1031 Exchange - The Best or Worst Strategy? - LIVE Q&A

To a live broadcast where we're going to talk about one of the best tax strategies in the real estate world, the 1031 exchange. But it doesn't mean everybody should be doing it. Sometimes the 1031 can be a disaster. It can be something that, you know, the round peg and the square hole or vice versa, whatever, it just doesn't work. But people think they've got to do it and so they force themselves into this 1031 and it just ends up being a mess. So I want to talk about when a 1031 makes sense, when it can really help you in building your wealth, saving taxes, deferring taxes, all the above, and answer your questions. So it's going to be a Q and a. We're going to do it live. My name is Mark Kohler. I'm a CPA attorney, bestselling author, podcast or radio show host, blah, blah, blah, blah, blah. And I'm here for you. And I love small business, love Main Street America, and I love real estate. So I'm all yours for the next 45 minutes here and let's see what we can accomplish, Please. Few housekeeping items. Keep your questions to the topic today of 1031 exchanges, or at least real estate in general or selling real estate and why a 1031 might make sense or might not. And number two, watch out for any crap on here of these bots that are going to play like they're me making a comment to some of you about some bitcoin or some scam. I am not making any comments on here. So any face of me saying, oh, the coolest deal ever sign up here or whatever, it's typically through Facebook. These computer bots, whatever they are out of who knows what country, are just a menace. So please do not respond to them. It's not me. Ignore them. Please put your questions in there and I'm going to do my best to answer them for you today. So let's get into it and let me explain what the 1031 is about. Answer some of those general questions. And to kind of get you excited here, I want to give you a cool strategy that I had with the client where we paid very, very little tax. I don't think we, yeah, we paid a little bit of tax on this deal, but it was a multi million dollar project and I've had clients do it with just a couple hundred grand as well. It's a bit, it's a, it's a very unique way of approaching a real estate transaction. So let's go to the whiteboard. Jack, if you'll hook me up here. And let me just give you an example of this. We had a client that had a kind of this big old farm. And I kind of. I wanted to create this little edge over here, but we can do it like this. But they had their home on the edge of this farm and it was 50 acres. And then they also had kind of barn and equipment and all of this kind of other property here. And this was kind of the operations, if you will, of this ranch farm thing. So think of this. This is Yellowstone, right? John Dutton live over here with Beth. And they're killing, you know, killing it, kicking ass, but. All right, so in this deal, they're like, we got this $2 million deal, or it was 1.5 million somewhere in there. And they're like, we don't want to pay any tax. Well, what we were able to do was divide the transaction into three parts. So what we did is we did the sale of home exemption. Now, this is going to be a conversation we're going to have today because a lot of people try to turn their home into a rental property so that they can get the 10:31 exchange when the sale of home exemption is pretty awesome in and of itself. So let's just define that real quick. If you own a home and you've lived in it too out of the last five years, then that means it could have been a rental for two years and you lived in it for the last three, or you lived in it for these two years one and two, and then you made it a rental for three, four and five, as long as you lived in it for two of the last five years. So here's the five year look. If you lived in it two out of the last five years, then you can exclude 250 grand of gain if you're single and 500 grand of gain if you're married. So these two exemptions of income you could do over and over again every two years. You could do this over and over again. I once had a client that had a cul de sac and they bought on this cul de sac. There was kind of a home here that wasn't theirs, and then there was another home over here and they had lot A, B and C. And so what they did is they bought their home, build it, got a loan, all the normal gig. They bought all three lots to begin with and they built their home and lived in it for two years and sold it, took all the gain, kicked it over here, no tax this one they got a little lower loan, built their next home, lived in it two years, no tax, took all the gain, built their last home with no loan, all cash, no tax. So every two years they kicked into a new home and that's the sale of home exemption. And it's really, really powerful. And a lot of people try to turn their home into a rental so they can get the 1031 exchange. What is like freaking just take this cell of home exemption. Who knows? So anyway, we're back to this farm. Let's get our image back up here. So I've got this farm and there's a home over here. And then they've got these 50 acres and this kind of ongoing business operation. And there was hay and equipment, cattle and you know, all this stuff. Okay, so what we did is we did the sale of home exemption. When they sold the property for, sorry, it was around 1.5 to $2 million. When they did the sale, we bifurcated the sale into three parts. Part one was the sale of home. And so we made sure we allocated, I think it was around 700 grand to 800 grand towards the sale of the home and chewed up that sale of home exemption. So there was no tax on this, this piece of it. Then we took the, the ongoing operations and we did what was is called a charitable remainder trust. So this charitable remainder trust, we could sell that portion of the business and we create, we were able to keep all of this in which created a stream of income. We kept the IRS away. There was no tax on the sale of the business operation and all the equipment because you can't 1031 equipment, you have to 1031 property. Then we took the 50 acres minus the 2 acres of the home. So I guess we could say 48 acres. And that's where we did a 1031 exchange. And then we deferred the tax. And I think the client went out and bought two apartment buildings or was it a commercial building? It was two commercial buildings. That's right. So we didn't pay any tax on that. So when I said a moment ago, they did pay a little bit of tax after they did the sale of home exemption, they still wanted some cash. So they took a little bit out of the 1031. And that's called boot. And they paid a little bit of tax on that. But for the most part, we did this whole deal tax free and, or I should say tax deferred because we took the gain from this 48 acres in, kicked it into two commercial buildings. Anyway, that's how you can get creative here. So let's just talk about again what the 1031 is exchange is about. And then we'll get into some Q and A here. So here's how it works. Let's say you've got a property. Now it's got. It can't be. You don't want to do this with your own home. So you're going to have a home, a rental property, or a commercial building. It could be raw land, it could be a ranch, it could be a second home, anything for investment purposes. But it can't be your primary residence. So let's say it's worth $1 million and you bought it for 250 grand. That's your basis. And if you sold it tomorrow, you'd have a $750,000 gain. And you're like, I don't want to pay the tax on that gain. And you might pay 20% fed, you might be in a state where you're paying 8% state. And then you've got your Obamacare, which could be another 1 to 2% in there. And so you're. This thing could end up being close to 30% in taxes. And so what would we be looking at here? We'd be looking at about 200 grand plus in taxes. And who wants to write a check to the IRS for 200 grand? That's a mess, right? So a 1031 exchange helps solve that problem. So what we do with the 1031 is you've got this property here and the seller is you. And in fact, I'm going to actually back up here and I want to do this for a moment. Jack, will you take the whiteboard off? Everybody take a breath. Okay? I wanted to throw out that example of a crazy 1031 with a CRT and a cell phone combo just to give you a little vision of what, what you could do. Okay, now let's just talk about a 1031 exchange. A 1031 exchange is where you have a property and it's got a big gain in it, like this million dollar property we're just talking about. And you don't want to pay tax on it. So if you, the IRS says if you sell it and buy a property of equal or greater value, you don't pay any tax now, any tax at all. Is it tax free forever? No, they say you defer it. If you buy a new property of equal or greater value, whatever the gain was in that property of yours, and you go buy that new one, we'll move that gain and defer it. We'll put it over in that other property. Then down the road you could even do another 1031 exchange. If that goes up in value and you exchange into another property and that the gain from the first one, the gain from the second is all kicked down, you know, kick the can down the road into the third property. Someday when you die, you might get stepped up basis and your family inherits the third big property and pays no tax at all. So when you die, you get stepped up basis, but along the way you can defer the gain. So it's called a 1031 exchange. I'm going to exchange one property for another of equal or greater value. Now it sounds easy, but it gets really crazy or fun for us geek accounts out there. For example, if I take that one property and I'm going to go exchange it for another one, what happens if that person, they don't want my property, I've got to exchange it for an equal or greater property. But they don't want to exchange. They want a different. They want my property, but I don't want their property. I mean, it's just, it's a mess. So it's called a deferred exchange where there's another property person in the mix. They might buy your property and then you take the money and buy the property you really want. And so now you get an exchange that's a delayed exchange. You've sold your property, the money's in a holding tank and you go out and buy what you want. Sometimes you can buy what you want because your property hasn't sold yet. And then the exchange holds it in the middle and waits until your property sells. It's called a reverse exchange. You buy what you want before you can sell yours. Now there's some timing rules, all this. I'll cover it in a moment. Another cool rule is you can say, well, I don't want just one property. I want to buy three properties. So if you sell that property for a million and I go out and buy three properties of in total equal or greater value. So I buy three of them for $333,000 for a total of a million. Then I sold one and bought three, that's okay. You can also sell three and buy one. As long as I sold the three for 300 grand each and I go out and buy a new property for a million, I can defer the gain. So the beauty of this is you don't pay any tax on the transaction. The gain is Transferred to the next property or properties. That, my friends, is a 1031 exchange. So I want to just diagram it here and then we're going to get into some questions. Jack, I don't know if you can change the black on white or white on black, but it's really hard for me to read some of these questions. So I'm going to do my best. I may even have you. That helps a ton. Okay, now let me do a quick diagram of this million dollar property here. You don't want to pay the tax on that. So let me just diagram what I just talked about. So let's say this is you. You're the taxpayer and you've got this one million dollar property and you've got to go buy one or more of properties that equal a million dollars. Ooh. And I'm going to have fun with this diagram. Let's do the basic one first. See, I'm already wanting to get too crazy on you. So you want this property over here and it's a. It's. And you could do it. Let's say this is a duplex and you want to go buy raw land or you want to go buy commercial. You can do that. As long as you buy. It doesn't have to be the like kind of property you sold. It just has to be real estate for real estate. So I can sell a duplex and buy raw land. I can sell raw land and then buy a commercial property. Ah, thank you. See, I just. Jack took care of me. I got my little rock star here. Just what the doctor ordered. Okay, so you're gonna go buy this property. And let's say I'm gonna buy a new property for a million dollars and $1. So it's a million plus $1, equal or greater value. That's true. It's equal or greater. So we'll just say it's 1 million on the dot. Okay? But this seller, they don't want my property. They don't want to exchange with me. They just want to sell. And so what you do is you find this buyer that is going to buy my property. So I'm going to give them my property, and then they are not going to give the seller the money. They're going to transfer the money into an exchange. This is called an accommodator. An accommodator is going to charge anywhere on a deal like this 500 bucks to 1000 at the most. Prices change. There's different accommodators out there. But this exchange is going to hold the $1 million. Now you may say, well Mark, there's a loan on this property. So I have a loan of 200 grand. So do I just have to reinvest the 800 grand? No. Do I invest the 200 grand? No, it's the fair market value, it's the sales price that matters. That's really what you've got to look at is the sales price. I've got to go buy something else for sale of equal or greater value. It doesn't matter what the loan is, doesn't matter what your basis is, doesn't matter what your equity is. It matters what the frickin sales price is. So you're gonna go buy a new property for a million dollars. So the buyer gets your property, they put a million in this little exchange and then you go shopping and you go find the property you want and you go I found it, I found it. So your million dollars goes over here and then the seller gives you your new property at closing. Now the timing is from the day you sell, this is D day. From the day you sell, you've got 45 days to identify what you're going to buy. And you have 180 days from the day you sold to close. So basically that's 135 days from the day you identify. If you look at it that way. So it's 45 plus 31, 35 gives you your 180 days and you can sell in November and close in the next year, it doesn't matter. But you basically have six months to close. And if you don't close within six months, you don't get to do the 1031 exchange. You're going to pay the tax over here. And if we said you had a million dollar property with a basis of 250, you're going to pay tax on 750 grand which would be 200 grand or more. You're like, yeah, I'm going to try to make sure I identify what I'm going to buy. Now they have all these identification rules. You got to identify three property. If you identify more than three, you've got to close on 90% of them. And there's all these rules here. Now this my friends is your basic exchange. Now before we add more properties to the mix and I'm going to ask answer a few questions, let's take the whiteboard off. Let me make an important point here. This is complex. The 1031 exchange. I go to one full day classes on this. My job is to kind of keep it simple for my clients. Answer the questions tailored to their situation so they don't have to learn the rules that don't apply to them. Now what we're doing in September, September 29th and 30th is the first ever I've seen Real Estate Tax Summit, a two day workshop in Austin, Texas that would be broadcast virtually for around the world. But for two days we're going to talk about every tax strategy known to man when it comes to real estate, even foreign people buying in the US we're going to talk about tax strategies and 1031 is going to have its own section. We're going to do opportunity zones, passive losses, short term rentals, real estate, professional builders, realtors, brokers. We're going to be in there talking about asset protection for a bit, making sure we choose the right entity. When do you use an S corporation? We got 15 topics and if you want to know more about the workshop and come and learn more about 1031 exchanges because I can't do it all here in just a live Q and A. Get over to realestate tax summit.com realestate tax summit.com and if you get over there, it's in the description, you can sign up. And we're doing a flash sale today. So it's Flash 15 and if you type in Flash 15 in your code you get 15% off today. And it's only for tonight, right? Tomorrow night. So about 24 hours. So if you want to come to the Real Estate Tax Summit, you can always upgrade later, but you could at least get a virtual ticket. Now we're going to do a VIP experience. You can get platinum level and get preferred seating. We're going to put together a suite for just 16 people. A one on one with Matt Sorenson and I and maybe some of the other speakers. And we're going to do something fun down in Miami. We did a yacht here. I want to do a frickin rodeo. We're going to go ride some mechanical bulls or something. I don't know. We're going to have fun one of the nights in the workshop for just VIP members and do some one on one. But anyway, check it out at realestatetaxummit.com where we're going to dive deeper into the 1031 exchange as well as 15 to 20 other strategies. Two days of topics with speakers. You're going to love it. Okay, now let's get over to the 1031 stuff and let me answer some of these questions and Jack you can scroll through too. I guess I can scroll as well. The odin's question. Okay. All right. My glasses, sometimes they work better with this distance, sometimes not. So I'm going to do this. The Odin says, LOL. 10:31 can never be a bad strategy. What the f. Oh, Theoden, Really? I've got five reasons why it can be a bad strategy. Really? This is good. Did he. Did you plant that one? Someone really thinks the 1031 is good. Every time. Oh, my gosh. All right. Okay. Let me give you the 10 reasons why a 1031 can suck. All right. Okay. The first reason is I have clients that don't understand all their options and they screw it up. They screw up the 1031 because they don't understand it. They could have done a reverse. They missed the identification period. Timing. The timing is really tricky. Sometimes the 1031 is a bad deal because the timing isn't going to work and they try to force it. And they missed out on an opportunity zone or they missed out on a charitable remainder trust because they were so hell bent on the 1031 and the timing was just not going to work. You've got 45 days to identify, 180 days to close. Are you trying to buy three properties? Sell three, buy one. So it's just a big screw up. And the 1031 works well, but it's kind of like trying to use a hammer to screw in a nail. I mean, sorry, hammer, Screw in a nail. That was a good one. You're trying to use a hammer to go, you know, screw in a screw. And the hammer doesn't work for that. And so the 1031 is a bad idea for what you're trying to accomplish. Okay, number two, sometimes it's better to just pay the tax when you, when you go through all the steps of the 1031. And I love 1031 exchanges, but sometimes I'm like, okay, you know, you're only going to pay about 20 grand in tax. Well, I don't want to pay the 20 grand. Well, do you want the flexibility of some boot, which means taking some cash out? Sometimes paying the tax is better than doing the 1031. It because you got the fees of the 1031. And by the way, just because you pay for the accommodator, you got to go get your accountant to do the tax return. Sometimes the tax return can be a mess. We've had we. I'm not saying we're generally pretty cheap as an accounting firm, but sometimes the tax return for a 1031 exchange can be 1,000 to $2,000 because we got basis and multiple properties. There was timing and the Odin. I mean, just because you can do a 1031 doesn't mean you should. Sometimes it's better to just pay the tax and move on. Number three, and maybe I'll leave it at this, is that clients feel like they've got to do a 1031 because it's the, the best and only strategy and they really don't want more real estate and they end up with real estate that is not what's in their best interest. Maybe a charitable remainder trust could have been better. Maybe an installment sale could have been better. Maybe just paying the tax could have been better. And the 1031 is not the get all end all. And that brings me to. I'm going to do number four is the sale of home exemption. And this is a really good point here because some people turn their home into a rental so they can get the 1031. When I'm like, you could have just sold it tax free with the sale of home exemption, which I talked about at the beginning. Now, Jack, I talked about this as one of the strategies that I think some of you might like. And Theo, and this is another important point, is I've got a client right now with a triplex. All right? So they've got an upstairs rental, we'll call that unit one, a basement rental, unit two, and kind of a little cottage, unit three. Now, currently my clients live in unit one, and they're coming up on this in about six months. They will have lived in the upstairs unit for two years. And they were talking to me the other day saying, well, we're going to turn this into a rental, sit on it for at least a year. Because to do a 1031, usually you want to show that it's been investment property for about a year. Sometimes you can get away with lower than a year. Some accountants and tax lawyers stick up their butt, it's got to be a year or more. Blah. You know, not every case is like that. But they're going to turn it into a rental for at least a year so they can do a 1031 exchange on the whole property. I'm like, whoa, whoa, whoa. Why don't we just do a 1031 on part two and part three and then do sale of home exemption on part one. See, so you can take a home and bifurcate it, you split it into its parts and do a sale of home exemption for. In this Situation maybe a third of the sales price and pay no tax because you've got that sale of home exemption. But the other 2/3, we do a 1031. And so a client that thinks it's all or nothing is going to do a 1031, which was a bad move because we could have done sale of home exemption on this piece and only done 10:31 on the other 2/3. And so guys, I'm Theoda and I'm glad you threw that out. I mean, the 1031 is not the get all end all. I have clients that love the crt which could be a better strategy for them rather than the 1031. So anyway, that's a good one. Thank you. All right, John asked, could I talk about able accounts and the tax strategies that go with it. John, it's going to be outside the scope of today with real estate tax and 1031s, if you don't mind. I appreciate your understanding. Andrew says as a broker, I strive to provide you with the best deals with the most long term. Okay, that looks like Andrew. Bless your heart. Thanks for trying to advertise on my broadcast. I appreciate you. That's not a question, everybody please keep the comments to questions, yada yada. Okay, let's see the. Trying to look for a good question here. Jack's moving a little quick. It's hard for me. Okay, I'm going to do Terry's question. Terry says what if the property is tied in S Corporation? Can an S Corp do a 1031 exchange, not LLC? Sadly, yes, Terry, you can do a 1031 exchange with a S corporation. So let's do our trifecta, people. Let's say that you've got an LLC with a rental. Let's say you have an S corp with a rental. And let's say I've got a client down here where the rental is in their own name. They didn't even do an llc, which is scary. They have no asset protection. And let's say maybe it's just in the trust name. Can you do a 1031 exchange in each one of these examples? Yes. But here's the problem. If you do a 1031 exchange in the S corp, the property is going to end up staying in the S corporation. So you do a 1031 exchange, you're. Which could be good. You don't pay. You know, you defer the tax. That's cool. Defer the tax. But now you've got your property still stuck in an S corp. Some clients that want to get out of the S Corp structure will just pay the tax and rip the band aid off and get that property over to an LLC. The other option here is I have an LLC with a rental. I want to do a 1031 exchange. Yes, I can do a 1031 exchange inside an LLC over here. Can I do a 1031 exchange in my own name or my trust? Yes, you do a 1031 exchange. But notice how I did not say, and I'll put this in red. You cannot do a 1031 exchange in your own name and ended up in an LLC. You can't do a 1031 exchange and end up in an LLC. You've got to do the 1031 in the with the owner who owns it, finish the 1031, then we can worry about moving it out to an llc. Here's a common question I get from people and I bet you this is probably in our list here, is that some people say, well, I've got an LLC that owns a rental and I have two partners and two of the partners, they don't want to do a 1031 exchange. They just want to take their money and run. They just want out. Okay, can I still do a 1031? Yes. What we do is we deed out a third of the property into what is tenant in common ownership. And you over here become an owner of the property, 1/3, while 2/3 may stay in the LLC by deeding out one third of the ownership to you on a separate deed. Now you can go do a 1031 exchange and not pay any tax on your share and let these two yahoos go pay tax and walk away with their money, which for them could be a good deal. Again, Theoden, just because a 1031 works for you doesn't mean it's a good deal for these people. They might have other fish to fry and other things to do. So that's a common situation. Now, I'm oversimplifying. I know some of you tax advisors or legal advisors out there are freaking out going, Mark, you're making it sound too simple. I'm just hitting in concept what is doable. You got to look at the facts of each situation. Okay, Subhash M says when is it? When it is passed on to kids eventually. They don't need to pay taxes when they sell it. So my tax deferred will eventually become tax deducted for kids. Sub hash M. Let me say it a different way. So let's do your trifecta. By the way, folks, I Love it when you call my office and my attorneys, tax attorneys here for very affordably, you don't spend 5, $10,000 with some other group. I mean for 1500 or less we can set up your own trifecta with a plan. So I always go back to the trifecta here. Subhash, you might have an LLC with a rental property in it and you do a 1031 exchange into another rental and then five years later you 1031 into another rental. So you've been 1031 all the way along and paying no tax. But you've got a huge built in gain. If you were to just sell and walk away with cash, you'd pay huge tax, right? But you want the rental income, so you just want rental income and you're cool with that. And so people, this is where I have clients that will just 10:31 boom, boom, boom. And that's cool. And they defer the gain and then they get rental income through their life. But when they die, let's just assume the kids. Say you have three kids and the three kids inherit those LLC or one LLC or five properties or two properties, whatever the hell, the kids inherit everything that you'd been 10:30 wanting. They get stepped up basis. So they step up to the current fair market value and they pay zero tax when they sell, no tax when they sell. Now someone out there is going to put some hate mail and go hold it Mark, what about estate tax or what they call death tax? Well that is separate from capital gain. The kids will pay no tax, they're going to get stepped up basis. The question is subhash, are you going to pay estate tax or death tax? Well federal doesn't kick in on fed federal estate tax until over about 12 million right now. So the IRS is going to take a picture and say is all that real estate worth more than 12 million? Oh, it's not. Well there's no estate tax. Kids get stepped up basis. It's all good. Now in my monthly calendar which all of you can buy on my website and you may say half the year is over, Mark, why would I want this? Because I've got all these cool tax tables and tax data. I've got maps over all the states and which ones have better asset protection or state income tax or state and local tax? Building your 10 year plan, tax deadlines for the rest of the year. Oh baby, we've still got a few left at the office. Get to markjkohler.com and you can get your calendar like 25 bucks. That's all. So in here, I have a little table that says, here's all this states that have state estate tax. Boy, my hair is jacked up right here. I keep messing around with my hair. We're good. So in here, you might want to. To see which states do you pay estate tax where the kids get stepped up basis, but you still might owe estate tax in your state. So you got Connecticut, D.C. hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, where you might pay death tax for real estate you own, even though the kids get stepped up basis. So a little more tricky anyway. Whoo. So exciting. All right, where are we at? Some. They're. Some people are talking about other channels that show examples of 1031s. That's great. Keep studying, everybody. And I would recommend if you get over to the Real estate tax summit, going to be doing a whole section on 1031s and having some experts talk about 1031s. We may even do a 1031 panel. That's what we should do, is at the tax summit. Let's do a 1031 panel. I think that'd be a great idea. Okay. Joseph Rio says, hey, Mark, I was doing a 1031 exchange, but I couldn't close on the replacement property. Is there anything I can do to avoid the tax burden? I'm also on the market in the market for a new vehicle. Would that help? Wow. Okay. The first thing I would say, people, is that if in this deal, let's say this is Joseph, I'll put Rios. Joseph Rios, he's going to go out and he's looking for. He sold his property to buyer, and buyer put the money into the exchange, and that's what Joseph is telling us happened. And so the buyer got the property, Joseph sold his property. It went down here. It's all good. The money is sitting here now. So he's got to go out and find a seller with what we call the replacement property. Now, if he doesn't find this replacement property by the deadline, one thing you could do, which is, in my opinion, a good fallback, is you might do an opportunity zone. So you could go out and look for an opportunity zone property and defer some of the capital gain, and you don't have to spend as much. It's not an equal or greater value. All you have to do is reinvest the capital gain into an opportunity zone, and you get to do some deferring. We're going to have a whole section at the Real estate tax summit on Opportunity zones. We've got a speaker that's already going to come in on that. We're excited about it. The other thing that you might do is if you've got this capital gain, you're saying, well, I've got to go out and buy a new vehicle to offset the capital gain. I don't know your whole situation and what type of business you have. Because in a business you're going to have an expense over here to go out and maybe buy a new vehicle. But that doesn't mean that business expense is going to offset capital gain. That could be a very different story. Offsetting capital gain is going to be on a Schedule D versus a small business. Could be an 1120s Schedule C. So I'm going to tell you going out and buying a vehicle is probably not going to help you offset this capital gain. I would look at your opportunity zone and the CRT is too late. You can't do a CRT by then. And see, this is probably back to Theoden's comment that a 1031 is always a great idea. Well, poor Joseph here didn't find his replacement property in time. Now the 1031's left them up a crook. The CRT is too late. Now you could still try an opportunity zone but that's not going to be maybe ideal and we've got this capital gain we're looking down the barrel on. So just I would lean on the opportunity zone. Joseph, look at that and get a consult with one of my tax lawyers and talk to your accountant and see if some business write offs might be able to help with your 1031 problem. Okay, Bob Johnson, your advice on a $750,000 home that is new construction, that would be our primary home, but now we don't want it. And the home has six months to go to finish construction. Should I rent it for a year and then 1031? Well, maybe. So let's talk about what Bob's doing. Everybody. Basically they were going to build a primary residence and it's going to have a fair market value of 750 grand when they're done. And they were going to move into it as their primary home. Well, the problem is they said nope, we don't want it anymore as our primary. And so now it's turning into a spec. So this is where it goes back to the situation of is the 1031 a good idea? Well, let's look at what, I don't know the numbers. Let's say that they're into this 700 grand and they're gonna sell it for 750. Well after cost of sale, they might break even on this. And so turning into a rental is unnecessary and waiting to do a 1031 could be scary. Who knows what the market's gonna look like a year from now. Now let's say they're into this 500 grand and they're going to sell it for 750,000. After cost of sale 10%, they might be down to 675. Now they've got a gain of 175 grand. I'm going to want to know what their fed and state impact on that might be if. Are they real estate professionals? Are we going to. You're not going to get long term capital gain because long term capital gain is from the day you close, not from the day you started to build it. So if we're looking at a timeline here, and this is 2022, we're coming up soon on 2023. Let's say Bob started building this in early 2022 and he won't be done until spring of 2023. Well, he's going to say, well look it, I've got, I've held it at least 12 months. I get capital gain, right. I get long term capital gain. And the answer is no. Your hold starts from the day you finish the property. So once you finish it then you've got this 12 months. Now you might say I want to keep it 12 months as a rental so that I can get long term capital gain. Because Bob might be in a really high personal tax bracket. And so I need to know what bracket is he in. Is he also in the business of flipping property? Are we going to have to deal with self employment tax? Maybe we want to run this through an S corporation. I don't know. We also might say let's do a charitable remainder trust. A CRT could be a good fit on this property. I don't know how much gain is in it, but if you were to hold it 12 months and make it a rental, all right, and then you get long term capital gain, that could really reduce the tax bracket. Also, is he in a state with state tax? And once you hold it 12 months, now I could do a 1031 if you want to. So Bob, when you say is it a good idea? I don't know. Lots of facts to consider. Is it an option? Hell yeah. Is it a good idea? Maybe keep it as a rental to get long term capital gain? Sure. What's the market going to look like? What are Your other options. Do you want to do an installment sale? And take a note, Lots of good things. Pulse gives me a great comment. You're a rock star extraordinaire. Thank you. I really appreciate that. I'm going to go to Ryan real quick and then. Yeah. So Ryan says, by the way, everybody, make sure you're avoiding all of these freaking scams on Bitcoin and Facebook bots that are trying to get you to click on things. Please don't do that. Okay, let's do Ryan and then Bo, Ryan says if 1/3 deed do you have to only reinvest the same 1/3 proceeds or still max out the total sales price? Great question, Ryan. All right, everybody, let's put Ryan back. You know, let's bring this question full circle. So let's say it's me, mark. I'm a 1/3 owner in this LLC. Jack, who's in our studio here, and Ryan, and we're all 1/3 owners. Now let's say Jack wants to go do an opportunity zone. Okay? He doesn't want to screw around with the 1031 timing me. Let's say I just want cash and Ryan wants to do a 1031 exchange. All right? Now, there's different ways to tackle this. We might deed the entire property out of the LLC and do three tenant in common deeds. Or we might just do a tenant in common deed for Ryan only and then just sell the rest of the property and kick out K1s for me and Jack. So you're going to meet with your accountant and there's options here, okay? But look at this tick. It's called tenant in common deed. And so Ryan's sitting on this deed. Now, let's say the Property was worth 600 grand. That's what we were going to sell it for. And I'll put SP sales price. Well, Ryan is going to get 1/3 of that property. So his deed is going to have a $200,000 income or sales price for his 1/3. So the beauty is Ryan only has to go out and buy a new, sorry, used or whatever. He could do a construction deal, but he has to buy a property of equal or greater value equivalent to 200 grand. The 600 applies to the whole deal. So this equal or greater value is on the 200 and Ryan gets to go out and do his 1031 exchange. Now, let's say on this deal though, we had originally bought the property for 200 grand and our gain was 400. Okay, is this interesting? So we bought it for two. We're going to sell it for six. We're going to have a gain of 400. Well, for Ryan's 1031, we don't care about the gain. And I'm not even going to talk about the mortgage in this, but let's say there's a gain of 400 grand. He just has to go out and buy a property of equal or greater value of the 200, which is 1 third of the sales price. Jack down here has got a different story with the Opportunity Zone. If the gain is 400 and we divide that by three. 400 divided by three. Thank you, Siri. That's 133 grand. So we have $133,000 gain attributed. All Jack has to do is go reinvest 133 grand in an op zone. Ryan has to go reinvest the entire 200 grand into a new property. See the difference? An Opportunity Zone could be a better fit than the 1031. You never know. Ryan may say, I don't want that Opportunity Zone property. I have a whole other property in mind. Okay, cool. See, so the 1031 is not always perfect for everybody. You could have either of these two options, but Jack's got to reinvest 133. Ryan's got to reinvest 200 grand. I say screw it all. I'm just going to pay the damn tax, and I can go use my cash and go buy crypto. I can do whatever the hell I want. So sometimes paying the tax is the best choice for me. Sometimes the Opportunity Zone is the best choice. Sometimes the 1031 is the best choice. Kind of exciting. All right, Bo Handsome, who says S Corp owns LLC operating business? Do I issue A W2 from the LLC? Well, I'm sorry, I was going to stick just to real estate, but I read the damn question. So let's say I have an S Corp here, and it owns an LLC, and Bo says S Corp owns LLC operating business. Do I issue a W2 from the LLC? Bo, I don't have enough facts. This is why you need a consult with one of my tax lawyers. Because we're going to rock your world and save you a ton of freaking money. I promise you that. People, if you just book one of my freaking tax lawyers for an hour, if I don't save you 10 times whatever the hell you pay them when you. We failed. Because this question. I don't know. He says he has an operating business up here. Are you talking about other employees? Are you talking about yourself? If it's Just yourself. I could issue it really from either one. Usually I'm going to issue it from the S Corp. Are you married or single? Do you have other kids on the payroll? Do you have other employees up here? Do you have other employees down here? So you can see there's a lot of questions here and I'm grateful for your question. I love your question. I, I want to rock your world and so I want to get you a W2 and I want to get you a K1 and I want to save you self employment tax. But if your accountant has already answered this for you, please call my law firm people. You can go to kkos lawyers kkoslawyers.com and or call 1-888-8-8, oh no, let's see. 1-800-888-0010. Give our law firm a call and we will take care of you and just do a one hour consult. Get your trifecta built. Okay Joseph says thanks Mark. I identified two replacement properties but both transactions fell through. I will look into opportunity zones. Am I still limited to the 180 day closing date? Yes, with opportunity zones you have to reinvest your capital gain within six months. But all of this identification crap is water under the bridge. You don't have to worry about it. Tommy says they may run into problems with the loan as well if they sign documents as a primary residence you need to occupy for one year. Oh Tommy, bless your heart. Okay, so Tommy, in my opinion and let's take me off white screen for a minute. I want to give this disclaimer right here to Tommy and others. I am not proposing that you ever commit loan fraud. But when you go apply for a loan and you say I'm going to be in it as my primary residence and for some reason a kid dies, you get divorced, some problem occurs and you can't live in it and you rent it, really you're not, you're going to be in problems if you don't live in it for a year. The mortgage company 99.9% of the time, Tommy, they do not care if you pay the freaking mortgage. I have interviewed so many lawyers for banks that are like the due on sale clause. If you transfer to an LLC or if you make it a rental, we don't care. Bank lawyers say this all the time to me. We, we do not care. Unless they're not paying their mortgage. If they're not paying their mortgage, we're going to find a reason to foreclose and asap. And if it means they're not living in it personally. That gives us a great reason to foreclose if they've got other reasons, you know. So, Tommy and everybody out there, I want you to make sure you're deeding your rentals to your llc and do not worry about the due on sale. I want you to get a loan, live in it if you can. If you can't and you have to turn it into a rental, so be it. You're not going to go to jail. If the, if the mortgage company wants to refi or do on sale, fine. Do what's best for the property. Do what's best economically and don't lie on your mortgage application because if there's a change in circumstances, I'm okay, I'm not going to stress out. So just. I don't know, Tommy, you may totally disagree, but I just. Too many people worry way too much about what banks think. Do what makes sense. Because banks do not do what makes sense. Drives me crazy. All right, Leroy Tillman Jr. Says, what if you are paying on a home mortgage at 180,000 now, it's worth 450,000 as is. Should we improve the home and sell it under our current company? Well, even though I don't know all the facts and I shouldn't be telling people whether to sell or buy or keep or rent or 1031 or CRT or OP zone or install. Guys, I'm giving general strategies here, hopefully. But you know, for fun, Leroy, let's. Let's see what we got here. So he's got a home worth 450 grand and he's got a mortgage of 180. Okay, now I have clients call the time and say, mark, what should I do? Is it a rental? Is it your primary? That's going to be my first couple of questions. Questions. Are you living in it? Is it your primary residence or is it a rental? Now, because he says sell it under our current company and we're talking about 1031 today, I'm going to presume it's a rental property. And so we're going to look at this 450/180 so I can do my mouth here properly. So we got a $250,000 gain. Now, really? Does Leroy have that amount of gain? We know if he was going to sell the property and you got selling costs and he may get the full 450, he may not. Let's just with closing costs and everything, let's say just 10% to be safe, which is 45 grand. So if we take out 45 grand. His real sales proceeds might be 400 grand, minus 180. Okay, so now we're down to a 210 gain, so. Or 220 gain, right? Yeah, 400 minus 180. 400 minus 180. So we're here, and I want to make sure we're looking good. So We've got a $220,000 gain. $220,000 gain. Oh, my gosh. I got Siri going crazy now on me. 220 gain. And on this gain, we want to look at what is your fed and state tax hit. And by the way, for some of you haters out there that might at least make fun of me, some of you go, hold up, Mark. You can't do 400 minus 180 on the fly. Your CPA people. When you're live in front of thousands of people on YouTube or Facebook, you tell me how fast you can do math. I'd love to hear. Because sometimes it's easier if I don't guess. I just use my little handy Siri. So I appreciate your patience. I'd rather be engaging and talking strategy than doing math. All right, federal, state tax, what is our damage? So this is how I analyze things. Everybody is. I want to look at what are my baseline decisions. If I were to sell this property right now, how much cash am I going to walk away with? What is my tax going to be? What is my. And by the way, he said his mortgage is there, so this is his cash proceeds. Whoo. I am so sorry. Cash proceeds. I don't know what his gain is going to be. And after really cost of sale of 45 to 50, and you're going to get cash. And then there's the mortgage. I'm going to say cash proceeds might be 220, but I don't know what his gain is. So a lot of people, everybody out there, I don't know what property values are going to do. Is this 450 going to go up? Is he in a good market, a bad market? Is it questionable? Is he cash flowing right now? What type of gain is on the property? I don't know what Leroy's basis is. And so I just apologize, everybody. I went with mortgage and went with basis on that. So we know what his cash proceeds are going to be, but we don't know what his gains are going to be. His tax, his damage. So, Leroy, if you did a spreadsheet and then got on the phone with one of our accountants, we're going to try to figure out anyway. Leroy says update. We are looking for a bigger house anyway. Now it sounds like it's his primary residence. Holy hell. Okay, so now if it's your primary residence, you're not going to pay tax at all. I mean on a $450,000 house. He's saying we. So I'm having a feeling he's married. And so we've got to look at the sale of home exemption. So hopefully some of you out there seeing this already and Jack, take off my whiteboard for just a moment. One thing here is that I love the interaction and getting kind of these things going is exciting. But when you have your facts in a situation, we want to make sure that we're applying them and looking at all of your options and just doing a one hour consult with a tax professional or a tax lawyer that understands asset protection, multi state taxation, fed all of your options. It can be some of your best money spent. And I'm not trying to be an infomercial. If you don't like my firm, fine. But go pay someone for a frickin hour and don't go googling around to try to find the answer you want. Next. I love Joseph's point of the Real Estate Tax Summit again. Coming in, educating yourself and diving deeper on some of these topics. If you're in real estate business or have rental properties, that summit is a tax deduction. Your travel, your hotel, your Uber, your Airbnb, the cost of the event, it is all tax deductible. And if you have at least even a rental property. If you're in the business of real estate, totally a write off, so make sure that you're checking that out. Tammy says I'm new to the channel and thank you for listening in today. I'm assuming it doesn't matter what state you're in to take advantage of your services, correct? Oh, sorry. I was going to say a 1031 exchange too. So let me say this to everybody first, Tammy, if you want a 1031 from a California property to Florida, you can do it. You, you can take ten 31s and go anywhere in the United States, but you cannot 1031 out of the United States. So just remember, 1031 exchange is our US properties only for our law firm and accounting firm. You can and you can be working with us anywhere in the country. We can do your estate plan, set up your entities, do a tax strategy plan. We love it. Leroy, it looks like you're dealing with your primary residence. You haven't lived in it the full two years. Make sure you get a consult with one of my tax lawyers and get your strategy down. I think you're going to love it. I don't think this is a stupid question, but almost there says, can I do a 1031 exchange from a property that was purchased outside of a Roth to a property that is purchased from a self directed Roth? And the answer is no. Let's go to the whiteboard real quick. So let's do your trifecta. So here's your revocable living trust, and let's say you have a Roth IRA and you want to go buy a property. Your Roth has to go buy that property. Normally you're going to do an LLC first. If you have a property in your own LLC, you've got a 1031 to another property inside your LLC. You can't just. Take this property you want to buy and somehow get it into your Roth. That is prohibited. So let your Roth do its deals. Let's let your LLC do its deals. And you're good to go. Molly. I love it. My daughter Molly is texting me during the show asking if I want food from Cafe Rio. Yes, I would love a burrito smothered. And I will get pinto beans with the sweet pork and mild sauce. Thank you. Okay, now let's move on. Bo says I have a Florida LLC owned. Oh, my gosh. He's trying to get more information out of this. All right, Bo, and damn it, I'm going to expect you to get a consult with one of my tax lawyers, but we're going to answer this question and call it a day. Sound all right, Bo says, and by the way, everybody, if you want to come to the real estate tax summit, do not forget the flash. 15 gets you 15% off in the next 24 hours. Prices go up in five days, too. So this is a big discount. 15% off. Okay, Bo says he has a Wyoming S Corp. So I hope you live in Wyoming cope anonymity, physician assistant with 1099 doing business and live in Florida. Do I need to register my Wyoming S Corp doing business in Florida and do W2 through Wyoming S Corp. Okay, everybody. And Bo, bless your heart and I hope you did not set this up at my firm, because I would. I'm going to slap around one of my attorneys if they did this or do it. I get talked into a Wyoming S corp unnecessarily. I'm sorry, Bo. You did. You don't need that. It's not good. Would whoever talked you into it. I would freaking. Hopefully they're a lawyer and you can sue them and turn them into the bar. But sometimes everybody out there, you get sucked into setting up entities with someone that is not a lawyer and you think you're saving money and you're not. And I'm sorry, Bo, you got sucked into some crap out there. Please, everybody, the bottom line, don't use one of these companies that promises unlimited LLCs or bullshit. And they're trying to sell you on entities and asset protection. And they're not freaking lawyers where you can actually hold them accountable. Okay, Bo, I'm going to help you out here. So, okay, this is salvageable. Bo. Bo has an LLC in Florida and he's a physician assistant making money through a 1099 and he wants to save money. That's FL for Florida. You're going to make an S selection on your Florida LLC. We charge like 200 bucks and you're done. That's all you need to do. Isn't this crazy? A real lawyer trying to save you money. And this is why you call us, because we're not trying to screw you over like these non law firm companies. We want to make sure that you are getting your Florida LLC registered as an S election. And that's where you're going to do your W2 for 2022. Now, I'm assuming you've had your Florida LLC for this year, so we can backdate your s election to 1122. But this s corp in Wyoming, I guess you could register it in Florida. But you already have an LLC in Florida. You don't need it. Get a consult with one of my team members. But I would probably kill this and try to get your money back from the dipshit that sold it to you. Sorry, I'm just being blunt. I, I. Mark unplugged today. Damn it. Okay, one casual question. Would love to attend, but I will be in Germany end of September. Hey, everybody. The Real Estate Tax Summit is virtually broadcast worldwide on what we call the web. And so get a virtual ticket. 15% off and you can get a recording of it at the end of the day and for free, it's included. Sorry, for free. A recording of the event is included for any of you, whether you intend in person or virtually. I'm going to answer one last question here for Ed. I love Ed's question. Rental Property purchased in 1998 for 250 grand. Looking to sell for 750. $65,000 mortgage can. How much taxes would be to pay to buy A single family instead of two family. This is in New York. Okay? So Ed says, everybody, let's go to the whiteboard. He's got a property worth 750 grand. He purchased it for 250 and it has a mortgage for 65 grand. He wants to sell it. Oh, it's a duplex. It looks like it's a duplex. And he wants to sell it and go buy a single family home. Now he says, how much will I pay in taxes? Bless your heart, Ed. I don't know because we've got to look at your depreciation over the last freaking 30 years or 22, 25 years. What is your basis? We don't know. So we need to determine your basis. Have you done improvements along the way? I don't know. And so I can't tell you what your taxes are going to be, but I can tell you they're not going to be great because I have a feeling your basis is down to zero because you've depreciated the hell out of this property. So I'm going to guess that you're going to pay easily over 100 grand in taxes. So a 1030, if you already know what property you want to buy and it's at least 750 grand, so it's of equal or greater value, a 1031 could be a great fit for you. You pay no tax, you defer the tax and you get into a new property. But again, I don't know what your long term plans are, what the rentals. I hope that you're careful in your analysis and get a second opinion. And Bo, thank you. I was being a little brutal. He says, mark, I appreciate your frankness. And anyone that curses, I immediately trust more passion. Well, I am passionate about what I'm doing here. And Nelson says, you made me hungry with that smothered burrito. What's up with that? Well, Cafe Rio freaking rocks, people. And Costa Vita is their sister company. You gotta check that out. Everybody, I want to say this from the bottom of my heart. If you're still watching, I appreciate you. I'm in a really good mood. I love you. I love small business. I love real estate. I love making money. And we can make mistakes and we got to learn and I make mistakes. I buy rentals. I try to do the best I can. This is a new rental property I just closed on this year and I'm really excited about it. We built our little studio in here. And I just want to challenge all of you to keep learning, keep being Careful. Get paid for professionals and get some advice when you need to make some specific decisions. But this learning here, so that you can ask better questions when you do a consultation. That's awesome. Please get to my YouTube channel. It's got a bunch of great videos on all sorts of topics. I publish a blog every week. I'm going home to do a 1031 blog tonight and I hope that you can all make it to. Oh, someone said you need a real estate tax class for Aria in Chicago. Oh. Oh, my gosh. I love to speak in Chicago and I do on a regular basis. And you call me Vic, let me know if you fly me out. I'll teach one of these classes in Chicago. Now, if I put the event together, I gotta make some money or you gotta pay me to come speak out there, but let's figure it out, you know, or something. But I want to tell all of you, I thank you so much for being here. And the phone number to our law firm is down in the description. The link to our law firm is down in the. I've got my accounting firm, we do our trust company, but we help clients all around the country, so. And oh my gosh, I'd love these last questions. I had heard you state in a previous video about the importance of creating an S corp in the state where you're living, but it didn't talk about why. I live and work from California, but want a Wyoming Corp. Please advise Dr. Six, everybody, you've got to set up your operational entity in the state where you live in. Breathe. The reason why is because you have to issue an S, a W2 from your S corp in the state where you live and operate. Now, if you're going to go buy rentals around the country, I might use Wyoming. I might use some LLC for that. By the way, tomorrow we were recording our podcast on three and three sections. Asset protection level one, level two, level three. Over the next three weeks, doing a Wyoming entity for asset protection can be great, but when you're an operational business, you got to be operating out of the state where you live because of employment law and the W2 strategy. That's how it works. So, Dr. Six, get a consult with one of my lawyers, my tax lawyers on that. And I know we'll save you thousands. Thanks, everybody. We got to get wrapped up. I'm just loving being here with you. I could do this all night. Hope to see you in Austin, even on the virtual aspect. Get signed up for the virtual piece, learn about the tax strategy. I don't care if you're in Chicago, Connecticut, New York, California. We're helping clients around the country. And our Real Estate Tax Summit is going to help everybody around the country save taxes and make more money in real estate. God bless you. Keep living the dream.