In today’s episode of The Same Day Podcast, Yoni Schmidt joins Marissa LoCascio, Senior Vice President and Chief Compliance Officer at 1031 CORP., to discuss the intricacies of 1031 exchanges. Marissa shares her insights on how investors can leverage the 1031 strategy to achieve their investment goals, the common misconceptions regarding 1031 exchanges, and the rules and processes for executing a successful 1031 exchange.
1031 Exchanges: Fast-Tracking Your Real Estate Investment Portfolio
Marissa LoCascio is the Senior Vice President and Chief Compliance Officer at 1031 CORP, a company specializing in 1031 exchanges, which allows real estate investors to swap one investment property for another and defer capital gains taxes. Marissa is an expert in real estate investments and helps clients navigate the complexities of 1031 exchanges. Her qualifications as a paralegal and Certified Exchange Specialist (CES®) further underscore her expertise in this field. Beyond client work, Marissa regularly conducts seminars to educate real estate professionals and investors on the numerous benefits of IRC Section 1031.
Here’s a glimpse of what you’ll learn:
- What is a 1031 exchange — and what are its benefits?
- The rules, regulations, and limitations of a 1031 exchange
- How investors can bolster and diversify their real estate portfolios using a 1031 strategy
- Marissa LoCascio explains how she facilitates a 1031 exchange
- The importance of planning ahead to avoid tax issue problems in a 1031 exchange
- What are the tax implications of exchanging an investment property?
- Why Marissa says you should consult a tax advisor when considering a 1031 exchange
- What is a reverse 1031 exchange?
In this episode…
Most investors work long and hard to build sizable real estate portfolios. However, there are ways to shortcut the process. How can a 1031 exchange help you transform your investment strategy?
A veteran in the area of 1031 exchanges, Marissa LoCascio says the strategy can be a game-changer for real estate investors, enabling them to achieve both short- and long-term investment objectives. By repeatedly employing a 1031 strategy, investors can sell properties and reinvest the proceeds in more real estate, all while deferring taxes. Marissa says this strategy paves the way for future acquisitions of more significant assets, such as a large commercial piece of real estate. Each use of this strategy brings investors closer to their ultimate goals.
Resources mentioned in this episode:
- Yonatan Schmidt on LinkedIn
- Mat Zalk on LinkedIn
- Walter Bowser on LinkedIn
- Keyrenter Property Management
- Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
- Keyrenter Property Management email address: [email protected]
- Marissa LoCascio on LinkedIn
- 1031 CORP.
- 1031 CORP. phone number: 800-828-1031
- “How Financial Woes Can Give Birth to a New Business” with Brad and Megan Skaggs on The Same Day Podcast
- “Profitable Real Estate Investment Strategies” with Kurt Volk on The Same Day Podcast
- “How To Compete in the Banking Industry: Relationship-Based and Customer-Centric Service” with Jared Goldfarb on The Same Day Podcast
- AppFolio
- Adam Grant on LinkedIn
Sponsor for this episode…
Keyrenter Property Management:
This episode is brought to you by Keyrenter Property Management.
Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.
The team helps clients build wealth while taking the headache out of property management.
That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.
To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].
Episode Transcript
Intro 0:05
Welcome to The Same Day Podcast where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.
Yoni Schmidt 0:20
Hello Yoni Schmidt here are hosting today’s episode of The Same Day Podcast where I connect with top business and real estate leaders past guests indeed Kurt Volk a client investor now a real estate agent in our office. Jared Goldfarb, Vice President of BancFirst and Brad and Megan Skaggs, the owners and operators of the Beauty of Wealth. Today’s episode is brought to you by Keyrenter Property Management at Keyrenter Property Management. We are a full service property management company helping our clients buy, renovate and operate real estate assets. We help our clients build wealth while taking the headache out of property management. That’s why no matter what rental you have single family homes, condos, townhomes apartments, we have the management solutions you need, go to keyrenterpmc.com or email us at Keyrenter at [email protected]. Welcome to our podcast where today we’re thrilled to have Marissa LoCascio, the Senior Vice President and Chief Compliance Officer at 1031 CORP. Marissa is joining us today. She’s a distinguished expert in the field of real estate investments specializing in 1031 exchanges a vital tool that allows investors to defer capital gains taxes. With a career spanning over two decades at 1031 CORP. which is extremely impressive. Marissa has facilitated 1000s of successful exchanges, demonstrating her unmatched expertise and dedication to making the complex process of 1031 exchanges simple and worry free for her clients. Her commitment to education, combined with your certifications and deep understanding of real estate law make Marissa a sought-after speaker and a revered figure in the real estate community. Today, she’s here to share her invaluable insights on 1031 exchanges, and how investors can leverage this strategy to achieve their investment goals. Join us as we delve into the intricacies of 1031 exchanges with Marissa LoCascio, a true leader and innovator in the world of real estate investments. Welcome to the show. And thank you for being here. Marissa.
Marissa LoCascio 2:23
Thank you for having me. Great to be here.
Yoni Schmidt 2:26
Yeah, so I’m really curious about this topic. And I’ve been, I’ve been, you know, very excited to, you know, have this, record this podcast with you today, mainly, because I am interested in doing a 1031 exchange. And I am also working with a client who wants to exchange a duplex into a piece of land that he’s pushing to also develop. So let’s dive right in. And we can hopefully bring some good, good content to our audience here. Marissa, could you start by explaining what is a 1031 exchange? And why is it such a valuable tool for real estate investors?
Marissa LoCascio 3:08
They are sure so are so you know, kind of basic, what is a 1031, it will allow real estate investors, right. As long as you’re owning real property that’s been held for business use or investment, you can sell that do the 1031 exchange and defer the taxes that you normally would have paid as long as you’re buying another piece of real property that’s going to be held for business use or investment. So it really does allow real estate investors to kind of build up their real estate portfolio and use those pre tax dollars in their pocket working for them rather than shuffling it off to the government. Right. And they do whatever they’re going to do with it. Right. So it’s, it really kind of gives them the ability to accomplish short term and long term investment objectives. You know, maybe the sale of that that duplex, maybe that’s their first 1031 exchange and what they buy is something that yes, you know, is going to defer the taxes, they reinvest and it gets them closer to potentially what their eventual goal is, which maybe down the line is buying a large commercial piece of real estate. But the first 1031 doesn’t quite get them there. They need to do a couple to get there. Right. So they can really utilize 1031 to to get them where they eventually would like to be.
Yoni Schmidt 4:42
Yeah, that’s interesting. So the money they’ve already spent to purchase the initial property, which is what’s known in the world of 1031 exchanges is the relinquished property, right? That was purchased with money that they’ve already earned and they pay taxes on so if they go sell it now Are they have to pay any capital gains taxes short or long term, depending on the timing of the sale, but in order to defer the that, that capital gain tax, they can just exchange it into a like kind asset. You mentioned a few, you mentioned a few things, and I want to touch on those. But with your experience in temporary one Corp, what common misconceptions do investors typically have about 1031 exchanges? One of them could be, you know, can I 1031 exchange my primary residence, for example, into an investment property or into five investment properties? Is that something new?
Marissa LoCascio 5:40
Right, you know, so that that is a question we get a lot. And, you know, as great as 1031, is, there actually is a way better section of the tax code for your primary residence. So you cannot 1031 exchange the house that you live in your primary residence, right. But if you have lived in that primary residence for two of the last five years, you get to use section 121 of the tax code, which says that if you are an individual, you can exclude up to 250,000 from that sale. And if you’re a married couple filing jointly, you get up to 500,000. So that requirement does not have any, you have to reinvest piece to it, which 1031 does. So 1031 doesn’t work for your primary residence, but you don’t want to do a 1031 on your primary residence anyway, right? You get way better section of the tax code to utilize. So that is a big question that we get a lot. One of the other big misconceptions, there’s, there’s actually kind of two with 1031, you would use the word like kind to describe the type of asset that you can reinvest into. And that is a little misleading. A lot of people think that if they are selling, you know, let’s just say that duplex, right that they have to buy, specifically another duplex. And that’s not true, the requirement is just that it be real estate, and you hold it for business use or investment. So you can mix and match residential and commercial. And it can be any type of asset, it does not matter the very specific type of real estate. So it’s a really broad definition. But there is a lot of misconception out there. And the other big misconception is how much you actually need to reinvest when you’re doing the 1031 to really maximize your tax savings. And you know, in a lot of people think that it’s either just the amount of the gain from their sale, or that it’s just the amount of cash that they get out of their sale. And neither of those are accurate, unfortunately. So you know, when you do the 1031 exchange, ideally, what you would try to reinvest is equal or greater value and equity to the property that you sold. So let’s just use real numbers, right, you sold for 500,000, they do allow you to subtract off closing costs. So things like real estate commission transfer taxes, items like that, let’s just say your closing costs in this scenario were $50,000. So now you want to look to buy something for approximately 450,000 or more, to really maximize your tax savings. You also need to make sure all the cash you get from the sale gets reinvested. And if you did pay off a mortgage, whatever value of that mortgage pay off, that also gets reinvested. So you buy a new property right for 450,000. And let’s say you had 200,000 of cash, you paid off a $250,000 mortgage, both of those values need to be reinvested into that new property to really maximize your tax savings.
Yoni Schmidt 9:06
Yeah, so you have to replicate at least the amount of debt that you had on the property. Yeah, if not more, correct,
Marissa LoCascio 9:15
yep, you can always buy for more, that’s absolutely fine. You know, where it starts to get a little tricky is if you do buy for less so you know, let’s just say you didn’t quite make it to that 450,000. So you only bought for 400,000 Wouldn’t make the whole thing taxable, right? It would just simply be that very small trade down or the 50,000. That didn’t get reinvested, that would be taxable.
Yoni Schmidt 9:40
So in that instance, would that would that be a partial exchange or essentially, yeah, yeah. And so you’re paying like pro gains on the difference? Whatever was not invested. Exactly. And how often do you see that people just go out and They look for another property to invest in. And so now they’re exchanging, say, one duplex for two duplexes or one house for two or three houses. Is that something that happens often? What’s the process there? What are the rules? If you’re identifying three or more properties? Can you walk us through those a little bit?
Marissa LoCascio 10:21
Sure. Yes. And it does actually happen quite often that people are reinvesting into multiple properties. So you know, maybe they sold one. And it was a higher dollar value property that they sold. And they would like to buy two or three properties, and, you know, split up their equity that they’ve got over those three properties, which is perfectly fine. And that actually became more of a trend in the last couple of years, I would say people acquiring more properties through their 1031. You know, it used to be a little more plain vanilla, they sold them, they bought one. And now it’s it’s kind of you know, they’re diversifying, they’re getting multiple properties, which is great. And the identification rules, you technically can buy and sell multiple in the exchange. So even if you sold multiple, you could do the opposite of what we just talked about, and buy one large property, combining all of those sales, that absolutely works, too. But with the 1031, there are yes identification rules. And and that 45 Day identification time deadline, that will start the day you go to closing on the property that you currently own. So you know that settlement date, you give up legal title that triggers a 45 day identification period. And within the 45 days, you have to identify what you would like to acquire through the exchange. And of course, there are some rules, they don’t let you just list you know, a property on the MLS, that’s not going to work. So it has to be, you can follow what they call the three property rule, which is what most will go with to be perfectly honest, you can identify up to three regardless of their combined value. If you decide you would like to identify more than three properties, you can, as long as you know, when you list all four or more of those properties. When you add those together, the combined value can’t exceed twice what you sold for or 200%. So if we go back to that, you know that example of the $500,000 property that you sold for, let’s say you wanted to identify four properties, you can do that as long as when you add up all four, they don’t total more than a million dollars. So, you know, not a ton of people will use that that 200% rule, usually those that are selling for pretty high dollar value will will utilize those, you know, they sold for 13 million. So now they’ve got 26 million to work with as a 200%. And that could work for them. So yeah, does kind of limit you. But you you know, you can acquire more than that if you wanted to. Right. So let’s just say you knew that you wanted to buy seven different properties. And let’s say it was being sold as a package deal from a seller, you could buy all seven of those, because now you’ve acquired everything that you identified, which is an acceptable exception. Under the identification rules.
Yoni Schmidt 13:40
Yeah. So if you’re exchanging that same duplex, say, for example, for you know, 10 properties, and each of them is say, roughly, you know, $100,000, so that that limit, tell me, do you have to close on a certain percentage of that portfolio that you identified? Or is that a misconception?
Marissa LoCascio 14:05
So if you sold and you identify 10, is that was that the example that you gave? Okay, so, in that example, you obviously went over three properties. It depends, are you still within the 200%? With your 10 properties? Let’s assume yes, let’s assume yes, okay, then you technically don’t have to buy everything on that list. As long as you’re still within that 200%. Where it starts to get into you must buy everything on that list is if you’ve broken both the three property rule and the 200% rule. So you use if those 10 properties are way over the 200% value, you are then subject to what they call the 95% rule, which basically means you must buy everything on your list. Right 95% Or more on your list? So that’s where yeah, that’s where it starts to get a little tricky.
Yoni Schmidt 15:06
Very interesting. Okay. Um, can you walk us, I guess, through the process of a typical 1031 exchange from start to finish? And, you know, in a nutshell, let’s say, I know that it starts with you basically deciding that you want to sell one of your existing investment properties, right,
Marissa LoCascio 15:26
right. Yep. Yeah. So typically, right, you’re going to list that for sale. And when you find a buyer, you get that under agreement. Most times, that’s when people will call us to initiate the 1031 exchange once they have a signed agreement with their buyer for their current property. And so once that happens, they fill out our order form, give us a copy of that signed agreement of sale, and also the closing details, right, because we need to coordinate with whoever is handling settlement for that particular property, we will prepare the necessary paperwork coordinate with the closing agent, once that property closes. That triggers the two time deadlines. The first is that 45 Day identification period, right, there is also a second time deadline that gets triggered by that same closing of the relinquished property, your current property. And that is a total of a 180 day exchange period to acquire something on that 45 Day list and get the 1031 wrapped up. Once closing has happened for the the property you currently own right, those are triggered from the sale, the proceeds, they actually cannot go directly to the seller, that’s one of IRS rules. So those funds would be wire transferred to an account that we set up for that that seller with their name and tax ID attached to it, it is in interest bearing segregated FDIC insured account. Okay. And within the 45 days, they identify something to us or multiple properties, you know, maybe one of which they’re really trying to go after and have the two others as backups. Once they know what they are going to acquire, they get that property under agreement, you can use the 1031 funds for deposits. So if they need that money to, you know, be sent to a seller for a deposit, we can certainly do that, we just need a little bit of paperwork in place, we coordinate with the closing agent on that purchase side and make sure they know that it’s part of a 1031 exchange, we wire transfer whatever funds we have in that account that we set up for the seller, we wire transfer those funds to closing the acquisition occurs and their exchanges finished. Beautiful. Sounds easy when you wrap it up like that? Yeah, some harder in real life.
Yoni Schmidt 17:59
Yeah, you’re acting, you’re essentially the financial intermediary who’s acting as a fiduciary holder of those funds. And you’re saying that you can pay out for example, earnest money to, to the title company, or to the broker? who’s selling you the property right? In you pay for inspections and appraisal and survey? And what other fees? Are you allowed to, you know, use the proceeds for? Could you use some of them even for closing costs, and to buy down some points on your on your new note? Tell us a little bit.
Marissa LoCascio 18:44
All right. So typically, any cost associated with obtaining a mortgage does not work, you cannot use the 1031 funds to pay for those items. So the appraisal points, things like that, no. And inspection would you know as long as your your contract is contingent upon which most are that would be something that we could release funds force, they would just, you know, provide us an invoice and we could pay that that vendor directly or that contract or inspector rather.
Yoni Schmidt 19:21
Got it beautiful. What about any work that you know needs to be done on the property prior to closing? So for example, I’m buying a house and it needs a new roof. And, you know, I want to put that new roof on there before I close, is that something that 1031 Exchange proceeds could be used for?
Marissa LoCascio 19:41
Is this on the one that you’re selling or the one that you are buying
Yoni Schmidt 19:45
the not the relinquished but the
Marissa LoCascio 19:49
the acquired property. Arguably, it could. But you would want to make sure that you’re working with your real estate Professional to make sure you don’t get burned in that instance, right, because you’re gonna make some sort of improvement to a property that you don’t own just yet. So, you know, usually what we have seen in the past is perhaps that invoice being paid at closing, and it’s a line item directly on the settlement sheet that gets paid to whoever that contractor is. And that way, there’s no chance of the seller backing out of that deal and taking your 1031 million money to fix their roof and then going out or want to buy this property or sell this property anymore.
Yoni Schmidt 20:37
Right, which would put them in a world of trouble. And I bet, you know, for sure, yep. In a in a lawsuit for specific performance that. Right, right, but ultimately, but it doesn’t really, you know, preclude them from then having to pay the capital gains tax, because it’s a prolonged process. So a couple of things you mentioned. One is, you know, you mentioned the timelines. One is a 45 day identification period, and another is 180. Day. Closing period, right. So if you identify from the from the day that you close on your relinquished property, the one that you’re selling, you have to identify within the within those 45 days, right, the property’s at least three, right, that you’re going to buy. Is that true?
Marissa LoCascio 21:30
Yes. You don’t have to do three. Oh, really? If you know for sure. You know,
Yoni Schmidt 21:35
you could go for that one. Yeah. And then, and then the 180 days? Do those include the 45 days? Or do those start after the 45 days end?
Marissa LoCascio 21:49
the 45? And the 180? Do run concurrently? So it’s 45? And then the remaining 135? To get it all wrapped up? Correct?
Yoni Schmidt 21:59
Got it. Beautiful. Tell me what happens, I guess, in the event, that you’re doing an exchange later in the year, in November, for example, because that would put you into the next buying calendar year? What are the what are the rules there? How does it deviate? Or change? Are there any, you know, is there any new regulation that’s been introduced, you know, for exchanges that close towards or that are initiated towards the end of the year and then rollover into the following year? And what are the tax implications for an owner or seller and investor? Who is doing that? November, December? And then, you know, they’re they’re rolling that into the following fiscal year? Yeah,
Marissa LoCascio 22:43
sure, sure. So the 1031 exchange does have to be reported in the tax year in which it was initiated. So if they closed in November or December, let’s just say it was of last year, right? So 2023, that 2023 tax return is where your 1031 exchange would need to be reported. We have some taxpayers currently that are not done their 1031 Exchange, and we’re creeping up on tax time. So what would happen is they would need to file for an extension of time. If they were to file their taxes, their 2023 taxes, they effectively would end their 180 Day exchange period. So you know, we make sure that they know it’s in our materials and all over our website, of course, but just make sure that they know, hey, don’t file your taxes just yet, if you’re not finished with your 1031 Exchange, so we want to make sure they get the full benefit of that 180 day period. The other thing that I’ll mention, let’s just say somebody did start their 1031 Exchange back in November, December, whatever it may have been. And they, for some reason, couldn’t nail down what they wanted to identify if they initiated their exchange right in the previous tax year 2023. But they didn’t actually identify and then subsequently received their proceeds after day 45 had expired, but now we’re in 2024, which is another tax year. They actually are spanning two tax years and could potentially have a little bit of a benefit there. Obviously, they’re not completing the 1031. So they don’t get the full tax deferral, but they could, in essence, break up their tax consequences and report some in 2023. And then because they didn’t actually receive the funds until the next tax year, they could report some tax consequences in 2024. So you know, it is yeah, a little bit of It’ll unusual will tell you when you do span over those those two tax years.
Yoni Schmidt 25:04
Yeah, is the I guess the break would depend on, you know, your your tax bracket for each of those years and your income situation for each of those years. And you know, you’d have to look at it on a case by case basis. Very interesting. Sure.
Marissa LoCascio 25:19
There would help them determine like, what what would work best in our situation here?
Yoni Schmidt 25:25
Yeah, that I mean, that’s why it’s so important to just, you know, use a reliable CPA who really knows the tax implications understands the business that you’re in, in the industry that you’re in understands date, and someone who can, I guess, work with you with the title company with, you know, you have 1031 CORP. to, you know, maximize the individual’s income and minimize their tax liability at the end of the year. That’s what I guess you exist for right to minimize. Right?
Marissa LoCascio 26:01
Right, right. I mean, we’re, yeah, we obviously want to make sure that that those that work with us are getting the most out of their 1031 Exchange. But as the Qualified Intermediary, we are prohibited from giving tax or legal advice. That’s the reason we’re qualified because we don’t provide any other service for them except facilitating 1031 exchanges. So it really is invaluable for someone to have good advisors that they work with that can help, you know, in their particular tax situation, figure out what’s going to be best for them.
Yoni Schmidt 26:43
Yeah, wonderful, beautiful. You mentioned earlier, though, that I can’t go on to the MLS and just find a property. And you know, say this is the one I’m going to buy. Can you tell us a little bit about that? And why is that the case? Because I wasn’t really
Marissa LoCascio 27:03
know what I what I meant by that was that you can’t just say that your identification is going to be a property on the MLS, it’s not specific enough. So you if you have access to the MLS, right, then you can absolutely go on there. Figure out which one two or three you want, and then write that very specific property on the identification list. But it can’t be vague. It has to be specific. That’s the that’s the Yeah, the difference there.
Yoni Schmidt 27:37
So you can you can say 123 Main Street is the one lesson and technically I’m, you know, going after this one got? Yeah, um, tell me, I guess you’ve been instrumental in educating real estate professionals and investors about the benefit of you know, the IRS section 1031. Is it IRS or IRC? I guess it’s IRC? Because, yes. You know, aside for what we, you know, have discussed so far, what key points? Do you always try to highlight in your presentation, seminars, conversations? You know, what’s, what’s something that you know, an investor should always be on the lookout for? Right?
Marissa LoCascio 28:26
So there’s, we talked about two of the really big rules, you know, how much you need to reinvest. Right. But that’s a big factor. We have also talked about the time deadlines, those are really big. And there’s also one last kind of big rule that we always share with everyone to make sure that they know. And it’s called the same taxpayer requirement, essentially, however, you currently hold title to the property that’s being sold in the exchange, that’s how you need to buy, right, so individual to individual LLC to that same LLC, so on and so forth. And that can be a little tricky, because sometimes, people own properties in different ways. Or perhaps they own it in an LLC, and not everybody wants to exchange and that and get a little complicated to, to do if not everyone wants to do the exact same thing and 1031 so that can cause a little bit of an issue, but generally want to make sure same taxpayer on both sides of the transaction.
Yoni Schmidt 29:32
So that brings me to my next question, because I own real estate on my own. I own real estate in partnerships. I will you know, one of my business partners and myself want to go sell a portion of our portfolio of property and I say I want to do an exchange. My business partner says I’m not interested in doing an exchange. Is that even possible because now you’re saying, right, the tax that tax ein the identity the employer identification number that’s on the exchange, right? As the one that is selling,
Marissa LoCascio 30:11
right, so if you own it in an LLC, right with, you know, another person, it’s a multi member LLC, that tax ID is what IRS has been seeing, you know, as far as income, depreciation expenses, that sort of thing, right. So that’s the history that IRS has. So if you were to go and report an exchange, where all of a sudden, it’s just your social security number, and you say you’re doing a 1031, exchange, IRS is gonna be confused, those two things don’t match up, right. So they’re in kind of lies the the issue and a potential red flag. So if you’re planning ahead, you certainly could, you know, make sure that you are doing the necessary steps to change that history with IRS, which means you need to kind of start getting things in motion, well ahead of when you would actually sell the property and have something to report to the IRS. So what we’ve seen in the past is what’s referred to as a drop in swap, but with ample time ahead of the what they call drops. So you would basically take it out of the LLC, you would liquidate the assets, put everything into individual names, and everything that reflected the LLC, that same scenario would have to be true. So utilities, insurance, bank accounts, it’s no small task, that is for sure. And then you would file a final tax return for that LLC, and start reporting it as two individuals, right tenants in common with each other, each taking your portion of ownership on your individual tax return, so on and so forth. And that would be, you know, ideally, a tax return or two, and then sell the property. But that is, you know, a lot of planning. Right. And that sometimes doesn’t always work, because people call us and they’ve already got the property on the market. They have a buyer and closing is in three weeks. Yeah, that, you know, that scenario doesn’t always end up working out for folks.
Yoni Schmidt 32:34
Yeah. So then one partner wants to do an exchange and defer the capital tax gain another may not. So what are the steps, I guess that real estate investors can take on the front end of an acquisition of an entity formation, you know, a partnership in general, that would lead them to a place where at the end of it, they could potentially do 1031 exchanges, in a way that split. One says, I’m going to do a 1031 exchange says other says, I’m going to take the proceeds and run. Right? Does it come down to the you know, operating agreement and the entity formation if we have an operating agreement? And you know, we call it whatever it is? Business Entity x, right? And then you have Marissa, you have your own entity, and I have my own entity. And fy two entities, I guess, are the members of the other entity of the entity x. Right. And maybe I’m complicating this a little bit more than it needs to be right? Is that a way to separate it to where we could do a 1031 exchange later on?
Marissa LoCascio 33:49
Right? So typically, where we see the flexibility to each go your own separate ways is when ownership is tenants in common. So whether that is to individuals as tenants in common together, or what we’ve also seen is to disregarded entities so perhaps a single member LLC, one of which is yours, and you’re the sole member, and then the other portion is owned by another single member LLC, of which your your business partner is the sole member. And each of those are disregarded entities for federal tax purposes. So they float through to each of you individually. And those two LLCs own the property together as tenants in common and report their respective interests on your individual tax returns. We’ve seen that type of scenario and that way it gives you the flexibility at the time of sale to each go your own separate ways and so that that structure has been done. But you know, I mean, we, we realize, obviously we’ve had people say to us, we will how the heck do you do that with, you know, rent checks and things like that do they have to make it payable to, to LLC, they’re like, I’m just telling you what, for 1031 purposes, you know, could be done the logistics of actually managing the property and that sort of thing. You know, that’s, that’s where you need to bring in those other advisors and those real estate professionals that know better.
Yoni Schmidt 35:32
Well that’s what we do. I mean, our core focus is property management. And we currently manage roughly 2600 properties across four distinct markets, Tulsa, Oklahoma City, Northwest Arkansas, Witchita Kansas, I can tell you, I consider AppFolio the Rolls Royce of property management software as a Service. It’s a wonderful PMS property management software, and we can, in fact, you know, deposit 50% of the rent income to one bank account and 50% to another, and we can allocate the ownership within our system to, you know, make those deposits in a very seamless way. So even if there are very, yep, ownership is, you know, divvied up into quarters, and each, each bank account would receive the, you know, the proceeds from that month, though. So it’s pretty simple. That’s interesting, though, that, you know, if you are looking to get into business with someone else, and you’re looking to grow and scale, but you may potentially, in the future want to do a 1031 exchange, definitely consider doing it in a way that sets you up to do a 1031 exchange and have, you know, two entities that are partners on a third entity, I guess, right. And that third entity could own the property.
Marissa LoCascio 36:55
And it would, it wouldn’t have to be, or it would be 50/50, it would still have to be just the 50 in order to keep that flexibility with taking your undivided interest. Yeah. So you would want to make sure that that those are the owners and not just another part of, you know, a multi layer LLC. Yeah. And make sure that you Yeah, you’re not acting as a partnership, you truly are tuning the properties as tenants in common? Yeah.
Yoni Schmidt 37:29
Beautiful, very interesting. Could you walk us through a yes, I? What are the you know, and I don’t know if you would even know this. But two questions. One is, you know, what are the general like ballpark costs of going through an exchange? Does it matter how large the exchange is? Does it you know, what changes the price of the exchange? And the second question is like, how do I know that an exchange actually makes sense to me as an investor?
Marissa LoCascio 38:02
Sure, sure. So we’ll tackle the first question with the fee. Typically, it is just based on the contract sales price, right? So for for our fee, I’ll give you a good good example. It’s a tiered schedule. So if you are selling for a million or less, it’s a flat fee of just 12 150. And that includes the sale of one followed by the purchase of one, if you were to sell a second property, or buy a second property in that same exchange, it would simply be a $300 additional property fee. And that gets paid right at closing, it goes right on the settlement statement, and we, you know, get a check for our feet or to pay it ahead of time or, you know, use your own funds out of pocket. So it just goes up incrementally, depending on that sale price. So we’re bringing nominal comparative to generally compared to what the potential tax consequences can be. Right. And what was the second part of the question? The
Yoni Schmidt 39:06
second was, you know, how do I know that an exchange actually makes sense? Typically, as investor, I, you know, I want to duplex I’m, you know, curious about the exchange process and how it can benefit me from a tax perspective perspective? Sure. I don’t know it makes sense.
Marissa LoCascio 39:24
Sure, yes. So, you know, for the most part, the sale price of the property isn’t necessarily going we’re not going to say, oh, gosh, well, you’re just not selling for enough that actually has nothing to do with how much potential taxes you may have. So what’s going to be a factor and what you would want to look at is, how much did you originally buy the property for? And how much gain Do you have? So is there a difference between, what you originally bought it for, and now what you’re selling it for, and how long have you owned it is depreciation. That is that going to factor into how much taxes you may have, we have had the scenario where someone bought a property and they actually bought it many, many years ago. And they are not selling it for any more than they bought it for 20 years ago. However, they have 20 years of depreciation that is going to be due when they sell. So even though they’re selling it for the exact same price, they bought it for 20 years ago, they still have a big tax hit because of depreciation recapture, which is a 25% tax. So, you know, there’s, there’s really no, you know, one size fits all it doesn’t make sense to do the exchange, it is based on your case by case basis and what you originally bought it for and what kind of tax consequences you have based on, you know, your particular tax situation. Yeah.
Yoni Schmidt 41:15
Wow. So depreciate recaptures, then what calculated back in to your your what taxes essentially?
Marissa LoCascio 41:25
Right? So if you took depreciation right on, you know, typically, when you own an investment property you are you’re gonna take depreciation on a yearly basis. So whatever the total amount of depreciation is that you took, over the time that you’ve owned this property, they’re going to say, Okay, you took, you know, whatever it is 75,000 in depreciation, you now owe us 25% of that back when you sell it.
Yoni Schmidt 41:54
Yeah, because that depreciation was used to wash away your tax liability in the years that you’ve a piece of real estate, you know, in Oklahoma, there is excess, you’re allowed to take accelerated depreciation. Those investors out there in Oklahoma or in any other market that allows accelerated depreciation. You know, consider that when you are when you are, I guess, doing your cost segregation or your CPAs. And your cost segue, and then, you know, taking that to help alleviate whatever tax liability you may have, at the end of the year, consider that if you want to do an exchange, right, yeah, right, interesting. Or even sell the property. Because if you were to sell the property and not do an exchange, and you had so much depreciation, you that that incident would be even even more severe.
Marissa LoCascio 42:52
Right? All right. Yeah. Depreciation is one of those things that a lot of people don’t factor in or think about, right. They took it while they own the property, and it was a great tax benefit on a yearly basis, but then they go to sell and go, Oh, my goodness, I forgot about that. And yeah, you know, it’s, it’s certainly something to consider, which is why we always say, you know, just double check with your accountant to get your full picture. What what tax liability Am I gonna have if I were to outright sell this?
Yoni Schmidt 43:25
Yeah. And then they can reach out to you to, you know, better understand what, how they can avoid any tax incidents, if they were to do an exchange, combined with the advice that they’ve received from their CPA on selling out, right. Is that,
Marissa LoCascio 43:43
yeah, we’d be happy to walk through a scenario with them. If they, you know, say, Okay, well, this is what I’m selling, this is how long I’ve owned it. This is what my accountant is saying my tax liability is, you know, and my plan is to buy X, you know, does this make sense? Because there are times where, you know, maybe they’re selling for a really significant amount. You know, I had somebody tell me years ago, they were buying, or rather, they were selling their property for 1.3 million, but they only wanted to buy one property for 300,000. And I said, whoa, whoa, whoa, whoa, whoa, hold up. That is a huge difference. And Does it still make sense for you to do the 1031 exchange? Because don’t forget, right? If IRS is looking at that transaction, they’re going okay. 1.3 million minus whatever your closing costs are, that’s what you need to buy for to maximize your tax savings. They weren’t even getting close. So Does it still make sense? The last thing we want you to do is pay us a fee to not save you any taxes, right? So in those scenarios, you know, even though yes, we tell people All the time to talk to their tax advisor, we really jump up and down when that kind of scenario presents itself because too severe of a trade down may not make sense. And we certainly want you to benefit from the 1031.
Yoni Schmidt 45:14
Yeah, that’s really interesting. I guess another question that I would have is for someone who is looking to sell a property, and they’re looking to buy, they’re selling a long term real estate rental, a long term investment rental, and they want to buy a short term rental that’s fully furnished and, you know, ready to go and operate, right? Is that something that you could do on a 1031 exchange, and including the purchase price, I guess, you would, you would break it up into real assets, which is the real estate and personal property, which is, you know, the furnishing and everything else that’s being bought, and is not allowed.
Marissa LoCascio 45:58
So for the 1031, the real property value would be allowed, but any personal property would be excluded, specifically, for 1031 purposes, right back in 2017, the tax cuts and Jobs Act got rid of the ability to do a 1031 exchange on personal property. So that was replaced with what you were talking about earlier, which was the immediate expensing. So when you’re doing a 1031 exchange, it will specifically exclude any personal property from the transaction.
Yoni Schmidt 46:35
Yeah, yeah. Very interesting. In for in, for those of us that are, you know, buying a house, for example, as a primary residence, and then turning it into a rental, and then moving into our next primary, right, those those that we’ve moved out of, and then we, you know, let them season as a real estate, investment rental property for a year, for example, six months, whatnot. That’s a lot, right, we could I could sell this property that I lived in, in the past, and it was my primary and do a 1031 exchange. Are there any rules? Is there a seasoning period that needs to occur? What’s the what’s the law there?
Marissa LoCascio 47:15
Yeah, so we see that a lot, actually, where people will convert their primary residence to a rental and kind of hang tough for a while rent it out. And, you know, I mean, there’s no set amount of time, not a bad year to get a tax return or to under under your belt, right with that. But in that scenario, that taxpayer might be able to kind of have their cake and eat it too, because they still qualify technically, in that scenario that you just laid out for the primary residence exclusion. And they could 1031 as well. So let’s just say they’re an individual, right, and they have lived there for two of the last five years. And then at the time of the sale, it was that rental property. And it’s been that for the last year and change. So what they could do is at the time of the sale, take advantage of that primary residence exclusion. So the 250,000, so they walk away from closing with 250,000. And anything above that would go into the 1031 exchange, and they would 1031, the remaining value, so kind of a great scenario. In that case, for people to kind of plan ahead and think about, you know, well, maybe I should hang on to this primary residence. Yeah, that’s how I get into, you know, investing in real estate, we’ve seen that happen over and over.
Yoni Schmidt 48:51
Very interesting. I want to be conscious of time, we kind of delve into just a whole bunch of like, spin off questions and conversate in a conversation not necessarily related to the questions that I get. Okay. I do have a couple more questions if it’s okay. And one of them is, you know, there’s there there seems to be sometimes this you know, notion of exchanges are enabling people to make silly investments because of the pressure right, that you know, people may or may experience and, you know, there there are so hungry to defer the capital gains tax evasion or incident and it may cause someone to, you know, make make a foolish mistake to go buy some piece of, like kind asset to exchange into, I’m sure you’ve seen this in, you know, in the two decades that you’ve been doing it, what are you know, some some strategies for identifying suitable replacement properties and, you know, tight real estate markets. Um, And, you know, how do you advise your clients to just end up taking the proceeds paying the capital gains taxes, instead of, you know, making some mistake that they may regret later in life?
Marissa LoCascio 50:14
Right? Sure. So, honestly, the best advice that that we give our clients is, take advantage of the time that you have before that 45 day time clock starts ticking. There is nothing that says you can’t sign an agreement for the property you want to buy, before you’ve even listed your current property, the dates that are on the agreements of sale do not matter, its settlement dates that matter. So you could have it set up so that you know your property you currently own goes to closing on a Tuesday, and the one that you are buying is set up to close on that Wednesday, and you’re done your 1031 exchange in a matter of two days. And because the real estate market is what it is, and has been those properties that are listed for sale inventories tight, so you kinda need to get it locked down. So you can feel okay, about that acquisition. And no, I’m not doing this just to wrap up at 1031. And this is a terrible investment. You know, and there are people that will get to the end of their 45 days, and they just simply haven’t found what they would like to acquire. And they they do they just let their 1031 fail, essentially. And, you know, after the 45 day window has expired, we send their funds back to them plus whatever interest it’s earned. And then they report the sale as a taxable sale and, and pay the taxes. Right. So, you know, obviously, they try to avoid it and taking advantage of that time before the 45 day window is is really the best way to kind of get ahead of that.
Yoni Schmidt 52:11
Yeah. Wonderful. That’s great advice. Love that. So find your identify the property before you even you know, get your relinquished property under contract and, you know, lock it up and just make sure that it’s that it is this, it’s closing after the relinquished property, right, you can’t click before because you haven’t sold and relinquished the property and funds haven’t moved around. And settlement, like you said, is what matters. So your relinquished property has to have settlement dates that are prior to the acquisition of the new one.
Marissa LoCascio 52:48
It is possible to do it in reverse, just as an FYI, it is possible to it’s called a reverse exchange, it is a little more complicated and a little more costly. But if you were backed into a corner and had to buy and close on the purchase before the sale, that is a transaction that that could be done. Very
Yoni Schmidt 53:08
interesting. And we probably need your own new podcast.
Marissa LoCascio 53:12
That’s a whole separate reversing improvements changes or a whole separate podcast. Yeah,
Yoni Schmidt 53:17
I guess it’s that sounds very complicated, because you still have to Shell out the money for that. And then you are correct. You get I guess, almost as like a reimbursement. And then there’s probably some paperwork involved with you know, your your tax filing your CPA when there’s Yeah, yeah,
Marissa LoCascio 53:38
I mean, the paperwork would still just be the normal 1031. But there’s a lot more paperwork on our side that has to be done to make that reverse exchange work.
Yoni Schmidt 53:47
So yeah, yeah. Which is an option. Yeah. Wonderful. Well, last final question. You know, I did a little bit of research about you, 1031. And before before a call today, you know, finally inspired by, you know, thought leaders like Adam Grant, which I saw that you follow on LinkedIn, he’s an organizational psychologist that I really truly respect and also follow. How do you incorporate you know, these like innovative ideas and general you know, organizational psychology, you know, call it philosophies and frameworks into your work at 1031 CORP?
Marissa LoCascio 54:36
You know, I mean, I obviously started doing this a lot of years ago and I have been with 1031 CORP. by started as everybody else does in this company, right? I started as an exchange coordinator, facilitating the day to day and you know, talking with the clients and I have morphed into a lot Different jobs over the years, right? But I always no matter what I am doing for our team, I am always trying to think of ways that how can I make this easier for them and easier for the client? Why What, what processes technology included in that, can we make better and make it work for us? So that this process seems seamless for everyone involved? Because there’s a lot of rules, right? There’s a lot that goes into a 1031. The fact that it’s part of IRS regulations, right? That’s scary to people. That’s scary for someone to have to try to figure out and follow. And there’s a lot of rules to explain, we try to really keep it as simple as possible for everybody, and explain things in a way that is easy to understand, right? We do this every day. But it’s kind of hard for someone who doesn’t do this every day to keep it all straight and figure out okay, what’s next? What do I have to do now? Or what are all the rules that I have to follow? I know, you told me this. Tell me the other 17 rules that I need to write. So it’s, there’s a lot that goes into all of these transactions. And, you know, we have to think about things from their perspective, and answer questions based on what, what is understandable to nearly everybody. And so we’ve tried to kind of keep our philosophy true to how do we make it simple? How do we make it understandable? You know, when I explain the identification rules, and you know, the same taxpayer requirements, and what we can do when there’s a sticky situation like a multi member LLC, and not everybody wants to 1031. So we’ve tried over the years to keep that as as easy as possible for everyone and an exceptional experience, because we made it simple and easy to understand and really keep that 1031 attainable for even the most green investor, and really help them understand the power and the possibilities of what 1031 could do for them with their investment objectives. Yeah.
Yoni Schmidt 57:44
Wonderful. Super interesting, very, truly inspiring, loving all this information. Really, thank you for your time. And I really cannot thank you enough. Because, you know, I know our audience is going to really benefit from this kind of content. And I know that I’m benefiting from this because I’m considering doing a 1031 exchange. After today, I’m going to connect you after this call right now. I’m going to connect the two of you and see if you can work together because he is also looking into exchanging a property. And I hope that we have the opportunity to work together again in the future.
Marissa LoCascio 58:27
That sounds great. Thank you so much for having me. Yeah.
Yoni Schmidt 58:30
Thank you so much. Marissa LoCascio 1031 CORP. If you are looking for 1031 Exchange Qualified Intermediary, reach out to Marissa, Marissa, what’s the best way to reach out to you? Email?
Marissa LoCascio 58:44
You can hop on to our website, which is simply 1031corp.com or our 800 number 800-828-1031. Beautiful.
Yoni Schmidt 58:53
Beautiful. We’ll make sure that it’s in the comments below. Check it out if you’re looking to exchange a property. Thanks, Marissa. See ya.
Outro 59:05
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