The BRRRR Investor Podcast
The BRRRR Investor Podcast is a dynamic resource for aspiring and seasoned real estate investors, focusing on the Buy, Rehab, Rent, Refinance, Repeat strategy to build generational wealth. It offers expert insights, practical advice, and real-world examples to guide listeners through every step of successful real estate investing.
The BRRRR Investor Podcast
Essential Guide to 1031 Exchanges for Real Estate Investors with Phil Atwan
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
💰Subscribe to my YouTube channel: https://www.youtube.com/@TheNahleGroup
Check out our next Real Estate event here - https://shorturl.at/jEO46
Learn More About BRRRR Investing Here: https://linktr.ee/Thebrrrrinvestor
Join us on The BRRRR Investor Podcast as we dive into the world of 1031 tax deferred exchanges with expert Phil Atwan. Learn the essentials of real estate investing and how to leverage 1031 exchanges for significant tax benefits.
-Explanation of 1031 exchanges and their benefits for real estate investors
-Criteria for eligible properties and common misconceptions
-Step-by-step process of completing a delayed 1031 exchange
-Importance of a qualified intermediary in the exchange process
-Overview of reverse exchanges and strategic investment tips
Stay tuned for invaluable insights and practical advice from one of the industry's leading authorities!
Connect With Phil and his team Here 👇
https://exchangeresources.net/
email: patwan@exchangeresources.net
Thank you SO much for stopping by! I appreciate you!
💰Subscribe to my YouTube channel: https://www.youtube.com/@TheNahleGroup
Check out our next Real Estate event here - https://shorturl.at/jEO46
Learn More About BRRRR Investing Here: https://linktr.ee/Thebrrrrinvestor
Alex Nahle
Welcome back to the BRRRR Investor podcast, where our mission is to empower aspiring real estate investors in their journey towards building generational wealth. Today, we're honored to have Phil Atwan, senior vice president of Exchange Resources, a renowned expert in 1031 tax deferred exchanges, joining us. Since starting his career in marketing and sales in 1982, Phil transitioned to the specialized world of 1031 exchanges in 1998 and has since become a cornerstone in the industry. Known for his extensive experience and deep knowledge, Phil educates professionals and investors alike from southern California to San Luis Obispo county and across the nation. He's a familiar face at over 150 educational seminars annually where he simplifies the complexities of tax deferred exchanges. Today, Phil is here to share his invaluable insights and guide us through the intricacies of 1031 exchanges, a topic crucial for any real estate investor looking to defer capital gains taxes. Phil, welcome to the podcast and thank you for joining us to share your expertise with our listeners.
Alex, I'm delighted to be here. Thank you for asking me.
Appreciate you very, very much. And I'm excited to get started with this.
I'm here to answer any questions you'd like me to answer.
Awesome. Appreciate that. So how about we start with the basic question? Would you be kind enough to explain what a 1031 exchange is and how that benefits real estate investors?
Absolutely. In 1921, before I was born, though it may not look like that before I was born, the government came up with a program for people who own farmland, work business properties and investment properties. So it give them a chance to move their properties around for their business or for their investment, and to defer tax, not for tax free, but to defer, to enable them to sell and buy and not pay all the capital gains taxes. It was called the 1031 eventually tax deferred exchange, and the purpose of it is to re leverage equity to do, to take it to other places. What's the benefit? The benefit is when you sell a property, you have to hire a real estate agent, an escrow company, a title insurance company. You pay transfer taxes, recording fees. He pay all kinds of other people, whether they're inspecting the property or they're fixing something or doing the 1031 exchange themselves, facilitating and ultimately what it did. It creates income for all these parties, which ultimately pay taxes. Got it to the government, and they go out and spend money, which stimulates all kinds of economies. So that's why the government came up with this thing called a 1031 exchange, because they figured they're going to get it sooner or later, but in the meantime, they're stimulating business.
Cool. That's very interesting. So what types of properties and transactions are eligible for 1031 exchanges, and what are the key criteria that need to be met?
Well, it has to be what they call a, like, kind exchange. But really, what does that mean? A lot of people say, well, if I'm selling a single family rental, I have to go back into a residential single family rental. But that's not what it means.
Okay.
It means there's three categories of something called investment property, and exchange is only for investment property. Yeah. So what are those three categories? Number one, you rent it out. Can you rent it for at least two years? Number two, you use it for your business. If you don't rent it out, you can use it for your business, or you can do both, like a shopping center, for example. Or number three, you could actually hold vacant land for appreciation purposes. So any one of those three can be exchanged, but then go back into any one of those three, because all of those threes are under the roof or the heading of investment property.
Got it.
So you can go from an investment property of any kind into any kind of investment real estate as a 1031 exchange.
Got it. Okay. I do hear a lot of investors struggle with, like, kind. So, you know, how about, like an example of. So obviously, someone purchased a property for, you know, the intention to have rental and rent it out, but doesn't keep it for two years. Circumstances come up, something changes in their life. Is that. Does that disqualify them? Would they be prevented from doing it in exchange?
It depends on their CPA's opinion, because the word intent is very important. If you're in an audit, you intended, but something changed that was beyond your wishes. It was beyond, that was not under your control. In some of those cases, the CPA can allow for that, but it's on a case by case basis. But the general rule, Alex, is two years of holding for whatever purpose that you bought it for. That's either for income or to work your business out of, or like I said, vacant land to hold for appreciation or investment.
Okay. And just for the simple reason that, you know, a lot of our listeners are newer to real estate or real estate investing in general. I'm going to ask a very silly question, but just to clear it up. So would I be wrong to assume that fix and flips will not be qualified for 1031 exchanges?
You're absolutely right. And the reason why is most cpas will say no is because you never rented it. You never moved your business into it, and you didn't hold it for two years if you had. So the bottom line is you do a couple of those, then the government puts you into a new category, and they call you a property dealer.
Got it.
If you're selling cars, you're a car dealer. Your cars are inventory. When you sell property, you're holding them and you're flipping them. Your inventory is your properties, and inventory is not exchangeable under, quote, section 1031.
Got it. Okay. And, you know, one very popular strategy that, you know, I very passionate about and, you know, I try to educate, you know, some of our listeners on some investors that I work with is called the birth strategy. So it basically, you buy, you rehab, you rent, you refinance, you repeat it. That shouldn't be qualified for a 1031 exchange because you are renting it, you're refinancing it. Then as long as you, again, you hold it for the two year period under normal conditions so that people should be able to do an exchange. In that case, I think.
I don't think a CPA would have any problems with what you said, but one thing they would recommend, most of the ones that at least that I speak to and educate, they would like to see a holding of the property for at least one year after the refinance, because you're not supposed to.
After the refinance.
Yes.
Got it.
Why? Because you have to refinance not with the intent to sell, and that makes it non taxable. But if you refinance with the intent to sell, that's like doing an exchange and putting money in your pocket.
Sure.
It's not allowed.
Sure.
So you'll have to pay taxes on that. So most cpas, and not all, are specialists in real estate. Just like if you have a problem, you know, whatever your medical issue is, you want to go to a specialist, not a general doctor, not an internist, but somebody who really specializes in that. The same is true at cpas.
100%. Yeah. I mean, they. They may be able to get the job done, but a specialist will be able to take you to the next level.
Absolutely.
And I'm glad you touched on that, because the. The intent of doing the birth strategy is obviously to hold it long term, but it's to refinance to get your initial investment in and then keep the property as a rental cash flow and appreciate. But, yeah, that's good for our audience to know that if you do want to sell it, eventually, you should. You have to hold it one year after the refinance.
I think that's a good strategy. Obviously, the longer you hold it, the more they see there was no intent to get rid of it and put the money in your pocket.
Absolutely. Okay. Are there any common misconceptions or myths about 1031 exchanges that you often encounter and would like to clarify for our listeners?
Thank you. That's a good question. Second, homes and vacation homes do nothing qualify as investment properties. That's just something that a lot of people feel that, well, on my principal residence, I get up to $500,000 as a married couple. If I qualify for the 121 principal residence exclusion, 250 for an individual. If my gain is far surpasses, that, I can exchange the balance and get. Wrong again, that does not qualify for a 1031 exchange. Flipping, like you mentioned, does not qualify for a 1031 exchange. And the other misconception, as we sort of already covered, was when you. When you think what like kind is, if I sell a single family rental, I can only go back into a single family rental. That is not true. That's a misconception. Some people think that they have a lot of extra time to acquire the property. That's a misconception. We'll clarify that later on as we discuss this. But that's a good point. Here's a real big misconception. People feel that, and this is common. Well, all I exchange is the equity. So if I sell property for $2 million, and I have, let's say, a million dollars of equity, all I need to exchange for is a million dollars. Wrong again. We'll talk more about that. But that is a big time misconception that I wish that everyone would listen or watch this podcast to be able to understand that there's more to it than you think. And it's nice to go into it with your eyes wide open.
Absolutely. And with the right support and guidance, of course. Absolutely.
Without a doubt.
So how about, would you mind walking us through step by step process of completing a 1031 exchange from start to finish? And this way, maybe we can go over those things you highlighted.
And there are different types of exchanges, but the most commonly used 1031 exchange, Alex, is called a delayed exchange. Some people call it a straightforward exchange, some people call it a regular exchange. What is that? It's probably 90% of all exchanges are used under this term. A delayed exchange. A delayed exchange means you're selling an investment property, you get it on the market, you get a buyer. We set up the 1031 exchange with your escrow agent or your attorney, depending on whether they're watching or listening to this podcast or the title company. But whoever's facilitating the escrow, that's who we connect with to set up the exchange documents after the sale closes. In a delayed exchange, you are down to something called 180 days, of which you need to close escrow on another like, kind investment property anywhere in the United States. So if you're selling here in California and you want to buy in Tennessee, you want to buy in New York or Hawaii, wherever, you can do that. But you've got to close your new investment property purchase within 180 days. Number two, the first 45 days of that 180 days is called the identification period. The identification period gives you a limitation of the first 45 days of that 180 days to determine how many properties or what you're going to acquire. Under the three property rule, you could name three different addresses. You can change those addresses 100 times, but not after day 45. So the bottom line is that you could only acquire what's left on that list up to any one, two, or all three. But you can't buy it if it's not on that list at the end of day 45. End of story. And then we hold the funds in between escrow you're identifying to us. We take the funds. When you get into escrow on an acquisition, we move the funds into an earnest money deposit for the new acquisition or acquisitions. You're not limited to one purchase. And then ultimately, as we fill out the documents, as we're ready to close, the client will give us the authorization. We will move all their money into the new acquisition and close escrow within the remaining balance of the 180 days. And that's a perfect 1031 delayed exchange.
Awesome. So a couple things I heard, obviously, the word investment property, right? It has to be an investment property you're selling. It has to be an investment property you're buying. You did mention 180 days after the close of escrow, of the property you're selling is when the time starts ticking, and then within the 45 days is the identification period. Now. So, again, just to clarify, you can purchase multiple properties. It doesn't have to be just one, as long as they're on the list within the 45, culitably, it creates an.
Equal or greater acquisition. Perfect.
Okay. And then my understanding, based on past experience doing an exchange with you and your company, you guys create an entity that actually basically embodies the transaction and holds the funds in.
What we do is we create a client trust account. It's a segregated. And if you don't use our company, this is what you need to do. Basically, you make sure that whoever is the facilitator or the accommodator, qualified intermediary, it's all the same thing. Whoever's holding your funds for you, make sure it's never commingled with anybody else's funds. Number two, make sure it's never in a corporate account of the accommodator. So people do that. And number three, make sure it's a segregated client trust account that requires your signature for funds to leave that account and to go into the replacement property that you would authorize to us. And that is what. And you want to make sure that bonding errors and emissions insurance protection for the funds, because, I mean, almost anybody could do documents, but when it comes to precision and expertise and protection of that money, you can't overemphasize that.
Great point. Can you explain to us what a qualified intermediary and a 1031 exchange is and why they're crucial to. It's crucial to have one.
It's crucial because the IR's says so. That's pretty much it. But somebody just asked me that question back today. I was speaking at a seminar in Pasadena, and what they said was, so do I really need an accommodator if I'm closing simultaneously with two properties? The answer is, it depends. They said, it depends on what? Originally, when Congress created this back in 1921, it was nothing, but the word exchange really meant trade. We would trade property, Alex. So we had equal value properties, equal equity properties, and we would just trade with each other. That's still good today. But if I'm going to sell to you and close with another party, that's not a trade.
Got it.
You have to have a third party that is qualified to facilitate that sale and purchase. Not with the same people. We step in and become that trading partner, and that's what the IR's had in mind. It wasn't created that way. But there was a big lawsuit beginning in the sixties that ended in the eighties with a man by the name of TJ starker who wanted to sell to one party, buy from other parties over time, and they said no. So they said, you can't fight city hall, right? Well, guess what? He took on the IR's and the United States Treasury Department litigated for 20 years, and guess what happened? The just agreed with him. And that's what created this third party. Facilitator, accommodator, qualified intermediary to facilitate a 1031 exchange. Can anybody do that? Yes. Do I recommend it? Absolutely. Not your attorney cannot do it for you, nor can your CPA do it for you, unless they have not given you any counsel except exchange counsel in the last two years.
Interesting.
Yeah.
Okay.
The government just won't allow it.
And it's a very sensitive subject topic, you know, and it's precise. A lot of moving parts. Yeah. So do you see any of you know, the exchange between two people? Like, I sell you my property, you sell me your property, I get maybe.
Enough out there I can count on one hand in a year. And I tell them, look, honestly, you don't need to pay me. You can do this by recording that on deeds and stuff like that if they're going to trade with each other. Because many times we, you and I, own two properties, we're half owners of both, right. Instead of being half owners of both, we may want to be 100% owners on one, and that would consist of trade. And that's the majority of what I see in those situations.
And you can do that?
Yeah, it's perfect at an angle. You don't have to pay me.
Okay.
My kids may not like it or my grandkids may not like it, but my wife first really won't like it. But the bottom line is that it's perfectly legal.
Very, very good to know, always learning something new from you. So appreciate that. You're welcome. And you mentioned there are different types of exchanges. The common one is a delayed exchange. Can we touch on a reverse exchange?
That's the second best or most utilized exchange, especially since you and I are in southern California and the market here is very, very difficult because of the lack of inventory. You try to make an offer, you may not get the property because somebody is going to help bid you. So there's just not enough property to go around. A reverse exchange is the perfect fix because it lets you wait until you find the right property. You quickly make an offer that the other person can't refuse the seller. It allows you to close escrow through the qualified intermediary first and then close the sale later. You know, you can sell in markets like this. Finding the right property is difficult. This allows you to wait until either you get the right property or number two. Opportunity knocks on your door and you can't say no. Cause it's a once in a lifetime find. Or number three, you're in two escrows, one to sell, one to buy. You're gonna close your purchase in two weeks, you're gonna close your sale in one week, and all of a sudden your buyer falls out or can't qualify for a loan. What are you gonna do with that purchase? The reverse exchange will allow you to close the acquisition first through us and then close the sale up to 180 days later.
Okay, so this is great. Reverse at least is another option, especially in markets like today, as you mentioned. So how about what advice would you give someone that is considering to do their 1st 1031 exchange and what's the best way to be prepared and get started?
Well, congratulations for being an investment real estate. Of all the people I know who have the most amount of wealth, 80% of them own investment property. That's how they made their money, not by their business, but by their investments. And that's a wonderful thing for you in the for the future. Second thing is, if you're going to do your any kind, whether it's your first exchange or your last exchange, the question is, what do you want your life to look like in terms of what you're going to acquire? Example, if you're retirement age, you probably don't want to be a landlord for the rest of your life. Or maybe, I don't mean any disrespect. You don't want to get rid of the landlord or the management company that's been mismanaging your property. The bottom line is, is that triple net might be a good way for you to go, because now you can own something that has a corporate tenant on it. They pay the property taxes, they pay for the insurance, they pay for the maintenance on the building. Or you can go into a Delaware statutory trust where you can't buy the old property, but you can buy a part of it as co owners with people you're out of management, you get a constant cash flow for your retirement. You don't lose your taxes to the government, you maintain the equity, or hopefully it grows over time, but you don't lose that precious monthly income. So you can do what you want to do with your life. That's when you're older, but when you're not older, you're still younger. I'll call younger. Between your thirties to your sixties. That's when you want to releverage the equity. Why do people do that? Because people are in it for three reasons, Alex. In monthly income, that's the number one reason to buy investment property. Every front door you own will pay you rent every month. Number two, you wanted to appreciate more. The number one regret that non investors and investors have is that they wish they had bought or bought more, because it's always going to be worth more. In the future. That's my regret number three. The third regret is, or, I mean, the third purpose is it creates tax write offs. You get to depreciate it. You get to write it off. You go to see it. You get to write off your mileage. I mean, it doesn't matter as long as it's, you know, your CPA will guide you in that, but it reduces the taxes you pay off the rent you collect, which means you have a fighting chance to get half of it from the government because the government wants everything, it seems. So it gives you an opportunity to save on taxes, to keep more of the rent and eventually exchange it again into some kind of a retirement property. That's going to be best for you.
Very, very good. And you mentioned Delaware statutory trust. It's, you know, it's something that I recently got exposed to and learned about, and we're going to have an episode about that. So stay tuned for, for that in the future. I appreciate you sharing the knowledge. And I want to mention one thing to our listeners. You know, you and I met about seven years ago. I was doing an exchange, and, you know, I didn't know much about it. And, you know, I was referred to you. And the reason I'm sharing this is because, like you mentioned, there are a lot of options for, you know, exchange companies out there. And I highly recommend you guys contact Phil and exchange resources because the experience that you guys provided me and you provided me, it's like that white glove service. You walked me through something that to me was, you know, a foreign thing, right? I didn't know much about it, but you made it very simple, very easy. You answered my questions. You were available when I had a question, you invited me to call you. You didn't make me feel like, you know, I'm annoying you or anything like that. So I do really, really appreciate that. And, and that still, you know, sticks in my mind until today, from seven years ago, you guys made it happen. You came through. It was a little bit of a challenging transaction, and we had to switch to a reverse exchange. So I learned about both at the same time, and it was successful, and the client was happy after all. So thank you so much for that.
You're welcome. You know, Alex, if there's anything you can share with your listeners, they say, never take business personally. I completely disagree with that. I think you should take it personally because then, you know, your heart is into that to serve that person. And, you know, I truly believe that you and I, we're in the relationship business.
Hundred percent.
You know what? And your people will either swear at you or swear by you.
Absolutely.
It's going to be one of the two. If they don't care, that's a zero, too. So the bottom line is that's how you create friends in the industry, whether you're selling lists, getting new listings and selling property, or whether you're facilitating 1031 exchanges. It's all about people. It's all about making sure they can choose what's important to them. And our job is to give them those options. Their job is to choose what they like. It's like going to a restaurant. You know, what? If they try to push the stake on you? You don't want that. You want the fish or whatever. It happens with the bee, right? You got to give them the options. They're smart enough to make their own choices.
Yeah. And I have to say, you're the true perfect example of the, of, you know, being it is a relationship business, and you're amazing at that. Anybody that knows you that I run into yesterday at one of our events, you know, we brought your name up and the two people that I was talking to, they know you very well, and they said the same thing about you. So it just comes to show, very kind.
Money will buy everything. No, I'm just kidding.
Well, awesome. Awesome. So could you let our listeners know what's the best way to reach you or learn more about your services?
We have a really great website, exchange resources. That's plural.net. or call me personally. 213-479-8800 that's my cell number. Or what happens is you can send me an email philand. It's p h I l a t, like Tom, w a n, like Nancy mail.com. you can reach me any one of those ways. And I'm always happy to send you some information. There's no obligation, and I mean that sincerely. And you do what's best for you. If you have a question, come back, we'll answer it for you. We'll send you on your way.
And you're very responsive. I've seen that. So I do appreciate we're going to leave information about, you know, Phil, his experiences, bio down below. We'll also leave that contact information. If you missed that, please reach out to them. If you have questions you want to learn more about 1031 exchange or if you're ready to do a 1031 exchange, or if you're an agent that has a client that has questions about it or wants to walk a client through Phil and exchange, resources are the people you want to work with. So, Phil, thank you so much once again. I truly appreciate pleasure.
I appreciate you and all your hard work that you put into everything.
Thank you so much.
You're welcome.
00:26:53 - 00:27:22Exclude
0:00 - 27:22
Thank you all for joining us on the BRRRR Investor Podcast. If you found today's episode helpful, please hit like and subscribe to our YouTube channel for more real estate insights. We love hearing from you, so please leave your thoughts, questions, or topics you'd like us to cover in the comments section below. Be sure to check out our website, theBRRRRinvestor.com, and follow us on social media @theBRRRRinvestor. Keep learning and investing and we'll see you in the next episode. I'm your host, Alex Nahle. Stay invested.