at $300,000. Now, if you make more income, if your income is, I think it's like $450,000 or $500,000 a year, you're looking at 35%.

40%.

Uh, my father-in-law says he doesn't have to pay any capital gains if he sells his house for some reason. Why is that?

Yeah. His primary home?

Yeah.

His primary home?

Yeah.

Yeah. Because he has the exclusion.

Okay.

Up to $250,000. Up to $250,000.

Okay. So $250,000.

$250,000. Okay. But after that, he'll get the 30%. Of course.

Absolutely.

Yes. Oh, dang. Okay.

Trump is trying to pass that law. You've I've heard about that. He's trying to, he's trying to give every homeowner like unlimited, like zero, like just—

Oh.

Yeah, no pay taxes, right?

Why should you pay taxes?

I mean, yeah, 'cause you know, you know why? Because people like me are stuck in my home. I bought it for $160,000, it's worth $1.4 million. I'm not gonna pay Uncle Sam taxes on that.

Move out, rent it to me for 2 years.

Okay. You can live there for a month.

$2,000 each?

Well, you don't like that number?

No.

No?

No. Have three more kids, and like we each have their own room.

It's not near the beach, and you're a beach person. It's by the lake. It is.

You can put a beach in the backyard, right? Put some sand in the back.

Yeah, there you go. A sandbox. A sandbox. Yeah, the old sandbox play.

So the the thing is though, if Trump did that, then there would be so much lost revenue for the cities and the counties, right? I mean, like that money goes towards schools and everything else, right? So. It's great for homeowners, but like, if you look at the big picture, I don't— that's definitely not a solution. I don't think getting, getting rid of the, of the, of the capital gains tax for homeowners. Now, should you raise it? I think you should increase it.

Okay, let's, let's, let's say this. Let's give him an idea. Let's allow everybody that is 65 and over to do this.

There you go. Yeah, that's possible. Yeah, just like what they did with the property tax out here. In the last several years, right? Like if you're how if you're is it sixty-five and you buy new property, your property tax goes with you. Is that how it works?

Yes, yes, yes.

Yeah, but I don't know what proposition that was.

But yeah, Prop thirteen.

No, no, it's nine thousand nine. Actually, I think it's ninety. I think yeah, yeah, but ninety somewhere around there.

But but Trump, yeah, you should do that. Or you know, given the economic times, everything's more expensive. Homes have gone up. Maybe increase the ceiling from five hundred thousand for married to like eight hundred, whatever it might be.

A million. Well, yeah, I mean, you're going to ask for something, you may as well ask for something up there. Yeah, go to the straight mill.

That's like peanuts these days.

It is. Yeah, that's, you know, average price.

Um, but going back to what you were saying, yeah, the DST would be a solution for someone who just like runs out of time. They're like, hey, you know what, I'm panicking. You can identify a DST within a couple days. I mean, we have some partners that offer DSTs. You just read through the, the prospectus or the, the financial analysis and pick what you want. And boom, you're off to the races and you can identify that.

In fact, one of our guests talked about that. So look at the old episodes and search for that information. That was his name?

Gaston, yeah. Gaston? Gaston, yeah. But also, just to answer the tail end of your question, I've never had that happen where someone's like, oh my gosh. Now I have Had people not purposely. I had someone who lost her job. They they went they were in exchange, and their their relinquished property closed. And this was like recently, like this this year, maybe end of last year. And they lost her job. They're like, "I don't think I can. I don't think I can qualify for financing." He could have got a DSCR loan honestly, but I think he just was too. He was like, "I'm not sure what my financial situation might be. Maybe I'm." Won't be out of a job for a year. He didn't know. So he's just like, I'll just take that. It was in California. He's like, I'll just take the tax hit. It was pretty big. It wasn't a million dollars gain, but it was, you know, substantial.

Yeah. So he could have gone into the Delaware statutory trust and got an income from that every, you know, month or whatever they pay. He should have.

But people panic sometimes. But I will tell you, there is a little bit of a loophole— a loophole, but Something that you can do is when you have enough write-offs, let's say you have other rental properties and you have a lot of other write-offs, maybe cost segregation is what we were talking about earlier on another property or whatever. On paper, all those losses, if you have a lot of other losses, it could help offset the gain that you already have, right? So it's not like, you know, I mean, if you only have one rental property and that was the one you sold, yeah, you're probably not in good shape. But if you have other passive losses and things like that, that might help lessen the blow.

So, uh, not to be depressing or anything, but when somebody does lose, okay, that— what, what is the logistics? What is— what do you do? Like, do you pay them all the proceeds? Do you hold money back? Do you send something to the IRS? I'm sure you do all of that stuff.

What's the procedure?

Yeah, good question.

We knock on the door and hand them a big bag of money. Yeah.

Big checks.

Let me know when you're coming.

Yeah, exactly right. Um, so here's a couple rules that you have to keep in mind. It doesn't really apply to a lot of people because most people identify their properties. There's a very small port— a very, very small portion of people that, that their exchange fails, but not on purpose. Um, if you identify a property and within the 45 days— um, I'm sorry, let me back up. If you don't identify a property In 45 days. On the 46th day, we are required to wire your money back to you. Okay. Wow. Now, okay, if you identify but you don't close on that property, we have to wait till day 181 to wire your money back. Okay. So let's say on day 50, you've already identified a property, and on day 50, you're like, hey, this property is not working out for me. I'm not going to do my exchange anymore. You got to wait all those days. Okay. Till day 181.

And how much money are you sending me back?

The full amount.

100%. You're not holding back for—

Our fee, our fee we deduct.

Well, yeah, but you're not holding back, you know, like 10, 15, 20%, depending on what tax bracket I'm in?

So in California, you guys are familiar with the, um, the Franchise Tax Board withholding, 3.33%. Yes. We have to withhold that and send that to the California State Board, not the IRS, but just to So the federal doesn't require you to hold anything back. No. So when you file your taxes—

So I get to play with that money until I file my taxes.

Yeah. So a good strategy, if your exchange does fail, take your money, go to Vegas.

There you go. On black.

Yeah.

Yeah, put it on black and just try to pump up the profit.

There you go.

That way, when you have to pay your taxes, you don't have to pay a lot. I've said that, yeah. But the following year when you file your taxes, yeah, that's when you're going to have to pay those taxes.

Got it.

Because we'll send you form and everything that says, hey, your exchange failed, you know, and all this stuff. And so your accountant will know that information.

And they snitch you off to the IRS too. Pretty much that's their job.

Yeah. Here's, here's kind of a cool trick. Just again, this is a timing thing, but let's say you, let's say you identified a property, let's say in November or December, end of the year, you're identifying a property and you have identified a property and you're closing like in March or April of the following year. Right. If that situation happens and your exchange fails, you don't— and it fails like in March, you don't have to report that tax or that failed exchange to the following year.

Yes.

So let's say, let's say the end of 2026, your exchange fails into 2027. You don't have to report that till 2028. So at the end of the year, if you're in exchange and it fails into the next year, you don't have to report that to the year after that.

Okay, give me some time.

So there are investors that are smart about that and they're like, hey, like what you said, take my money, go put it in crypto or whatever you want to invest in, make some money on that. And then when you have to go pay your capital gains tax, hopefully it won't be as big of a blow because you've made some money with that money.

There you go. Make money with your money. Classic. No one's ever gotten in trouble for that. No. Now I'm wondering, I mean, you mentioned that there isn't really anything in the code that says anything about a timeline.

Uh, you mean as far as like how long?

Yeah.

The property has to be held for, right? That's correct.

So if I want to do this with a flip, do I need to find like a shady guy?

Um, that's where I need to— See, that's, that's the other rule, you know, that now that you mentioned it, I, I, you know, I, I didn't even know. I probably violated. You should rent your place out for at least 2 years.

Okay. You should, but—

You know, but that's the problem with flipping. You're not renting it out. Right. I know, but still.

There's nothing that says that. So technically you could.

Is that true?

So I, I, so I would not, if you came to me and you said, hey, I'm doing a flip, I would say you cannot do a 1031. Exactly. And I would say, you know, you're not a shady guy. No, not a shady guy at all. I would, I would say, no, don't do it. You can't do that. Right. Okay. Here's another thing. You guys have heard of the slow flip, right?

When someone, you never heard of it? Oh, oh, actually that's, I was going to be one of our, Over a year.

But well, yeah, let's just say like, you know, in California it's taking so many years, so many months and years to get permits and things like that. But you bought the property, but you're not— let's say it's been a year and a half. Okay. That you were intentionally intending to flip the property, but it took a lot longer. Yeah. That could be challenged. And the reason why is because there's no income on the property. And your intent is— if your intent is to flip it and if you ever get audited, they would go back and say, okay, you bought this property for X amount. Yeah. And you've been putting a bunch of money into it. There's no lease agreement. There's no no intent to rent it out. Now, if you have if you had like on the MLS marketing on the MLS, you could say I tried to rent it. It just never got rented.

Now you have to find a shady realtor.

I've seen listings like that. You know what I mean? I've seen listings that where they've been on there for a long time, and you're like, what is going on with this shady realtor trick?

Maybe try to maybe try to like. I mean, I'm not saying tax. I'm not saying anyone.

No no no no no no no.

But maybe you put it on the market on MLS for like several thousand higher than what the market rent is. And you're like, hey, like, this is not renting.

Okay, so it's not renting. I tried.

Okay, but we're not tax people here.

We're not tax people. This is not advice.

If you hold that property for longer than a year, then you're in a different category tax-wise because that's now long-term capital gains.

You are correct. Bingo.

Okay. Right. So you're going to be paying less than if you hold it, which is ordinary income.

Right.

So that's, that's a big difference. The income— not that we're tax guys, right? We're just throwing that out.

Just remember, what it comes down to is what is your intent? And if you have no paper trail showing that you were trying to rent it out, it's the same thing. Like, let's say you bought a vacation home that for a 1031 exchange, but you lived in it more than rented it. They would want to see like all your utility bills. They want to see your, your income, the lease statement, all this stuff. Right. And they'll do their evaluation. If they come down to it and say this is only rented 20% of the year and 80% of the year you live in it, you could be in big trouble for that. So yeah, you don't want to be audited. No one wants to be audited. Okay.

Well, so I guess the parameters only come from who's been audited, even though there's nothing in the tax code that says it needs to be two years and you need to rent it. Back to that again. I'm just asking like why? Who made it that?

That just accountants and CPAs. They've— I— you'll hear this over and over, like when you go to events and you talk to investors. Yeah, they'll say, oh, my accountant said 2 years.

It's consensus.

It is.

It's just consensus. But you could fight it if you wanted to fight the IRS, if you were a dumb A.

I was gonna say, you definitely need to be a dumb A.

No one wins against the IRS.

That's the one thing. Oh my God. Yeah, yeah, yeah.

Because then, because, because then if your exchange fails and they say, hey, this is not an exchange, then you got penalty fees you got to pay on top of that. And you know that I think they charge right now. The IRS is charging like 20% a day if you if you're not like filing your taxes. If you're right, it's crazy. It's a lot. It's a lot. So you don't want to be caught. So so so what it comes down to is yeah, you cannot do a 1031 exchange on a flip. And I talked to a lot of agents and they said, "Well, you know, my my client, my investor client said that he could do that." And I'm like, "Well, if you know, he said he could." Yeah, his accountant says he could do that.

I asked ChatGPT and it agreed with me.

Right. Right. I'll give you an example. I, many months ago, maybe this year, I think is what I spoke to an agent and they had a home listed in Palm Springs or something like that. And they did a complete like 180 renovation. It was like everything was like done from like from head to toe on this house. And it even said in the remarks, it said like, you know, took 2 years to remodel. And I said, well, okay. And the guy and then he said, my client's gonna be doing a 1031 exchange on this. I said, but Was it rented for those two years? He said no. It was being renovated for that for those two years to resell. To me, that almost—that's a slow flip. It sounds like he's flipping it, right? So that could be challenged in court. So there are people out there who say I'll just take the you know I'll I'll risk it and I'll just chance it. Yeah, you may not get audited. I don't know.

Yeah, but yeah, you gotta risk to get the reward. Oh, I just thought of something. We were. Rentivating it. So you're renovating it and you rent a portion of the outside to somebody.

The doghouse?

Yeah, or you just sort of make like, yeah, like a, like just some, some sort of structure. You rent it to the guys working on it.

Alex, I'm trying to teach you the right things to do, okay? I mean, if no one's ever heard of that. You can't come up with creative bad stuff to You know, put out into the ether. That's not good.

I'm just saying I don't see a problem with that. Do you?

That's the problem.

You rent it to the workers, they work on it for 2 years, you renovated it.

As long as you have a lease in place or something, sure.

Thank you.

And, and it's at close to market rent. So here's another—

For the, for the little doghouse, it will be. Yeah.

Here's another, here's another scenario. Let's say your mother or father owns a rental property. And they rent it to you. Let's just say you're the tenant, right? Or it could be any tenant, really, I guess. But if they rent— if they're renting it out, but they're not claiming the income on their tax returns, that's bad. That's bad. They're not going to be allowed to do a 1031 exchange, even though it's been a rental for 20 years. But I've been pocketing the cash the entire time. There's nothing to say that it was a rental property. There's nothing. So that will be challenged as well. I had a client, same situation. You know, he had a property and he just— he— or ADUs are a big thing, right? ADUs in the back of someone's house. If you're just pocketing the cash, can you 1031 that? Probably not. No, probably not.

Got to decide which one do you want? Do you want to play that?

Exactly right. It's tough. Yeah. Another, another— here's another cool— since we're kind of like on a creative spin here, you can 1031 into a rental property and then move into it as your primary home. And after two years, claim it as your primary home. That's another trick. So let's okay. This happens a lot. Let's say someone's been a landlord for thirty years. They're like, "I don't want to be a landlord anymore. I'm going to retire to Hawaii, but I want to buy a house in Hawaii. I want to live there. But can I can I ten thirty one into a primary home?" Answer is no. But if they buy that primary home and they rent it for a couple years, they they collect the rent. They follow a lease. They yep. And then they move into it and they claim it as your primary home. Then when they go to sell. That those capital gains are not there.

Oh, I'm doing that exact thing. That's what you're—

thank you. My dad did that 5 times. He had 4 rentals, a primary. He'd sell the primary, move into the rental for 2 years. He'd sell that, go to the next one. He did it 5 times. He never ever paid any taxes. Smart man. Yes. Wow.

Yeah, there you go. That's so— that's a really good strategy if you're kind of like at the end of your investing career, you're like, I don't want to be a landlord anymore. Either DSTs or buy another house to live in. In your situation, you could rent it out for a couple of years and then 1031 it into something else.

Yeah. My problem is my wife does not want to move into any of my rentals.

Yeah. Lake Elsinore could be a tough sell for somebody that's like—

San Juan Capistrano. She knows Spanish, right? Yeah. 2-bedroom, 1-bath condo.

Deep in the heart of—

She's not gonna go there.

No, she's not going there.

That's my problem.

Uh, we had a question from the audience. Can you sell a boat in a 1031 if it's used as a charter, as a business?

No, because that's not real property.

How dare you, sir?

That's a great answer. Yeah, it's not real.

Okay, so you can't do mobile homes either. No, unless it's on owned land with permanent foundation. Correct.

It has to be like attached.

See, that's a great question. Whoever asked that question, yeah, 10 stars. Okay, that's great.

That's a great question. Well, I thought you were gonna— I thought the, the, the listener was gonna say, uh, I rent my boat out and someone lives on it, right? 1031, right?

Still wouldn't count because it's not real property. Yeah, it's not like—

but it's international waters, so you don't have to pay taxes. Kind— not like kind.

Yes. Okay. You know what is like kind? Like kind is also, um, air rights and oil rights.

Oh, landman style.

Yeah. So like, think about— think of like cell phone towers. Yeah, right. Those guys have air rights. You can actually 1031 into a cell phone tower or something like that. You can, because they have air rights. Or we've had people exchange into land that has no oil well on it. It's, it's, yeah, investment, business, or trade.

What about a mine? Gold mine. I'm getting a lot of emails from like mines recently. I don't know what list I'm on. Yeah, I don't know. I'm on some list.

Maybe looking for a diamond or something.

I don't know. They're like, he's a married producing gold mine. And they're like, diamond mine. Diamond mine.

Well, but I don't think there's any diamond mines in the US because you can only do 1031s in US, right? Lithium. The lithium mines. Yeah. Well, it's, I mean, the land's being built. Yeah. Farmland. I would say, I would say, yeah. If it's land, you're good.

All right. It doesn't matter what it has in it. It can have oil. It could have diamonds. But there's no diamond mines in the US. Is that right? I never knew that. I don't think so.

I mean, I don't know.

Not that we know of. I don't know.

That's a good— not sure. Good question.

This is the part of the show where we— I and Joe, Joe and I have brought— got some videos here and I want to get your reaction, your cold, hard reaction to these people on the internet. Okay, cool. What am I watching on the screen here? Yeah.

Oh, this one.

I just put it on that one.

Okay. Yeah. Put it on this one. Okay.

Here we go. Let's check it out.

Don't do that. You can do a 1031 or a 721 or a Delaware statutory trust. Or there is a way. It's called a slow man's 1031. You have to do it in the same calendar year. I did this for our property in Montana. We sold 2 houses in Knoxville. We Had them 2 years, we're all in at $415,000. We sold 2 years later for $765,000. We took that money directly. So that would be ordinary income to us, plus capital gains, plus depreciation recapture. But what did we do instead? We bought up. We took $350,000 of that and we bought a more expensive property in Montana and then cost segged it. We wiped out all that bonus depreciation. Depreciation recapture, we wiped out all the capital gains. And because we're able to cash flow the property in Montana, we came out ahead. No tax repercussions to us at all. It's called a slow man's 1031. So, we didn't meet the 180-day rule. We couldn't do the exchange within 180 days because we never identified within 45 days. Because we basically did it within the calendar year and put it into service, we got the benefit of the cost seg all the 162, the 163, 168K, and we were able to offset what was coming back at us because it was a pretty big hit.

Don't do that. Mm-hmm. Yeah. So that's— take this off because it's hard for me to hear sometimes. So I actually call that a, like a lazy man's exchange is what we call that. Right. Okay. So you can do that. We were talking about that earlier, right? How you can do cost segregation. And basically use those losses to offset your capital gains tax. But you should talk with your accountant to see if it makes sense, because again, if you don't have enough losses— because I mean, for those who don't know what cost segregation is, it basically lets you take the entire 27.5 years on a residential property of depreciation and allows you to take it all up front. So let's say on a million-dollar property, you're able to depreciate $150,000 all up front. If you need those, those losses, yes. But, but, but yeah, but he's right. Yeah, he's right. You can definitely do that.

Yeah. Okay. So you're not actually doing like a 1031 exchange. It's just you're just offsetting. You're just— yeah.

But you have to make sure that you have all the numbers correct.

Yeah. To do that. That guy was like a tax attorney, so I'm sure he knew what he was talking about. But if you're going to just watch that video and go out there and attempt to do that, might not be a good idea.

Yeah. We have a couple of partners that we work with that offer cost seg stuff. And like, let's say, I mean, let's just say, for example, you had a $100,000 gain and you're like, I don't want to do an exchange on it. If you're able to depreciate, you know, $100,000, you know, from a cost seg study, would that offset all that? You know, again, I'm not an accountant, but I would think it would. Most of it.

Yeah. Okay.

Yeah. I don't like it because he called it a slow man. It should have been a slow person.

Yeah, yeah, yeah. I just call it a lazy exchange.

Yeah. Lazy exchange is good.

That's, that's, that's good.

Yeah, but slow man, you can't, you can't say that.

No, no, that's not good.

Can't say that anymore.

Biden is also targeting real estate investing by proposing to remove the 1031 exchange. And if you don't know what a 1031 exchange is, without going too much in depth about it, it's when you sell your investment property and reinvest the proceeds into another similar real estate property. So if I sell this duplex for $400,000 and then use that money to buy another duplex I won't have to pay capital gains tax on the proceeds of the sale of that duplex under a 1031 exchange. Biden is also targeting real estate investing.

He was, he was basically just explaining—

You can do a 1031.

Kind of how it works.

Yeah. Yeah. How it works, but also how Biden was trying to get rid of, he was trying to, I guess, get rid of it, or he was trying to put a cap on it, $500,000 cap, or limit the number of exchanges.

They've been trying to get rid, get rid of the 1031 code for Decades. It's not gonna happen, people. No, right?

Because I'm sure everybody in Congress or whoever is like doing it on the daily.

Sure, they are. Like, yeah, we're gonna let them know. Think about this. When someone purchases and does an exchange, just because IRS is not getting their, their capital gain, um, but think about the property tax revenue that that new owner is going to have to pay, right? That's new revenue. So it's not like it's their It's not like they're missing out or anything. It's not like it's not going to help them.

Yeah. Yeah, exactly. Yeah. Okay. This one is called Most 1031s Fail Before They Even Start.

So the single most important requirement is to use a qualified intermediary. They have to be involved prior to the closing of your sale. First of all, the 1031 is all about advanced planning.

All right.

As soon as you're starting to think about selling a piece of property, you should get involved with a QI to start to understand the process and let the process adapt to what you want to do. Absolutely. Okay, that's number one. Now, there are 2 timing requirements. You have 45 days to identify your potential replacement property Either closing or selling, you have a total of 180 days process. Now, 180 days doesn't feel like it's all that long. Actually, that feels fairly long, and it is, unless what you're trying to buy is a new construction. So you sell your property in June—

See, I told you.

You've got 180 days and you want to buy this property that's being built. Oh, let's just say it's in Southwest Florida and they swear it's going to be done by November so you can meet your 180 days, and then a hurricane happens. Yep. You don't have a choice.

Is this guy Tony Soprano?

So, um, he's absolutely right. So I'm a huge advocate of talking with someone before they even list a property, you know. I Like understanding who's on title, what they're looking to do, all that stuff. Because I have— I can't count the amount of times people call me when they're in escrow. They're like, hey, I'm closing in 2 weeks. My brother's on title. He doesn't want to do an exchange. We're in an LLC. Do you know like the headache that's going to create?

Yeah.

Because I don't know if you know, if you have an LLC in California and you're partners, you can't Just transfer somebody off that title right before you close. I mean, it doesn't work like that. So California highly scrutinizes this. It's called the drop and swap. You ever heard of that before? Yeah. They don't like in California when someone just on an LLC, when someone's like, I don't want to do an exchange right before you close like that. That is a— you're definitely begging for an audit at that point. Yeah. So you have to do that far in advance. If I know In advance, like months. I have a client right now; their parents and all the siblings are on title of this property in California, and they're going to sell it. And but but the parents are the only ones claiming the income, so they're they're the only ones that can do the exchange. So I told him like he's like you guys need to transfer get yourself off and off the title before you guys even list a property. That way it's far enough in advance where it's not going to be a problem. But he's absolutely right. Yeah, definitely.

Is it is it what's the easiest way to do it if it's in a trust or I mean what's the best I guess structure? I mean, I guess, you know, it can get messy if there's like 8 people on title and like 2 of the uncles don't want to, you know, sell or whatever. But trust or LLC is fine as long as everybody's on board.

Yeah. So the easiest thing to remember is taxpayer. Whoever the taxpayer is needs to be the same. So the same— the taxpayer who is selling has to be the same taxpayer who's buying. It's as simple as that. So, you know, let's say you have a property in your trust. You're the trustee. When you go to buy your new property, the lender's not going to give you a loan in your trust, right? It's in your individual name. But you're the— it's okay because you're the same taxpayer.

Right.

Right now, let's say your wife was not on the property you're selling, but she wants to be on the property that you're buying. Not a problem because you guys are probably filing joint taxes, same taxpayer ID. Right? There might be scenarios where they're not, though. You know, whether husband and wife are not the same taxpayer—that's a different story. But you know, in the event of a girlfriend, yeah.

Yeah.

But there might be a scenario where, like, they are two different taxpayers and they have the same name. Like maybe they got married, but they just—they didn't. They're not filing taxes together, that's probably going to be okay. LLC, same thing. If you're the single member of the LLC, you can definitely buy the property in your name and then move the property into your LLC. The, the problem, the challenge is when you have multiple people on title and someone to do an exchange and some don't. If it's individual names, not a problem. Easy to just get people off, right? Title can do that. But when it's in an LLC and you have like 3 or 4 siblings and like 2 of them don't want to do an exchange, you have to— what you have to do at that point is you need to take title and break everyone off to tenants in common. So everyone's like, let's say it's 4 siblings, it'd be 25, 25, 25, 25% of all kids in tenants in common. Then the other 2 people cannot do the exchange and the 2 people can. Got it. So, okay, good.

Immediately, okay, they don't want to do the exchange, like Just meaning they're not going to sign off on it.

They want to cash out maybe.

Yeah. Okay.

Okay.

They're going to— they're going to get taxed right away. I'll give you a situation.

Last year, I remember this woman was selling her property, I think in Long Beach maybe, and Belmont Shores, nice area. And her sister and her were in an LLC and they had other properties in the LLC. And she's like, my sister doesn't want to do an exchange on this. She just wants to take her cash out. She's like, "I closed in three weeks." Why did you do that? Well, that is going to be a problem because I was saying California scrutinizes the drop and swap. They don't like that. It's the only state in the country that does not like that. Come on!

Why? They love fraud.

Well, think about it. It should be right up their alley. You're not referring to the homeless scam, right? The homeless. Yeah.

You name it.

Yeah, they don't like that. So anyway, so you don't want to do a drop and swap. If it's in Texas or Florida, New York, it's fine. You can do them like right when you're in escrow, it's fine. But California does not like that.

So, you know, you bring up— we're almost at the end here, but you bring up a really good topic. You can do a 1031 exchange anywhere in the US. So you can sell a property here in California and buy one in New York or vice versa. Correct.

Okay. I even had a client recently that was that owned some vacant land in the Virgin Islands, U.S. Virgin Islands. You can do that. It's U.S.

territory. You can exchange. He sold an island. I wonder who it was. Epstein. Yeah, someone's gonna exchange Epstein's island for something real. Bill Clinton. I know. Yeah, yeah, yeah, yeah. He's still alive. He's living in the underground bunker.

Anywho, he's living with Elvis.

That's right. And Tupac somewhere in the Bahamas. Wow, Aristotle, you made 1031 exchanges really fun. I appreciate it. How can people get in touch with you?

Sure thing. So our website is excel1031.com. That's excel1031.com. My cell phone number, which I have on all the time, is 310-467-8122. Gotcha. So you can call me anytime there. Go to our website. You can kind of read about us there. We have some calculators on there that help people calculate capital gains. We have some information about exchanges, but you can always reach out to me anytime.

Perfect. And we have all that information down in the description box below. We are going to be back here next week. I believe our guest switched dates, so we're going to get somebody else. Okay. And it's going to be a good time per usual. Thank you everybody who watched live. Make sure to share this far and wide, and we will see you on the next one.

See you then. Yep. Thanks, guys. Bye. If you want some more advice on real estate investing, reach out to us one-on-one.