David Moore, 1031 exchange expert with Equity Advantage Incorporated speaks on what can be exchanged using IRC 1031, what Like-Kind property is, and more!
What Can Be Exchanged?
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What can be an exchange? What is like-kind when applied to real property? People look at 1031 companies and say that we are real estate companies. Well, we’re not. We have nothing to do with real estate, other than it is one asset class we work with.
So, we are looking at real property. The like-kind requirement for personal property is totally different than like-kind requirement for real property. Real property is a very broad definition because you can exchange out of a rental house into an apartment building, a dirt office building, strip malls, or a place at the beach to retire into. All those things are going to be of like-kind because it has to do intent, not time. For examples, buildings that say build to suit or a 30 year lease… A 30 year leasehold interest in property actually constitutes like-kind property, which constitutes real property and a 30 year lease or a lease with extensions to 30 years. Even that will fit, so it’s a very broad definition.
When we look at this tax reform act and the measure that they put forth, this is something that they have been kicking around and it’s tightening the like kind requirement. Which is a problem because 1031’s are one of those tools. I think a lot of the politicians look at 1031’s as something for the very wealthy. But I would submit that it’s one of the only tax things that is really there for just the everyday Joe. Because this can be used by anybody, and it’s an inexpensive tool. You don’t have to have a high powered lawyer to do it. I mean when you’re talking these huge estates and big people, they don’t pay taxes, they’ve got teams of lawyers taking care of stuff. But this is for the everyday people.
I’ll never forget… we are on the first floor of the building down here in the hallway and we have a lot of walk in people. One day one of the guys that works on the elevators came in, so I went out and sat down with him and he was just an elevator repair guy. He lived over in Northeast and he’s a really nice guy. He said one of his neighbors was moving away, and he’d always helped this gal out with different things, and she says “hey I’m going to sell my house, are you interested?”. So the guy ends up buying it. Then another neighbor came to him, and he buys something. So this guy who started out with very little money, now he’s got millions of dollars worth of property. It’s great. This elevator repair man doesn’t have tax or legal people to take care of him, but he saw what we did and he understood for a $1000 he can do an exchange. That’s a pretty nice situation.
This is a way better investment than the stock market, where you just give your money away to someone and have no idea what it is you’re investing in. We always say invest in what you know, think about real estate. I always joke I’m in the business of selling real estate to real estate people. If you buy gold, what are you betting? That it goes up in value! If you buy stock, what are you betting? It goes up in value. Maybe you have a dividend on it. When you buy real estate, it doesn’t have to go up to make you money. You have interest deductions, you have depreciation, and you have cash flow. The property could never go up in value. You have a kid going to college, so maybe you buy the house that the kid is living in, and let the kid manage it. Then the roommates are going to be buying the property for him.
Value doesn’t have to go up.
But typically over time it’s going to. So it is a pretty darn nice deal. Any real property, held for investments like-kind with any real property that you’re intent to hold for investment.