How You Can Double Your Cash Flow Without Paying Any Capital Gains With Bill Exeter

MCFA 19 | 1031 Exchange


As an investor, deferring paying capital gains taxes legally when selling and whenever possible is a great strategy. The 1031 Exchange is one option that can make this happen for you. Athena Paquette Cormier interviews the President and CEO of Exeter 1031 Exchange Services, LLC, Bill Exeter, about what the 1031 Exchange is all about. Bill breaks down the pros and cons, along with everything you need to prepare and watch out for when doing an exchange. Don’t miss this episode to learn how you can take control of your investments without losing out on capital.

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How You Can Double Your Cash Flow Without Paying Any Capital Gains With Bill Exeter

I’m here with Bill Exeter. He’s the CEO of Exeter Exchange Services and Exeter Group of Companies. He’s here to tell us about the 1031 exchange. Welcome, Bill.

All of a sudden, the bank decided to start a 1031 exchange company that was years ago and my career did a left turn. You never go to college thinking, “I’m going to be 1031 guy.” It happened. We’ve been doing 1031 exchanges and trust services for years and specializes in real estate.

You don’t do banking anymore. That’s your business.

I’m a liberated banker.

I’m sure you make a lot of bankers jealous. How did Exeter Exchange come about? I noticed your name and Exeter Exchange has a similar name. Is this your creation?

It is. We were working for another large title our corporate attorneys wanted us to do. That was back in 2004.

How big is Exeter? You have more than one office location. Where are the locations and staffs? Give us a sense of how big it is?

Our headquarters in San Diego and then we have offices throughout the country. Some of them are direct operations, which are sales offices but there are staff that are employees of our company. Others are independent contractors who do other things and work to do sales and marketing for us. The headquarters in San Diego does all the corporate stuff if you will and the client administration, so it’s all centralized so we can make sure we have good control over the quality of the product and whatnot. We’re training staff members that do nothing but 1031 exchange work.

That’s a good size. Why don’t we jump into it then? What is an exchange?

It’s a tax deferral strategy, it allows the client to sell real estate and defer the payment of their capital gain taxes, their depreciation recapture taxes, and even avoid the Medicare surcharge, the Obamacare tax by exchanging into other replacement property. A standard or basic exchange would be somebody has a single-family property and maybe they’ve had it for 3, 4 or 5 years and they decided that they’re ready for a duplex or a fourplex so they’re going to trade up in value. They meet with their accountant and find out that there’s a huge tax bite and they start talking about strategies. That’s where they find out about the 1031 exchange. It allows them to sell their single-family and do the exchange, buy the duplex or the fourplex and defer the payment of all their taxes. It keeps the money in their pocket and making it a lot easier to trade up. If you had to pay a third of your profit to federal and state taxes, it becomes difficult to trade up in value.

You might not get as big of a property or it would take longer to build your portfolio if you had to give away a third every time you sold.

In fact, if you compare it to families, one that pays taxes as they go and one that does the exchange over and over, the one that does the exchanges after 40 years will have a net worth that is significantly larger than the family that pays the tax as they go.

What is the 1031 part? What does that mean?

It’s named after the Tax Code itself, Section 1031 of the Internal Revenue Code. We got creative and called it 1031 exchanges. You’ll hear it referred to as a lot of other things as well. Starker exchange is a name that way back in history. Delayed exchanges, deferred exchanges, they all mean the same thing effectively.

What types of exchanges are there? Do I have to find the person I’m buying from and we swap properties? How does that work?

It’s a mistake that a lot of people don’t plan exchanges in advance. Like any real estate transaction, you need your team in place. Click To Tweet

Most people, I’d say probably 97% or so, do regular 1031 exchanges. People call them regular or delayed or deferred. A lot of people are calling it forward 1031 exchanges because you sell first and buy second. Forward exchange can be concurrent. You’re closing your sale and then you close on your purchase all on the same day. That’s probably the safest way to do it because everything closes, it’s concurrent, and there’s no room for error. The vast majority of them are delayed. You close on your sale of the relinquished property today and then you buy or close on your purchase sometime in the future within the required deadlines. That’s the vast majority.

There’s also a reverse exchange where you can buy first. You close on the purchase, you know you’ve got that locked up and that’s effective in the market because the market is fast, there’s low inventory, you’re getting multiple offers, bidding wars, the cap rates are low. It’s a crazy market. You can find the right property, buy first, it takes a lot of the risk out of it and then you’ve got the 180 days to sell. Those are more complicated, expensive, so most people still do the forward exchanges.

That reverse one sounds like it would be easier on your nerves in the sense that you already picked the one you’re going to because most of the time people have an easier time selling what they have because you’re usually buying up. A house is easier to sell than a fourplex. A fourplex is easier to sell than a multifamily. It seems like picking first would make sense to me. That’s brilliant right there. Are there any other kinds of exchanges?

There are also a few others called improvement exchange. It’s getting referred to as a build a suitor or a construction exchange. That involves buying replacement property. We take title to it, or what they call Park Title and then the client has the rest of their 180 days to do the build-out. Whether they’re going to make improvements to the property, whatever that might mean, as long as it’s a capital improvement, then that would also work. Those are difficult because a lot of times, the construction can’t be done in six months. It depends on the project. If it was a multifamily project, then you’re going to put carports on. That’s probably doable. If it’s a ground-up project, brand new construction, you’re not going to get that done in six months. Maybe you’re lucky to get your permits pulled in six months.

Who are the players? Who needs to be involved for an exchange to happen? We’ll talk about how it happens, the steps.

A lot of clients don’t look at it from that perspective. They don’t plan in advance. Like any real estate transaction, they need their team in place. You’re going to have your typical team where you’ve got your real estate professional that’s going to work with you on selling and buying your properties. You’re going to have your finance or lender mortgage broker involved to do all the financing, but you need to have an attorney involved in case you need somebody to review documents, your CPA or tax advisor. Most people don’t go to their attorneys or CPAs until after it’s all done or after there’s problem. Going to them in advance is a lot safer. If you’re doing an exchange and of course you would need somebody like us, which is a qualified intermediary or people call us accommodators or facilitators that means all the same.

What does an accommodator or intermediary do exactly? You’re not the attorney and you’re not the realtor, I don’t think.

That’s correct. We’ll work directly with the realtor, the attorneys, CPAs, the mortgage broker. I forgot Escrow. Escrow has to be in there. Whoever they pick will work with those folks directly. Our role is drafting the legal documents to structure the 1031 exchange transaction, holding the money or holding title to the property during that whole process. One of the most important things is being available to answer questions, to bounce ideas off of us. 1031 exchange should be a simple process but it’s been convoluted over the years. It’s got all sorts of court cases and private letter rulings out there that affect it and it takes a lot to keep up with that.

We’ve got the realtor, the escrow, the title, we’ve got all the people that would normally be in a real estate transaction sale and purchase deal, but then we’re also consulting our CPA and maybe having an attorney because of the legal documents. We have the accommodator and you are in between doing documents that are specific to the exchange part of it. Correct?

That’s exactly right.

We’re clear on that. Who would want to do an exchange?

That goes back to the team. Anybody who’s selling rental investment or business property, business used, should consider doing the 1031 exchange. The first step would be, go to your tax advisor and ask the question, “If I were to sell this and cash out, what are my damages?” Sometimes you find that your capital gain is not that much and it’s not worth doing the exchange. Other times, especially in states like we live in, California, usually the capital gain is significant and painful if you were to pay the taxes. That’s when they should consider doing that if they’re going to reinvest and stay in the real estate industry.

I heard you said business. I thought 1031 exchanges were for real estate, but you’re saying businesses could also be exchanged.

Yes. 1031 exchanges would all apply to any type of property, real estate or personal property. The tax reform act effectively mixed everything except real estate. Only real estate qualifies. We used to do exchanges for aircraft and shipping and trucking and machinery equipment and franchises and stuff like that, that no longer qualifies for 1031 exchange treatments, only real property.

They didn’t give it a new name? They didn’t create an exchange special for that? It’s gone?

MCFA 19 | 1031 Exchange
1031 Exchange: Any kind of entity can do an exchange.


They didn’t

That is not a happy story right there.

It eliminated a lot. It’s real estate. When I say business use, it’s any real estate you buy and might use in your business, maybe an office building and you operate your business out of the office building. If you’re a retailer, you buy a retail shopping center and have your retail location there, anything like that that used in the business would qualify.

Let’s say I have a Laundromat that I own the building, but then I also have all those machines and what-have-us inside the Laundromat. Can I exchange the building is what you’re saying? The business part of that, the value that I’ve assigned to the business part cannot be exchanged, is that right?

We could have. We do exchanges of all the washers and dryers for other washers and dryers. All we can do is the real estate. They would have to allocate a part of the sales price to the real estate and the rest of the sale price is probably goodwill and a little bit for the equipment.

Do you know people who do that? Who does that exactly, valuations of a property that has a business part to it?

There are valuation experts that specialize in small business. Are there even large businesses that you can hire to value that? Some of your CPA might help you. You probably need an evaluation specialist.

We were going to do the steps from beginning to end. How does the exchange unfold?

The first thing for taxpayers to remember is they have to have the 1031 exchange in place prior to closing. I can’t tell you how many times we get calls every week where they say, “I closed on my single-family last week. I just found out about the 1031 exchange.” Unfortunately, once it closes, it’s too late to do the exchange. Even if they tell the closing agent, “Don’t disperse the funds. I’m going to use it for something.” The fact that it closed means they have the right to the cash and that’s the way it is. It’s taxable. They need to put all the parties in place and get us as the qualified intermediary assigned into the transaction, which is all the documents we complete prior to closing, and as long as they get that done, then they’re ready for the exchange and we’re in good shape.

Once the sale closes, that’s what triggers all the deadlines. Let’s say the sale closes today, then tomorrow would be day number one. They’ve got exactly 45 calendar days to identify what they’re going to acquire, and they have exactly 180 calendar days to finish all of the acquisitions and wrap up the exchange. It’s 45 days plus an additional 135 days for a total of 180. A lot of people goof and they think it’s 45 plus 180. It’s a total of 180.

It’s 45 calendar days, not business days. What if my 45th day is on a Sunday or a Saturday?

It’s still that Sunday or Saturday. It does not get extended for weekends or holidays or anything like that.

It would be Friday for all intent’s purposes.

We get people who identify up to midnight at 11:59 PM on a Saturday or Sunday too.

You have to be notified. Part of this process is you as the accommodator have to be notified of what the property is, which property got picked and the identification.

You have to have the 1031 Exchange in place prior to closing. Once the sale closes, that's what triggers all the deadlines. Click To Tweet

We’ll provide an identification form. They fill it out, scan it and email it back to us.

If I got it to you, you may not be there but as long as I got it into by that deadline, I’m okay. Do you have to confirm that you received it?

It’s always safer if we confirm it to make sure there weren’t any technical problems. As long as it gets in our system, we’ll time and date stamp it so we’ll know that it got here. We have people on call 24/7. You can always call in and ask whoever’s on call to verify receipt of the ID.

It’s like the 911 line, 24/7. If I’m selling a property, as soon as I’m in escrow, I should let that escrow company know who my accommodator is from the get-go and I should let you know, “I’m an escrow.” Even if it falls out, you can always tell Exeter that it fell out of escrow and you’re going to try again with a new buyer to keep you in the loop.

We’ll work directly with escrow to get everything done we need. Usually, we start exchanging emails between all parties.

You mentioned identifying the property. I heard you talk once before where you said there are different ways to identify the properties that I might be buying. Walk us through what our different choices are in identifying those properties.

There are two rules and one exception. Almost everyone uses the first, which is the three-property rule and that means you can identify up to three properties total, not more than three. There’s no limit on the value. It’s a limit on the number of properties. That’s usually because they’re selling one asset and they’re probably going to buy one asset of greater value so they identify three properties of greater value and they’ll choose which of those three to buy. The second and the third are probably backup properties in case the first property falls out of escrow. The challenge in the market is if your first property falls out of escrow, the second and third properties are probably long gone. You have to be careful with that.

You also get clients who are selling a larger asset and maybe they’re trying to diversify. Maybe they saw a $5 million asset, they want to buy a whole bunch of smaller single-family properties out of state. Then they’re going to look at the 200% rule because they want to identify more than three properties and probably buy more than three properties. The 200% limit has no limit on the number of properties, the limit is on the fair market value. If they sold one property for $5 million, 200% of the $10 million, they can identify as many properties as they want up to $10 million in value. You don’t have to buy that many. That means they’re identifying $10 million worth of assets to go through due diligence on. As long as they buy at least $5 million worth, it will be tax-deferred.

What was the exception rule that you were talking about?

The exception is called the 95% exception. If they’ve identified more than three properties and they’ve identified more than 200% in value, they’ve gone over both identification limits, they’ve blown their identification. If they acquire and close on at least 95% of the value identified, then that’s the exception, they’ll still qualify. If they identified $10 million worth of value, they’d have to close on $9.5 million in order for that exception to kick in. It works a lot better with portfolio acquisitions. We had a lady who had to find 40 single-family properties. Forty would be a risk because if you can’t acquire at least 95% of the value, 1 or 2 of them falls out of escrow, it’s going to be a blown exchange. This deal was one owner, one seller, one contract and closing. She was sure she was going to close on 100%, so she used the 95% exception.

I can see where someone might want to sell something that has high value but low cap rate and buy a whole portfolio that cashflows and has better cap rate. This is a good time to talk about what they mean when they say, “Like-for-like.” What does that mean?

There’s a lot of misinformation out there. I still see classes and curriculum that says, “If you sell a condo, you have to buy a condo.” It’s not true.

A lot of people have that idea.

It’s out there all over the place. The best way to look at it is like-for-like means like-kind. Like-kind means you’re selling real estate, you have to buy real estate and that’s all it means. Any kind of real estate qualifies as long as it’s considered to be real property.

Does it have to have cashflow or it doesn’t have to have cashflow?

MCFA 19 | 1031 Exchange
1031 Exchange: People say you make your money when you buy because you can control how you buy, what you buy, where you buy, what you pay; that means you also have to do your own due diligence.


It doesn’t have to have cashflow. They could be rental and have some type of cashflow. It can be held for capital appreciation. You can exchange into land and hold it until it appreciates and then sell it at that point. It has to be held for investment. If a client wants to buy a single-family, fix it up or rehab it and then sell it, what we call flipping and that would qualify because it’s held for sale, it’s not held for investment. That’s the differentiating factor there. Same with developers, builders, contractors, they buy, build and sell, it’s held as inventory, it wouldn’t qualify for exchange treatment. If we were to buy, build and hold as an investment property, then it would qualify.

What you’re saying is I could sell a house and buy a duplex and a fourplex or a fourplex and land into any combination as long as it’s realistic.

There are some esoteric items or assets out there like water rights, air rights, mineral rights and gas interests. As long as it’s defined as real estate, it would qualify.

Can you exchange it into notes?

No. You’re selling real estate and a note at this point is a loan document effectively. It’s considered personal property or non-real estate. However, if you sell your property, do an exchange, and then you have the qualified intermediary buy the note, so we own the note and then convert that to real estate somehow through foreclosure, deed in lieu of foreclosure so that we have fee simple title and pass it on to the client, then it would be possible.

Would you have to do that in those 180 days?

Yes, that’s the downside.

If you bought some non-performing notes and somehow could foreclose that fast.

That would work. When they do that, they’re buying a non-performing note from a bank. The bank has already recorded the notice of default and they’re probably close to the trustee sale date. They buy it as part of their exchange through us, we take title. Hopefully, within a week or two, the foreclosure goes through the deed of sale or the trustee sale goes through and closes. Then we convert to a fee simple interest so we own real estate and then we can pass that on to the client. They’re an effective tool, but there are a lot of moving parts there too. It depends on the whole foreclosure process and that can be postponed numerous times.

It depends maybe on the state too because some states it takes longer to foreclose, so it may not work in some states where it might and others. Is there a limit to how many times you can exchange?

There’s no limit at all. There’s probably a bigger question which is, what qualifies how long you have to hold title? There are a lot of people out there who would tell you, “You don’t qualify because you didn’t hold title to the property for at least one year or two years.” Those are opinions, not facts. Tax code, the regulations, nothing says you have to hold it for X number of days. What it does say is you have to have the intent to hold it for rental investment or business use. If you get audited, you have to be able to prove that and show that you did have the intent to hold. If you do a whole bunch of them and they’re every 30, 60 days, they’re going to look at you and think, “You’re flipping property.” If you do a whole bunch of exchanges but the holding period is maybe 24 months between each one, then you can demonstrate clearly the intent to hold for investment. It’s all about your intent and what you can prove should you get audited.

I don’t have to hold the property. That was one of my questions, how long do you have to hold the property before you can exchange it? It’s what you said, what can you prove that was your intent?

We’ve had clients who do the exchange. You finished buying your replacement property and then with a short period of time, they’ll get an email from somebody saying, “I know you bought the property but I’d like to offer you X, which might be considerably more than what you paid for the property.” Most people are going to jump on that. As long as you can show you have the intent to hold but there was a business purpose and economic purpose like good investment decision to move on, you’ll be okay. If you’re intending to flip it, then you’ve got an issue.

Can you exchange across state lines?

Yes. All 50 states would qualify. Even US Virgin Islands, Guam, and the Marianas Islands would be considered US territories for 1031 exchange treatment. You and I live in California. California has their wonderful nuances. California has something called the California Clawback. It’s the old bear claw. They take the position if you sell California real estate, you exchange out of states, you’re buying in one of the other 49 states. The old tax-deferred, but in the future if you ever sell in cash out, they want their fair share of the taxes paid.

To qualify for an exchange, you need to be able to prove that when you bought the property, you had the intention to hold. Click To Tweet


Proactively. You have to file the tax return and pay it. There’s a lot of objection to that. Before 2014, it was the honor system and then January 1st 2014, we say they put the claw in Clawback because they have reporting requirements. If you exchange the out-of-state property every year, you have to file. It’s the 3840 form and it reports the status of that other properties out-of-state. It’s like a tracking mechanism.

Can I exchange out of country? With all your news of California and they’re tracking me, maybe I want to exchange to another country like Canada. Everyone wants to move to Canada.

It crossed our minds. It would have to be all US property to qualify or it would have to be all foreign property. Contrary to popular belief, you can do foreign property exchanges but it does have to be foreign for foreign. If you sell a rental flat in London, you’d have to buy another rental property in some foreign country. You can’t go from US to foreign or foreign to US.

I have a couple of case scenarios I want to ask you about. Let’s say I own a duplex and I live on one side and the other side is a rental. Can I exchange that? How would that work?

It’s what we call a split use property. Half the duplex is rented, half the duplex is your primary residence. Assuming the square footage on both sides is exactly the same, it’s 50/50. When you go to sell that, half of the value would be counted as part of a 1031 exchange where you’d exchange it to other rental property and the other half would be considered your primary residence. You would get that tax-free exclusion, which is the $250,000 tax free exclusion if you’re single or $500,000 if you’re married. It’s a great way to juggle the two and get the best of both worlds.

Part of the exchange I heard is you have to exchange for a property that’s higher in value and you have to carry the same mortgage debt or whatever the add on the old property. Is there anything else? How does that all transfer? What are the rules for the limits on all that?

In fact, that’s where the catchers get a lot of confusion going on. There are lots of different stuff on the internet. It’s confusing. You hit the first one right on the head, which is you have to trade equal or up your value. If you sell for $1 million, you’ve got to buy for $1 million or more. That’s oversimplified but that’s effectively how it works. A lot of people go, “My profit is $200,000 or my equity is $600,000,” or something like that. Effectively, the government is taking the position that the investor owns an asset worth $1 million. As long as you remain fully invested at that level, they let you defer the taxes. If you sell for a $1 million, buy $1 million or greater and most investors trade up. You could trade down. You might want to trade down. Those folks in the real estate investment world are real estate rich and cash poor. You could sell the $1 million asset and maybe you reinvest at $900,000, trade down by $100,000 and pay the tax on the $100,000. It doesn’t hurt the exchange. It just means you’re going to pay a little tax.

You can withhold a little bit and not exchange all of it, because you might have a cash need.

It’s always good to have little savings. That’s not a bad thing. You also get investors that say, “I want to get out of real estate, but if I get out at the same time, it will kill me in taxes.” Every year or two, they’ll do another exchange and trade down each time and slowly pull it off the table so that way it keeps you at the lower tax bracket and slowly working yourself out of the system. That’s what we do. The second requirement, you also hit the nail right on the head. There are two ways to look at it. You either have to replace debt or you have to replace your investment.

The way I describe it usually is if you’re selling a $1 million home, buy a $1 million or more and the second one is reinvest all your equity. The cash that comes out of your sale, reinvest that. The difference between what you purchased and the equity you reinvested will either be a new loan or out of pocket cash. You can buy an all cash property, not replace your debt and would still qualify as long as you’re trading equal or up in value. You have to reinvest your cash and then decide if you’re going to get a new loan which most people do because most of us don’t have that kind of cash laying around or if they do, they can always buy it with all cash.

What happens to the depreciation that we’ve been taking all the years prior to the sale? Does that disappear? Do we owe tax on that? Maybe I depreciated the old building for years and now I sell, I was at the end and it was a low depreciation compared to the new buildings potential depreciation. How does the depreciation work?

That gets complicated. Let’s say you sell an asset for $1 million, you buy an asset for $1 million, it carries over almost exactly the same amount. Your costs basis carries over, your deferred gain carries over, and your depreciation as you take them carries over. Aside from closing costs, it’ll change it a little bit. Everything carries over to be the same. If you sell for $1 million and you buy for let’s say $2 million, all your numbers carry over and your cost basis would be increased by the million dollars that you traded up in value. Some people have almost fully depreciated the property. They’re running out of tax benefits and they’ll trade up in value to create more basis to depreciate.

You get to take depreciation on the difference between the old value and the new value?


MCFA 19 | 1031 Exchange
1031 Exchange: If an investor wants to remain in control of their investments, then the TIC and DST is not for them.


That’s why it’s worth stretching as much as you can.

You’re buying more cost basis to depreciate.

That’s one of the reasons that I’ve heard people do want to do in exchange is because they want to start over their depreciation because they’re losing that or maybe they paid a low price for the old property so their depreciation is low and they want to go to a new property that would have a bigger depreciation and higher cashflow. The next question I had that’s a scenario is, “What if I hold my property in an LLC? Can an LLC do an exchange? How does that work?”

Any entity can do an exchange, whether it’s a corporation, an LLC, a partnership, a trust, they can all do exchanges. With LLC, it depends on the members. If you set up an LLC and you’re the sole member, then it’s probably a disregarded entity because it’s considered to be you. If you’ve got an LLC for liability purposes but it’s disregarded or ignored for tax purposes. It’s treated as if you’re the owner. You can sell as an LLC and buy as an individual or in your trust or in and another LLC, it still qualifies. If you bring in an investor and there are 2 or 3 or 4 of you that are members of the LLC, now it’s more than one member, it becomes a partnership. It’s a distinct entity. It’s a completely separate taxpaying entity, so it does matter. That partnership would have to sell and buy and do everything together. There are ways to break it up. If you’ve got a follower who their partnership wants to break up, there are ways to deal with that. All of that gets complicated.

If I heard you right, if I’m an LLC and I’m the only member, then I can do an exchange and it’s no problem?


If it’s husband and wife, presumably you’re exchanging together into the new property. It’s a big assumption maybe. I thought in the exchange, the seller’s name and the buyer of the next properties names needed to match, right?

They do. When they say it has to match it, it has to be considered the same taxpayers, the critical component. If it’s a single-member LLC, the real taxpayer would be the member. As long as the member is selling the relinquished property and the same member is buying the replacement property and it’s considered to be the individual would work. It gets complicated. Let me give an example. You might have a multifamily property in an LLC and you’ve set up the LLC for liability protection and you’re the sole member. You sell it and you do a 1031 exchange. The sale closes and we’re holding the funds. You go to buy your replacement property in the name of the same LLC and the lender says, “We’re not going to lend to an LLC. We would only lend to you as an individual.” You can still, in that case, buy as an individual because the LLC is a single-member LLC. It’s disregarded and treated as if you’re the real owner. You sell by yourself and you buy by yourself. Right after you can, if you want, contribute it back to the LLC. That would work because it’s still considered to be you as the taxpayer.

Even though the LLC has its own tax, you would have to make sure that it’s the tax ID of the LLC and then the tax ID of the LLC.

The keyword there is disregarded entity. As long as the entity is disregarded for tax purposes, you’re okay. If it’s not disregarded, then it’s a whole different ballgame and it’s a problem. If you have 3 or 4 people coming together to invest and they’re all members of the same LLC, none of what I said would work because it’s truly a separate taxpayer. It’s not disregarded and that would have to stay together.

If we have an LLC where there are several members and they’re not husband and wife, they’re unrelated people. They can do an exchange but nobody can exit this LLC, right?

If they want to keep it simple, nobody can exit. That way it’s a nice straightforward exchange. The LLC is the taxpayer and the LLC is doing the 1031 exchange. There are ways to break up and go different directions but that gets complicated and it depends on the fact pattern.

Would that apply to S corps or C corps? Can those entities also do exchanges?

Yes. S corps and C corps can certainly do exchanges. They’re more difficult to break up. When S corps or C corps wants to break up, that’s even more problematic. It’s difficult to break those up at all. In theory it’s possible, but it’s more complicated with that. Partnerships and LLC are easier to deal with.

My next scenario is similar but different. If I own a part of a property, I’m a part owner, I have a fractional interest, I’m tenants in common with some friends and we bought this property years ago and one of us wants out. Maybe the ownership is 30-30-30-10, let’s say. One of the 30% guys wants out and the others have agreed to pay him out, can that person that has that fractional interest exchange just the interest in that property? Does the whole property have to be sold?

People in the real estate world are real estate rich but cash poor. Click To Tweet

No, but you can do that 30% interest. Effectively, they own 30%, the other folks are saying, “We’ll buy you out.” They sold real estate by selling that 30% position to the other people when they can do an exchange into other property.

They would need an exchange accommodator. The money that they receive from their friends or their co-owners, that needs to go into an accommodators account, right?


They can’t touch that money is what I’m asking.

They may have an escrow set up. If I was them, I would do an escrow and I would get title insurance because a lot has probably happened during the time they’ve owned it together. You want to make sure the title is clean. Some people want to go for sale by owner and not do all that. That works too but you’re taking some risks with that. It depends on the parties. Either way would work. You’re selling an interest. It’s a regular 1031 exchange at that point.

I have a couple of questions from the people that have joined us. Ben has a question on the duplex, the one side owner thing. He’s one of those guys that lived in one and wrenched out the other. He occupied it for one and a half years out of the past five. He says, “Can I treat the sale as two separate units? 1031 exchange one side or half the profits and only pay a little tax on the second unit?”

If it’s split use, 50/50, then half of it would qualify for a 1031 exchange. Half the gain would be allocated to the investment side and half the gain will be allocated to the primary residence side. Half the game will be taxable because you haven’t lived there for at least two years to get that tax-free exclusion. Half the game will be allocated to the rental property, which could be 1031 exchange into any other rental property. It’s one sale probably that you’re going to buy to split it into two different tax strategies.

A gentleman by the name of Larry wants to know your opinion on the alternative, “Some people run into problems with their exchange and they look to alternatives. TIC and DST, which one do you think is the best and most popular? What are some of the downsides to taking some of those alternative options?” I’m sure there’s more than what he mentioned there. What do you think about these? I call them crunch time, eleventh-hour solutions. What do you think are the pros and cons on those?

The TIC is the Tenant In Common investment property and the DST is the Delaware Statutory Trust. Both of them qualify for 1031 exchange treatment. You can exchange into both. In most cases, they’re both targeting investors who want to get out of real estate but don’t want to get killed with all the taxes. They don’t want the property management headaches and whatnot. You sell what assets are. You do a 1031 exchange and you buy fractional interest either in a tenant in common investment property or the Delaware Statutory Trust. There are pros and cons with anything. They always say you make your money when you buy because you can control how you buy, what you buy, where you buy, what you pay, etc. That means you also have to go and do your own due diligence and kick the tires, etc. Some people don’t have time or don’t want to do that. That’s where the TICs and the DSTs come in. They’re packaged. They’re ready to go. Their sponsor buys them. The sponsor puts the financing in place and then you identify an interest and buy it. It makes the process a lot simpler.

Pros and cons, if an investor wants to remain in control of their investments, then the TIC and DST would not be for them. If you got an investor who doesn’t want to have any control, they’re tired of the property management headaches, then those are two of the assets you would look at to see if that would solve your concerns and it would still be tax-deferred. With TICs, you usually have up to 35 investors. If things go right or wrong, you have to have 35 people vote together. It’s like herding cats. Sometimes you have to be careful. It depends on your preference. Some people want that and some people don’t want that. With the Delaware statutory trust, you have one person serving as trustee, and that’s usually the sponsor or related sponsor entity, and the investors are completely passive. They have no responsibility, no discretion, no authority to make decisions. It’s purely passive investment. If that’s what you’re looking for, then that serves a purpose.

As you indicated, it’s the eleventh hour. A lot of times, people will identify 1 or 2 properties that they have gone out and found. The third property will be a DST. If the first two properties completely fall apart and they can’t buy them for whatever reason, then they got the backup strategy. That certainly works. Other investors or maybe commercial investors, they’re buying large properties and when they’re done purchasing, they find they’ve got a little sliver of cash left. It would be $100,000. Rather than paying taxes on $100,000, you can slide it into a DST nicely and it fills up. In terms of popularity, the tenant in common investment property used to be common before the recession. During the recession, lenders had a hard time with foreclosure issues and getting 35 people to make decisions. The lenders have effectively said, “We’re not lending to TICs anymore.” They are lending to Delaware statutory trust. You’re going to see a lot more Delaware statutory trust. You’ll see a few providers of TICs out there, but most of them are DSTs.

Could you tell us what a DST is for people who don’t know what it is?

Let’s start with TICs first. A Tenant In Common investment property usually it’s a $20 million, $30 million, $40 million asset. Each person buys a fractional interest and you’re on a recorded title. If I bought into it, I might buy an undivided 3% interest as a tenant in common and I would be on the deed, etc. With the Delaware statutory trust, it’s a trust that’s written under Delaware law. The trust has a trustee, which is somebody with whom the sponsor has put in place. The trustee goes out and buys the property, puts the property in the trust, funds it or pays for it, and it puts the financing in place and then what the investors are buying is a beneficial interest in the trust. They become a beneficiary of the trust. They’re not on a recorded title. Both the TIC and the DST have IRS rulings. The TIC has a revenue procedure and the DST has a revenue ruling that authorizes the use of both of those for 1031 exchange purposes.

Correct me if I’m wrong, but it sounds like someone who wants anonymity or does not want to be on searchable on title might like that one because their name is not on it. You need another wrinkle in your exchange. I also want to be anonymous. Larry also asked a couple of questions, “Are there conferences that you know, annual conferences, like investor conferences where you can go learn about these things or maybe even invest?”

Both of these are sold securities because of the way they package them. A lot of the registered representatives or broker-dealers will have various seminars that will talk about what they are. Some are more salesy. Some are more educational, so you have to pick the right one. We also do seminars. We could talk about those as well.

He had another question about the recapture of the depreciation if that’s a significant factor in cashing out in most transactions, compared to long-term capital gains.

It can be. It’s taxed at a higher tax rate generally. It depends on how long you’ve had the property, what type of depreciation methodology you’re using. Is it MACRS, ACRS, double-declining balance, straight line? It depends when the property was put in service but in most cases, it’s probably going to be taxed at 25% at the federal level. A capital gain tax is probably going to be 15%. It could be 20%. Depreciation recapture is certainly the more expensive of the two taxes.

Let’s say I exchanged a property. Can I exchange it the next year? We’re alluding to there’s no waiting period, that’s doable?

As long as they can show they have the intent to hold. One of the things investors don’t realize is if you’re a flipper, you’re buying with the intent to buy, rehab and then sell or flip, you’re treating that as inventory in your real estate business. It’s not held for investment. You and I would not do that if it was not an investment. Under 1031 exchange purposes, that’s not considered an investment. That’s considered a business buying and selling real estate. That wouldn’t qualify as you flip that property, but if you’re buying it with the intent to hold, then it would certainly qualify, you just have to prove intent.

Next year later, the value is so much higher. We talked about this earlier. You have the opportunity to exchange again. There’s nothing wrong with that.

We have one as an example. We had one where they did an exchange, bought a condo and two weeks after they closed escrow, they finally read the CC&Rs and it said, “You cannot rent the property. It had to be owner-occupied.” The client turned right around and sold it. They were entitled for less than 45 days and they were audited. They were allowed to count it as a 1031 exchange because they had the intent to hold, just didn’t do their due diligence.

The other confusing thing that confuses people is the basis versus the current value. How does that work in an exchange? What are we looking at? Are we looking at the price we paid twenty years ago? Are we looking today’s value? How do you determine how much you need to exchange?

From a 1031 exchange perspective, the basis has no use. It’s more from a reporting perspective. You have to calculate the basis and report that on your tax return. From a 1031 perspective, what triggers it is the gross sale price, what you sold the property for. You can subtract certain things, not everything on the closing statement, just your routine selling expenses. Your broker’s commission, title and escrow recording fees, documentary transfer tax, that would get you your net sale price and that’s the magic number. That’s what you have to reinvest. If you sell an asset for about $1 million, your net sale price after selling expenses is going to be about $950,000. How much do you have to reinvest? You do not subtract your loan balance or mortgage balance. That’s not one of the trackable items.

If someone refinanced let’s say last year and they took cash out, they can now exchange and they don’t owe the taxes on that cash-out?

Absolutely, because that’s considered debt at this point, but that’s a good point because a lot of clients will say, “I bought the property for $200,000 now it’s worth a $1 million.” Get it in refi. I get 80%, now I got $800,000 debt, $1 million asset and I sell that, they pay off the $800,000 debt. They’ve got $200,000 in equity, they have to go buy a property worth at least $800,000. It’s not the equity of $200,000, it’s the total of value, $1 million. They put the $200,000 of equity into the new property and probably get a new loan for $800,000.

That’s one of those myths that’s out there is that if you took cash out, you owe the tax on that because you took it out and you’re exchanging. I’ve had people ask me about that a lot. That’s good that we clarified that.

It pulled the cash out of closing. Escrow closes and they said, “Give me $200,000.” That would be taxable because they did not reinvest it. What they could do is do the exchange, reinvest all the cash and wait 2, 3, 4 months and then work with you to do cash-out refi and that would taxable.

Get the money that they would have wanted at closing but shouldn’t take unless they want to be generous with Uncle Sam. It’s amazing when you do things in the right order, you save so much money. It’s amazing to me how much money people waste or give to the government by doing things in the wrong order, right?

That’s true.

Getting the right order.

Having that team and having everybody review and keep you on the straight narrow.

It looks like there aren’t any other questions. Thank you, Bill, for sharing a lot of information with us. If someone wants to get a hold of you, can they run a scenario by you? How does that work to work with Exeter?

We’re always available to brainstorm or bounce ideas off of. We don’t charge for that. Usually, calls like that are 5, 10, 15 minutes, those are complimentary. They’re welcome to email us, call us, whatever they prefer.

How would they get a hold of you to run a scenario by you?

The phone number for the San Diego office would be area code (619) 239-3091 or you can go to our website, There are emails through there. My bio is on there as well as the rest of our team.

On your website there are great learning tools. I forgot if you call it university. There’s a section where people can learn about exchanges and other things.

If they have a hard time sleeping that’s perfect place to go.

You mentioned when we started, you trust work. Can you tell us a little bit what kind of trust work you do and who that might help out there?

We’re changing that whole area. We are in the process of applying for trust powers. We’re going to be launching a trust company headquartered in South Dakota, and that will allow us to become the custodian of self-directed IRAs. They could buy real estate and what we call alternative assets inside of that.

We’ll have to have you back to talk about that then. That’s great. The IRA division has not been set up yet. Do you have a guest? I hate to guess because you’ve been working on it a while, but those exchanges have gotten away, right?

They did. If all goes to plan, it will be by December.

Ben wanted to know, do you have to live in the property a full two years or can it be one-and-a-half years and you get 75% of your gains. Is there an in-between?

You do have to live there for at least a total of 24 months out of the last sixteen months, two out of the last five years. There are some prorated exclusions, but it usually revolves around either forced relocation due to employment changes, medical situations, military service. If there’s a reason you’re doing it, that’s out of your control, then talk to your tax advisor and see if one of the exceptions would apply. If you’re choosing to sell it for investment purposes, they will not apply. Unfortunately, there’s no prorated amount for a year and a half.

Ben is creative and I’m sure he will find a way and find a CPA who can help him. Thanks for answering that. That will do it for us. Thank you very much, Bill, for joining me.

My pleasure.

It was awesome as usual talking with you. I’m going to New Orleans and I’ll be attending the mobile home park boot camp. I’m going to take you all along on Facebook Live, and it’s going to be a blast. After that, joining me for discussion on a type of depreciation that’s on hyper mode to save you a lot on taxes, it’s called cost segregation, and I have Michelle Mackerdichian from KBKG who did my first cost segregation. She’s going to tell us all about it. It’s going to be informational and hopefully lead you to save lots of money on taxes like Bill did. Thank you, Bill. Thank you, everyone, for joining me.

Important Links:

About William Exeter

Chief Executive Officer, Chief Trust Officer and President

William “Bill” L. Exeter is the Chief Executive Officer, Chief Trust Officer and President for The Exeter Group of Companies, including The Exeter Group, LLC, Exeter 1031 Exchange Services, LLC, Exeter Trust Company, Exeter Asset Services Corporation, Exeter IRA Services, LLC and their affiliate companies. Mr. Exeter is based in the company’s National Corporate Headquarters Office located in San Diego, California.

Banking, Trust and Fiduciary Services Executive

Mr. Exeter has been in the banking, trust and fiduciary services industry since 1980. He began specializing in real estate tax strategies in 1985 with a specialty emphasis in 1031 and 1033 Exchanges as well as Self-Directed IRAs.

Professional Speaker, Author and Continuing Education Instructor

Bill has written, lectured, taught and trained investors extensively on 1031 and 1033 Exchange transactions, Tenant-In-Common (TIC) investment properties pursuant to IRS Revenue Procedure 2002-22 and Delaware Statutory Trusts (DSTs) pursuant to IRS Revenue Ruling 2004-86 as replacement property solutions for 1031 and 1033 Exchanges, Self-Directed IRAs and Title Holding Trusts (Land Trusts).

In addition, Mr. Exeter is a frequent guest expert on “The Financial Advisors — Money Talk Radio Show” on San Diego News Radio AM 600 KOGO, the “Craig Sewing Radio Show” on San Diego AM 1170 KCBQ, “The American Dream TV and Radio Shows on San Diego Cox/Time Warner Cable Channel 4, on “House Calls” on Los Angeles Talk Radio AM 790 KABC, and on the “Inside Business Radio Show” on Business Talk Radio AM 1000 KCEO San Diego.

Expert Witness Testimony

Mr. Exeter also serves as an industry consultant, advisor, trainer, and expert witness. His work as an expert witness focuses on matters related to 1031 Exchanges, 1033 Exchanges, Self-Directed IRAs and Title Holding Trusts or Land Trusts. His expert witness work has included testimony at numerous depositions and trials.

Professional Experience

Immediately prior to founding The Exeter Group of Companies he served as President and Chief Executive Officer for four years of TransUnion Exchange Corporation (formerly Diversified Exchange Corporation) in San Diego, California and prior to that as Executive Vice President and Chief Operating Officer for 13 years of The Chicago Trust Company of California and Chicago Deferred Exchange Corporation of California, its 1031 Exchange subsidiary, in San Diego, California, which were part of the Chicago Title and Trust Family of Companies.

In addition, he served as a senior executive with two 1031 Exchange companies in the 1980s during the 1031 Exchange industry’s infancy, and is one of the founding members of the industry’s trade association, the Federation of Exchange Accommodators. He has administered in excess of 125,000 1031 Exchange transactions during his career.

He was Assistant Vice President and Controller of Provident Savings Bank in Riverside, California and Assistant Vice President and Controller of OneCentral Bank in Glendale, California during the 1980’s.

Mr. Exeter’s professional experience includes 1031 Exchanges, 1033 Exchanges, title insurance and escrow services, trust company management fiduciary, trust and self-directed retirement account administration and services, including Self-Directed IRAs, trust operations, investment management services, commercial banking, and insurance administration.

Professional Associations

Mr. Exeter is one of the founders of the Federation of Exchange Accommodators. Bill Exeter is also involved with numerous professional organizations including the Retirement Industry Trust Association (RITA), which is the industry trade association for Self-Directed IRA Custodians, Alternative & Direct Investment Securities Association (ADISA formerly REISA and TICA), AIR Commercial Real Estate, ICSC, the San Diego Chapters of CCIM and CREW, NAIOP, SIOR, California Escrow Association, San Diego County Escrow Association, and NorCal Escrow Association, Society of Exchange Counselors (SEC), National Counsel of Exchangors (NCE), and the San Diego County Creative Investors Association.

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