- Hey guys, what's going on?
Seth here, from the RE Tipster blog.
What is a 1031 exchange,
how does it work,
and what do you do if
a 1031 exchange falls apart on you?
That's what I'm gonna talk about here in this video.
(chirpy music)
Okay, so, first time I ever heard
about the concept of a 1031 exchange,
seemed a little confusing at first,
but once I kinda grasped
the tax implications of what it means,
it made a lot of sense.
Essentially, a 1031 exchange,
it's called that because that's, you know,
basically from the IRS tax code,
and as with most things IRS,
it's not very good at explaining stuff
in a way that's easy to understand.
But essentially,
what a 1031 exchange allows you to do,
in very simple terms,
is taking an investment property,
so not your personal residence,
but an investment property,
and then selling it
and instead of paying taxes
on all of your appreciation
and all of the capital gains from that property,
assuming you have any at all,
you can take the money
and put it into a new "like-kind" property.
And the definition of "like-kind"
is a little bit ambiguous, but essentially,
it's any other piece of real estate,
and again, I'm not a CPA,
so like, talk to your own CPA
before you just go ahead and do this stuff,
but, you know, essentially,
you could sell a single-family house
and then buy an apartment building,
or a piece of land,
and then buy a commercial property.
As long as it's like,
real estate to real estate,
you should be okay.
The problem though, with a 1031 exchange,
they can get a little complicated
because the IRS requires that you identify
the new property that you wanna buy
within 45 days of selling the old property.
And then you have to actually
close on that property within six months.
And if you know anything about,
you know, real estate transactions,
especially when you get into
the bigger commercial-type properties
that can involve some tricky financing,
it's not always feasible
to do this within six months.
Back when I was working
my eight to five day job,
I worked for a company that did SBA 504 loans,
which is kind of a niche commercial loan product,
and I can tell you
just from that experience in doing
a handful of 1031 exchange deals,
that the timing does not always go according to plan.
Sometimes deals fall apart
because the seller gets cold feet,
or the due diligence reveals something
about the property that the buyer doesn't like,
or the financing just doesn't come through.
There's all kinds of stuff that can harpoon a deal
and make it fall apart.
And the problem is,
if you don't actually pull this off,
you know, identify the property in 45 days
and then close on the new property
within six months, or 180 days,
then you're out of luck.
You have to pay that entire tax bill.
And I've seen people have to pay tax bills,
like, just the tax bill itself,
was like, $750,000,
simply because they were not
able to pull this off in time.
So depending on the situation,
the consequences can be pretty nasty.
So I thought it was pretty brilliant,
I recently was talking to
the folks over at Realty Mogul.
Realty Mogul is a real estate
crowdfunding platform,
and I had never really knew
that you could do this,
but apparently, with real estate crowdfunding,
where, essentially,
people can invest in smaller portions
of a bigger real estate investment,
rather than buying the whole thing outright
and having to do it all themselves.
They can be one of many different players
that puts their money into a specific property.
And when you're doing this kind of deal,
say if you have a 1031 exchange
that is not going well,
say something went wrong
or the property is just not going through,
or say like, you don't even want to mess with that,
you have a property that you inherited,
you just wanna sell it off,
but you don't wanna pay a huge tax bill on anything,
you just wanna take the money
and transfer it to real estate,
but you don't want a hassle
with all of the difficulties
and burdens of finding a deal
and going through that whole transaction.
A really nice and easy solution to that
would be something like Realty Mogul.
And the nice thing is, with Realty Mogul,
they already have these deals all put together,
and it's like, you know,
three to five business days after you say,
yes, I wanna do it,
that the deal is done
and you don't have to pay the taxes,
they handle all the forms,
all of the red tape, all the paperwork, everything.
They've got the systems in place
to make this really, really easy.
This can also make a lot of sense if,
say you just sold a property for,
I don't know, $500,000,
and you've identified one or two new properties,
but the total cost of those new properties
is not $500,000, maybe it's $400,000.
So you've still got this extra 100 grand
chunk of cash that you have to do something with
or pay taxes on that.
And sometimes, say if you have
some excess cash left over
and you don't know where to put it,
and there's not like,
a clean-cut new real estate deal
where you can just kinda nicely
shift that over there,
Realty Mogul can be another great alternative for that,
where you can take your cash and put it there.
So there's really a lot of situations
where falling back on the real estate
crowdfunding option, or alternative,
can make a lot of sense if your deal
is either falling apart
or if you don't wanna be a landlord,
or if you have a little bit of extra cash
and you have no clean place to put it,
they can be a great option to work with.
And, you know, with Realty Mogul,
or any real estate crowdfunding platform,
there's no guarantee of how these investments
are gonna go, I mean,
it's just like any real estate deal,
like, it all depends on how well the deal is vetted,
and who's managing it,
and how the economy goes,
lots of different factors at play.
So I don't wanna make you think that like,
it's gonna be like a completely safe thing,
'cause there's just no guarantee,
but from what I've heard of these guys,
they vet their properties pretty well,
they do like, on-site visits
for every property they get involved with,
so in terms of all
the crowdfunding outfits out there,
I think they're, you know,
one of the better one to work with,
just in terms of like,
safety and risk mitigation and all that.
Anyway, I had known about
1031 exchanges for a long time,
but I never knew about
this little twist on them,
that there's a fairly simple way
to negate some of these
nightmarish issues that can come up.
So if you're in the middle of a 1031 exchange,
and things aren't going well,
or if you're thinking about
going down that road
but you're not so sure you want to
manage a property yourself
or be a landlord first-hand,
or if you just have some excess cash from a deal
and you don't know where to put it,
this kind of thing can be a great alternative.
So since it was new to me,
I wanted to share that with you guys.
I do have an affiliate relationship
with Realty Mogul if you wanna check them out.
I'll have a link beneath this video,
you can click on that
and sign up if you want to,
look at what kinds of opportunities
they have available.
And keep in mind, there's other places
besides Realty Mogul too.
They're not the only outfit
out there that does this,
but they were the ones that told me
about this option in the first place,
so I wanted to give them credit on that.
Thanks a lot for watching.
I wish you all the best on
your 1031 exchange transaction,
if you're doing one.
Hopefully I'll talk to you next time.
See ya.