We are back to bring you the latest in the world of 1031 Exchanges! We are pleased to include David’s Co-Founder and brother, Tom Moore. They cover the latest tax proposals, what they mean for your Exchange, and a few client questions.
What you will learn:
- The importance of communication between clients and their service providers
- Challenges and nuances of handling a 1031 Exchanges
- Impact of potential tax law changes
David Moore: Hello everyone. David Moore here, and I’m blessed to have my brother Tom with me today. You guys get tired of hearing me. We want to bring Tom in and get some real good information from him. So, it’s a day mid-September of 2024 for future context. It’s sort of an entertaining time in that we don’t really know what’s going to happen with tax laws going forward, but you’ve heard my story of how the firm got started and I’d sort of like to have you hear a little bit about the company from my brother Tom’s perspective and what sort of makes us unique in the industry.
Tom Moore: Yeah, well, good morning. The whole impetus be behind our starting this company was really that we weren’t able to get the kind of help that we wanted with respect to 1031 transactions when we were doing them. And we really wanted to offer a service that did provide a lot of information and be able to consult with people and give them answers and solutions to their issues and problems going forward. Just yesterday we had most of our staff in a meeting that went probably a couple of hours long and we were discussing a couple of transactions where even though we spent a lot of time with our clients, their plans had changed midstream and they did not notify us. And that kind of thing results in problems.
Tom Moore: So, we have always tried to be there for our clients and have live warm voices on the phone when you call in and be able to have somebody available to talk to you always, and you’re not getting answering machines and voicemails and stuff like that. And I think it’s, we’ve got a lot of people that have come back to us year after year after year for 30 years now, 30 plus years. And I think that they really appreciate that. So…
David Moore: So, one of those things, it’s really, it’s just conversations and that transaction part of the issue was that the client didn’t really want to take the time to even talk to us. I mean, they explain what we wanted to go through the deal with them and just couldn’t even get them to talk to us on the phone, correct?
Tom Moore: Yeah. And exactly. And this stuff is super important for the client to understand. And I know they had tax and legal people involved as well, but the client themselves needs to be fully aware of how important all these deadlines are in a transaction and just exactly what they can and cannot do. And they obviously, they work very hard to make their money and as we always state in our ads, we work very hard to keep their money theirs and it has to be a team effort. So, yeah, conversations are super important.
David Moore: So, I think, I mean, one of the things we’re up against right now, even with the inflation and everything else, everything’s been sort of mushroomed. The interest rates are higher, but you’ve got people that have properties may have gone down in value. They might have situations where going forward they might have to inject money into a transaction, a variety of different things that need to happen. And this code is over 100 years old at this point, and you’d think there’d be better level of knowledge across the tax and legal community. And it just doesn’t seem there. And I think, if you think back when we put the company together, I mean, we put it together because really nobody was here doing it.
David Moore: And since then you’ve got big national companies that have gotten involved and it just seems as though they just handle it as a transaction and sort of order takers. But I mean, we’ve had a few deals recently where something’s been set up with brand A, that just is an order taker and then somebody gets us involved hopefully before it closes and it ends up being restructured. I mean, fairly common occurrence, unfortunately or I mean, how often Tom, do you take a call or working with somebody that is actually working with another company but unable to get answers?
Tom Moore: Pretty common. Not just me, all of our advisors in here will take phone calls and we’ve got people who are working with other companies and they’re just not able to get ahold of them or they’re not able to get answers and get the help that they really need. A lot of their tax and legal people are telling them to ask us the questions, ask the facilitator, accommodator the questions. So, it again, is really important that they’ve got somebody there to speak to the client and get some answers.
David Moore: Hello everyone. David Moore here, and I’m blessed to have my brother Tom with me today. You guys get tired of hearing me. We want to bring Tom in and get some real good information from him. So, it’s a day mid-September of 2024 for future context. It’s sort of an entertaining time in that we don’t really know what’s going to happen with tax laws going forward, but you’ve heard my story of how the firm got started and I’d sort of like to have you hear a little bit about the company from my brother Tom’s perspective and what sort of makes us unique in the industry.
Tom Moore: Yeah, well, good morning. The whole impetus be behind our starting this company was really that we weren’t able to get the kind of help that we wanted with respect to 1031 transactions when we were doing them. And we really wanted to offer a service that did provide a lot of information and be able to consult with people and give them answers and solutions to their issues and problems going forward. Just yesterday we had most of our staff in a meeting that went probably a couple of hours long and we were discussing a couple of transactions where even though we spent a lot of time with our clients, their plans had changed midstream and they did not notify us. And that kind of thing results in problems.
Tom Moore: So, we have always tried to be there for our clients and have live warm voices on the phone when you call in and be able to have somebody available to talk to you always, and you’re not getting answering machines and voicemails and stuff like that. And I think it’s, we’ve got a lot of people that have come back to us year after year after year for 30 years now, 30 plus years. And I think that they really appreciate that. So…
David Moore: So, one of those things, it’s really, it’s just conversations and that transaction part of the issue was that the client didn’t really want to take the time to even talk to us. I mean, they explain what we wanted to go through the deal with them and just couldn’t even get them to talk to us on the phone, correct?
Tom Moore: Yeah. And exactly. And this stuff is super important for the client to understand. And I know they had tax and legal people involved as well, but the client themselves needs to be fully aware of how important all these deadlines are in a transaction and just exactly what they can and cannot do. And they obviously, they work very hard to make their money and as we always state in our ads, we work very hard to keep their money theirs and it has to be a team effort. So, yeah, conversations are super important.
David Moore: So, I think, I mean, one of the things we’re up against right now, even with the inflation and everything else, everything’s been sort of mushroomed. The interest rates are higher, but you’ve got people that have properties may have gone down in value. They might have situations where going forward they might have to inject money into a transaction, a variety of different things that need to happen. And this code is over 100 years old at this point, and you’d think there’d be better level of knowledge across the tax and legal community. And it just doesn’t seem there. And I think, if you think back when we put the company together, I mean, we put it together because really nobody was here doing it.
David Moore: And since then you’ve got big national companies that have gotten involved and it just seems as though they just handle it as a transaction and sort of order takers. But I mean, we’ve had a few deals recently where something’s been set up with brand A, that just is an order taker and then somebody gets us involved hopefully before it closes and it ends up being restructured. I mean, fairly common occurrence, unfortunately or I mean, how often Tom, do you take a call or working with somebody that is actually working with another company but unable to get answers?
Tom Moore: Pretty common. Not just me, all of our advisors in here will take phone calls and we’ve got people who are working with other companies and they’re just not able to get ahold of them or they’re not able to get answers and get the help that they really need. A lot of their tax and legal people are telling them to ask us the questions, ask the facilitator, accommodator the questions. So, it again, is really important that they’ve got somebody there to speak to the client and get some answers.
David Moore: People, a lot of people don’t want to talk. I mean they just want to email or text you and say, “Hey, put it together.” But we really, you don’t know what is necessary or what, we want to know why you’re doing the deal and the opportunity cost that transaction is, you got to get it done in that 180 day timeline. You got 45 days to figure it out. And that’s part of the problem with this, that transaction yesterday. That was a problem. And it’s really communication and understanding that if you choose to do this one, we don’t want to do a deal to do a deal. We want to make sure it’s getting you where you want to go and the opportunity cost of the transaction is that finite period of time.
Tom Moore: Yeah. And we fully understand that plans change and it’s just the nature of real estate that somebody finds something initially it looks like a great acquisition, it’s going to fit their needs, and then as they go through inspections and all the due diligence process, it’s not working out for them. And so yeah, we certainly understand with real estate that plans change midstream. And we’re not saying you can’t change plans, just let us know and if not working with a company that does have the staffing, that can take the calls and answer questions. And if you just don’t have that communication, that’s where trouble arises.
David Moore: So, in the marketplace today, I mean obviously if we look at since the last crash, the market just continued to increase more and more. And then during COVID, I think we were both, you’ve got a lot more hair on your head than I do. I think I pulled mine all out, but we had so much volume going through, it was really, it was sort of craziness and people are just making things happen. But today, deals are harder to create and we’ve got more complex transactions occurring. But as far as somebody coming in and looking to do a transaction, what are the typical things that you want to know, Tom?
Tom Moore: Well, first off, as you had mentioned, we want to know, why are they doing the deal? Do they need to do the deal? So, that’s where there’s going to be a number of questions that we’re going to ask them because there’s a big misconception about what even gain is in a transaction. And this is a tax deferred Exchange, so we’re trying to defer gains on property transactions, but there’s a big misconception about what gain actually is. And a lot of people just think that it’s the cash they’re walking away with. They don’t have the information a lot of times themselves, either from their tax or legal people, to know whether or not they even have to do an Exchange. We can through a number of quick questions, figure out pretty quickly that, whether or not they do have gains on that, particular transaction.
Tom Moore: It may make sense, but they also have to look at what else has gone on in their life, gone on in their life for that year. And do they have other losses maybe that can offset gains? It’s not always the right thing to do. The Exchange is not always right for people. And we both handle transactions or phone calls all the time we’re they just don’t need to do an Exchange and we don’t have a problem in letting them know that. So, a lot of times we’ll take a phone call and they want to know what they’re going to pay in taxes right away. And that’s not an easy answer either. We might know after, getting some information from them what their exposure might be if we’re looking solely at this deal.
Tom Moore: But again, there’s a lot more going on in their life than just this one real estate transaction. A lot of times they’ll pop in and say, well, yeah, this property also is a property that I used to live in. And that brings up other questions, how long ago did you live in it? If it was recently, they may be able to take advantage of both the section 121 and the 1031 tax codes, take their universal exclusion on the property for the time that it was a residence. And for anything that they’ve got over that if they’ve got over the 250 and 500,000 capital gain amounts, then they can do an Exchange on the property and hopefully defer the balance.
David Moore: So, along those lines, we got a question actually it looks like this morning from somebody that, emailed in, just had a question regarding a conversion of a property from their primary residence into investments. So, the exact scenario you just mentioned, and they gave us some details, but they’re wanting to know what they need to spend as a replacement. And really, if you look at the message it, it talks about, their gains and talks about 250 or 500, and then they’re asking, is the 500, what needs to be spent or what do they have to spend going forward? But they didn’t give us the value of the house or any of the closing costs or anything that was going on. I mean, so for us to answer what they have to spend in a transaction, I mean, you’re really sort of stuck. I mean, so they’re married. So, they got a half million exclusions. So, whatever the thing sold for, I mean what, how would that work?
Tom Moore: Yeah, so, and it’s great to at least get this much information going forward. because now we know what questions to or where to start with our questioning back with them. But they, if they’ve got, if it’s a married couple and it is a property that they had lived in, and it’s, and they had lived in that property, two of the last five years, so really they moved out of it three years ago or less, if that’s the case, then they can take that exclusion and in which means that they can, they really could go down in value as far as the Exchange is concerned by about a half million dollars and still, defer all their taxes. because they can get the $500,000, if they sold a property that, let’s say they sell a property for a million bucks and it’s got, $800,000 in capital gains, then they could take the $500,000 exclusion and do an Exchange on the remaining $500,000. So, they buy a $500,000 property and that’s going to allow them to defer the balance of the 800 in capital gains.
David Moore: So, 121, I mean if we look at 1031 and 121, 121 the universe exclusion, and we, when we got in business, that didn’t exist. So, that was 1997. And I guess what I’d say is 1997, 250 and 500 gain meant something. If you just look at what’s happened in the last few years just with inflation and the values, the 250 and 500 is woefully inadequate. It probably ought to be a million five or a million or two million or something like that. But I mean, the 250 and 500 is woefully inadequate for people in today’s world. But when you’re looking at that stuff, 1031 is going to apply to what something is at the time of acquisition or disposition where 121 just simply applies to any property that meets that two out of five occupancy.
Tom Moore: Yeah. And just to be clear on what I was just going through. So, again, that the property at the time that the sale occurred was a rental property, but it used to be the primary residence and then, and it was the whole property was the primary, but it’s now all been rental property and within a time period that will allow for the section 121 exclusion, we also deal with properties all the time that are mixed use properties that will, that people can have an allocation for the primary residence portion and also the investment property portion. And that can be a, it might be a duplex, it might be a fourplex, it might be a ranch or farm property, that the client’s living on. And so, they have to have the help of their tax and legal people to determine allocations for the investment portion and the primary residence portion.
Tom Moore: Bottom line, they can do both 1031 and 121, and again, hopefully they can defer all their taxes, but section 1031 is certainly not an all or nothing proposal or transaction. And it’s very common to have people that are either wanting to pull money out or the property that they’re looking at as a replacement property is just not up to the same value as what the investment portion may be. And they’ll, it doesn’t disallow the Exchange. They still have a valid Exchange, but they may have some tax on, the difference if they’re going down in value. In the industry it’s referred to as boot. And so boot occurs if they’re getting something back in the transaction that is not real estate. If they go down in value, they’re either going to have, boot as a result of cash that they receive and they’re not spending, or they’re going to have boot in the form of debt relief because they’ve got a loan on the acquisition that is less than what they previously had.
Tom Moore: There’s a lot of different ways that they can go about these transactions. There’s a lot of different ways that the section 121 and 1031 can be applied at the same time in property transactions. And you’re absolutely right for these numbers to stay for the last, what, 27 years unchanged [laughter] 500,000 is not worth what it was then.
David Moore: So, it’s funny, I don’t even hear anyone talking about the politicians. Nobody talks about bumping those numbers and it’s really sort of intriguing to me. But, I just want to clarify. So, you talk about relinquishing, let’s say an asset that that could be a single asset with allocations both investment to residents. So, what about people? So, I was on a flight home the other night, and I’m sitting next to a girl that the VRBO is her house, so she travels a lot when she’s gone. She’s got that, but then she also, VRBO is just a room in the thing all the time. So, in that situation, you’d be looking at whatever portion of the house is being used in that context and I mean with depreciation or I mean, what are you doing. And carving it up obviously gives you the ability to allocate things different ways.
Tom Moore: Yeah. And that again, is something that they’re going to really have to look to their tax advisors and hopefully there’s, the taxes have been treated for, several years or however long they’ve been doing this, where they’ve got the percentage allocated, the tax people have got the percentage allocated. They’re taking depreciation on the property for that percentage. And it’s very well documented. But yeah, that can certainly happen. It happens all the time. There’s such a big, a lot of people with the ADUs now. Probably…
David Moore: That’s what I was just going to say.
Tom Moore: Yep. Happens all the time, and the dollar’s not going where it used to go. And so people are looking for other income sources all over the place. Look at the number of people who are going back to work that thought they were retired and, if somebody has a room or a separate unit on their property, maybe they can rent that out and avoid having to go back into the workforce.
David Moore: So, if they’re renting out a portion of their house or they got the ADU in the backyard, you just, you just commented about depreciation. What’s the government’s position on depreciation?
Tom Moore: Well, they feel that, if you have property, if it is indeed investment property, rental property, and it’s depreciable whether or not you have taken that depreciation, they can treat it as though you have. And so, you may end up with a lower basis and depreciation recapture that you didn’t know that you really had so…
David Moore: And never had the benefit of it.
Tom Moore: Yeah. Never had the benefit. So, if you can take it, it is a great benefit. If you can take depreciation, certainly do so.
David Moore: I mean, they hear me a lot more and on the presentations all I always say, look, good tax people, I think are some of the most important people period in your life these days. And we’ll talk a little bit later about some of the tax proposals in, the Harris side, the 24 party platform and what they’re proposing. But if you look at these things, if you think about, I was talking to a buddy this morning and Eric and I were talking about the need for good tax people and what’s going on in these different situations. And you start thinking about just a question, I had a… Yesterday I got an email from somebody wanting, he said, I looked at 24 different, I think it was like 24 different capital gains calculators. And he says, they’re all giving me different answers. And I’m laughing because, you just said it. I, you want a good tax person, period. But if you look at your return on investment, you might, if people are interested about Cost seg, take a look at our YouTube channel is there’s a series of videos on Cost seg. It’s Cost seg is just sort of the basic, delineation of the investment property.
David Moore: The rental house most people are going to say okay I bought it for X and I’ve got… So, that’s a $250,000 purchase. Maybe the Dirt is 100 and the improvements are 150 and you’re going to write the 150 off over 27 and a half years. I just threw numbers at you but who makes up those allocations? And that’s an opportunity where you’ve got to work with your tax people to do that. And the more you shove to the improvements the better your return on investment is going to be. And I just don’t think people think about that, that much. Cost seg is just out on steroids. Instead of two allocations you’re going to have 50 or whatever it might be. And we can look at one of those videos on Cost seg that we’ve got online if you want to know more about that stuff. But who puts the value on the ADU? Who puts the value on the room? Who’s helping you with that stuff? And I just see such an aversion. People don’t want to pay for those answers and think about your basis on a property.
David Moore: Basis is simply the purchase price plus capital improvements minus depreciation you better keep track of every receipt you’ve got for that property from the time you bought it or through your investment life because in 1031 we’ve got a basis carry forward right? 1033 involuntary conversions basis carry forward. As you said earlier 121 when it came in before that we had 1034 basis carry forward.
Tom Moore: Yeah. And a lot of people will say well is my basis really going to be that important if I’m not going to ever sell it if I just keep exchanging? And yeah, it is because it’s going to determine how much you’re going to be able to depreciate on the acquisition of the new property because your basis is carried from one property to the next and it may be adjusted upward if you’re going up in value certainly go up in value by another 500 grand. You may have up to that much more depending on the property type but you may have that much more to depreciate moving forward. And again, big benefit if you can. Those allocations are going to have to be something that’s agreed to between tax maybe legal it’s going to be determined a lot of times by brokers help coming in and giving some comps in the market and it’s just a number of different things that are going to play into that equation. But it’s certainly very important to figure out for the life of the investment.
David Moore: So, when you’re looking at a basis in a property like I said it’s that acquisition. Probably the acquisition varies dramatically depending on how you got the asset. And then your capital improvements. How often do you talk to somebody when you start talking to them about buying a property putting… Whether they put money into it during the time they’ve owned it whether it’s been expensed or capitalized?
Tom Moore: Well, almost every time we talk to them because people will say I bought this property for X. I put Y into the property. And then basically the next question that comes out is well, were those monies that you put into the property, were they capitalized improvements or was it just expensed items? Were they major remodels items, new kitchen, new surfaces, new siding, things like that or was it a lot of repair because that’s going to affect their basis because they may think that they put 100 grand into the property and that instantaneously bumps their basis by that much and bottom line maybe none of it does. If it’s all expensed then certainly it was a benefit to them in that tax year but it’s not going to affect their basis and therefore gain on the sale when that occurs.
David Moore: So, earlier you were talking about numbers a little bit the basis and you started looking at how people allocate things to improvements or capital improvements or just writing it off as expenses. And I think there’s so much confusion. People just… You ask them well how much money did you put? I put 100 grand into it. Did you write anything off? Oh, I wrote it all off. So, in that context that situation there’s no change in the basis period but that’s where they could tax people and also what happens sometimes, the capital improvement might just be an expense if it’s part of the closing right?
Tom Moore: Yeah, it could be. Yeah. If they’re getting the property ready to sell and yeah.
David Moore: So, what happens how often do you talk to somebody that’s prepping a property… I laugh because our friend Chip is… He was complaining that they’re selling their house and that the broker listing for them they want to do like $50,000 worth of work to it. And he’s like oh it got to come out of pocket all that money and it’s like, okay, so what happens for somebody that maybe they took money off their HELOC, put the thing in or maybe bought a property with a HELOC instead of going to get a loan? What’s HELOC look like on a disposition and what happens with the Exchange?
Tom Moore: Yeah, so that’s a good question. People…
David Moore: A HELOC for those who don’t know is a home equity line of credit.
Tom Moore: Yeah. So, they borrowed money for the property acquisition, and they probably want to pay that back when they sell their property but it’s not a recorded lien on the property. It’s probably a lien on their primary residence. So, as far as the banks are concerned that property is a debt-free property owned free and clear and you sell it for half a million it’s all equity. Everything would in an Exchange transaction less closing costs of course title escrow fees and commissions and things like that all of the cash would come into the Exchange and they cannot take any of that money without having to pay taxes on it. So, it’s certainly a conversation that if they want to pull money back out and pay back that loan we’ve got some things that we can certainly discuss with them to help them out. But it again takes planning and that’s where we come back to questions and answers and having those conversations it’s really important. Somebody may contact us initially and tell us yeah, they bought a property for 500 grand they borrowed 250, they got a 250 loan.
Tom Moore: They may just say it’s got a 250 loan on it and we see settlement statements or the title report and no there’s no recorded lien there’s no debt against the property and it shows it’s all cash coming out. And so that comes back to having those really important conversations and getting down to the bottom of exactly what’s going to take place when closing occurs.
David Moore: So, you probably agree with me after doing this for so long that when people ask us when we’d like to know about the transaction I tell them when they buy the property not when they’re selling it because you and I were taught the same strategies with investments. What are you going to make? How are you going to make it? When are you going to make it? If you can’t answer the questions, don’t buy it. But with 1031 in mind it’s really that form of ownership that’s critical. If you and I go buy something together and we do it via a limited liability company, what do we own? And if we go to sell it going forward are we going to go forward together? And what happens in that situation if we want to go separate directions?
Tom Moore: That’s a question that comes up all the time. Whenever we see somebody come in and they’ve got a property that’s held under an entity like a limited liability company again one of the first questions we’re going to ask is how many members are there? Who are the members? Does everybody want to go forward together or do they want to split up and go their own separate ways? And yeah, we want to get the phone calls well ahead of them ever listing properties for sale if we can. It takes planning especially in those cases where you and I own property together in a company name and you want to take your money and invest into something else and maybe I want to take my money and I don’t mind paying taxes. Maybe I’ve got losses that I can offset for that year and I want to go on a vacation or something.
David Moore: Maybe you just want to buy a boat.
Tom Moore: Yeah maybe I want to buy a boat. And a lot of times with these partnerships people will initially start out with the same goals in mind and they might go through several transactions but they eventually always end up getting to a point where they want to go separate ways. And we see it all the time and we don’t want to see it a week ahead of closing. But if that is a situation they’ve got a partnership, partnerships and Exchanges. We’ve done so many. We’ve done tonnes of videos on this stuff. We’ve got all kinds of articles that have been written. We send out information on partnerships in Exchanges to potential clients all week long every week. And it’s a big question. It’s a big deal super important to talk about because it takes planning and a lot of times these LLCs are going to have to be dissolved and switch it over to a tenant in common ownership. And sometimes that’s done a year or two in advance. It all depends on how conservative people want to be about it but that’s a very hot topic in the Exchange world.
David Moore: So, Tom is the deed or title of the property does that always indicate true ownership of the property?
Tom Moore: No. No. No. We’ll have people that will tell us that they either own property individually or they own it in a partnership and we’ll get a copy of the title report and it doesn’t reflect what they’ve been telling us. And they said well, yeah, we deeded this property we just never recorded it but they have treated it tax wise as one way or the other partnership or individually owned assets. And if that’s the case then great. It’s a matter of getting that deed recorded and hopefully they have been treating it tax wise as however they ultimately think they have been. But if they’ve got a partnership and they say that now we dissolved it years ago and it’s not been treated that way then it could have other issues.
David Moore: So, we got a deal last month. And this is I think a great example of having the conversations and why we used to talk about the difference between in the Exchange world what we do is called, I mean we’re called QIs, Qualified Intermediaries we’re called facilitators, accommodators. And we always just with our roots thanks to Ron, we always called ourselves facilitators acting… Taking an active in the transaction. But there are many people that just sort of handle the… Take the paperwork and put it together and don’t ask the questions. And a deal that comes to mind is one that came up last month that was actually put together by another company. I don’t know how the other company got involved but they just put it together and it was just in the gentleman’s name Oregon couple and been married for years and filed jointly. So, both have been enjoying the benefits and burdens of ownership but they just set up the Exchange in the gentleman’s name because that’s how the title read. And nobody bothered to ask them if that’s the way they wanted to do it or if that was the way it had been handled through the years.
David Moore: And fortunately their broker’s the one that sent them to us and we got involved in the transaction and actually had the deeds corrected to get both people… Get the spouse on the title as well before the disposition. And those changes were all being done the set properties were being sold because he was terminally ill.
Tom Moore: Yes. There was concerns over his health.
David Moore: Yeah. Concerns about his health and they were trying to get some planning done and he actually unfortunately passed away a couple of weeks ago. And so if she hadn’t been added.
Tom Moore: Yeah in mid Exchange. Yeah, the sale had occurred and thankfully she is on the title. And so it certainly is going to be a great benefit to have that moving forward because she does have to complete the Exchange for her portion.
David Moore: Do you want to talk about that a little bit because the way the law is today you get stepped up basis for now take a look at the ’24 policies but at least today you’ve got a stepped up basis. But real quickly…
Tom Moore: Yeah she would for his portion of the property if they’re both on the title and he passes then they’ll establish what the fair market value is for the property currently at the time of his passing. And now the basis will be adjusted accordingly to give it value appropriately.
David Moore: But they’re still going to have to complete the Exchange and meet the value and equity requirements they were looking at while he was alive otherwise, they’re going to have to tax it.
Tom Moore: Yeah, yeah. Moving forward the basis will change into the new property acquisition. But yeah it’s complicated. And again it’s a good thing that everybody did get involved with that. The topics were brought up. There was concern over his health and you don’t want to hide from this stuff.
David Moore: So Tom when we were much younger and we were getting into this business one of our mentor Ron’s statements was that keep your eye on the politicians that they’re going to come after us over and over again even though the quote’s over 100 years old at this point final guidelines were issued what? Fall of ’91 right? As we put the company together we’ve had changes, we’ve had revisions on reverse Exchanges we got that. We got second home stuff, we lost personal property in Trump’s tax reform in 2017 by the way for everyone out there that thinks that his reform was for the wealthy it took all the personal property away and shoved it into QOZs and all. So, you used to be able to Exchange. We had so much fun doing cars and boats and planes and stuff.
Tom Moore: Yeah. We’re both car guys. Those were fun to see what was coming through.
David Moore: All that went away. So, right now we’re facing a situation yet again where they want to screw with 1031. I think last time when Biden was elected in his early budget they were wanting to cap annual deferrals. You could keep 1031 but they wanted to cap it to a half million per person per year. The ’24 party platform actually does away with 1031 and also does away with long-term capital gains tax rates. So, we’d have a tremendous… Basically going from 20% on appreciation 25% on depreciation at the top end up to 37% would be normal income. We’re looking at… So, you combine that with elimination of 1031 and what’s going to happen to market velocity you’ve got the taxation of unrealized gains which on Wall Street would do one thing but on… Imagine people owning homes or ranches and would they even be able to keep the properties they’ve owned for years?
David Moore: And especially considering that a lot of the gains are subject to like I said earlier not appreciation per se but inflationary gains especially when you’re looking at the 250 or 500 and then elimination of the stepped up basis. I would argue any one of those things is really a doomsday situation for investors. But if we combine a few of those it’s catastrophic. And just the sheer… Can you imagine the sheer cost of implementing that taxation of unrealized gains is one thing on Wall Street where you’ve got a value of every stock at any given second. But what’s real estate worth? I mean our youngest brother for those of you that don’t know out there he is an MAI appraiser. I mean that’s top of the heap in the commercial appraisal world. And I’ve asked him if you watch our videos you’ve heard me say before it’s like, Hey Greg, how do you know when you’ve done the right job? And he’s like well, it’s easy. I say, what do you mean by that? Nobody’s too happy or too mad. But those values are totally subjective. And could you imagine the sheer cost of trying to value those things?
Tom Moore: Well, I guess you could look at it another way and say if they do pass all this stuff then all the values of everything’s going to plummet so much that nobody will have any gain. [laughter] That’s kind of… You laugh but at the same time it’s going to result in stagnation in the marketplace in all the different fields of investments, real estate, stocks, everything you mentioned. We have had to fight this every couple of years it seems for quite some time. And the politicians come out with these proposals and they think well, these are going to be winners for us tax wise. We’ll get all these additional tax revenues. And it always turns out to be a loser. It always does. They think they’re going to get taxes on every transaction. Well, you know what? Those transactions are just going to stop. Because if somebody has to pay such a huge amount of their net equity in these things. Maybe it’s not even equity they have if they’ve got tax exposure on these transactions that are just through the roof every time and they’re not going to sell.
Tom Moore: If they don’t have a way of deferring taxes they’re not going to move from property to property. They may do it one time and then they’re going to sit on them. And now what goes away? All the tax income all the revenues on appraisals and inspections and escrow and real estate commissions we look at settlement statements every day and the number of different fees that are all taxable fees the government gets their cut on on a settlement statement is tremendous. So, if all that stuff goes away so does the income.
David Moore: For all those people, the tax revenue for all those people.
Tom Moore: Yeah. All those people. So, the private industry is hurting, the government is going to end up losing money on it. And again our industry the FEA, Federation of Exchange Accommodators we pay for a lot of people to do a little lobbying in Washington and they are always coming out with all of these studies and these proposals always end up in big tax revenue losses for the government. It’s the total opposite of what they expect. These people are not… They’ve not been business people they don’t live in the real world and they should be consulting with those that do. That’s the bottom line. And they apparently always know more than we do. So, they’re not going to.
David Moore: They wrote a white paper on it Tom, they went to Ivy League school. They wrote a white paper on it.
Tom Moore: Yeah, I don’t remember anybody calling me ever and asking my opinion about stuff. Anybody that I know that would be a great source of information for them.
David Moore: The last time the proposal to cap the gains ultimately leading to stagnation of the market but ultimately the way that it was really fended off was to show… When was the last time that… Well, anytime you and I buy a property together we are always improving. But I mean think about for those of you out there think about the last time you bought a property where you didn’t put any money into it. So, the vibrancy of the market there’s all these cries for low income housing in a market where the government hits you with all these SDCs all these fees it costs you so much to get a shovel in the ground per unit where you can’t afford. And now the cost of building the cost of the Dirt, everything is so high, they want low income housing and it’s just you can’t build it in the current marketplace, at least up and down the west coast. But you think about the buildings those and the stuff that we liked I mean sort of the garbage real estate we’d buy and improve. So, you take something we can all drive down the street and we can see a property and know whether the owner wants it or not.
David Moore: So, there’s ways if you’re an investor and you want to buy a property that’s sitting there rotten on the sidewalk and if you just go ask the person to list it you give them a place to go tell them Hey, go buy a Delaware statutory trust or something. Get the check in the mail, defer your gain, do that stuff. But really the last time the proposals happened we started looking at the industry NAR thank you. You start looking at how 1031 was successfully defended at that point was just that market velocity. And what happens to low income housing which would be those BC apartments not the big shiny new ones that the real estate investment trust and everybody buys or builds but it’s the old stuff.
David Moore: And so, if it can’t be sold either because we have insurance issues now where insurers aren’t insuring older buildings. So, if you can’t insure it how’s anyone going to buy it? But also just the vibrancy of those properties to keep them working. Every time somebody buys it they’re shoveling money into it. So, it is really critical when you look at this stuff understand really educate yourself. Our father always used to say anytime you read anything about something you know something about you know how wrong it is. So, I would challenge everybody out there really take a serious look, whatever side you’re on or I think more of us are probably in the middle just tired of all the politicians. But if you’re looking at this stuff really take the time to understand what candidates are trying to do what and what the ultimate impacts are. Don’t just listen to the talking heads and believe them.
David Moore: Really think about it rationalize what’s going on. And what do you think the impacts of these different measures are going to be? Obviously for the two guys sitting here today I mean we look at… And we are sort of unique honestly because we also have… We’re talking to you today from the context of a 1031 side via equity advantage. If you’ve got retirement money and you want to take that money to go out and buy things wall Street doesn’t sell. Give us a call IRA Advantage is going to take care of that. And when they were talking about taxing unrealized gains I started thinking and it’s like, okay, well if somebody comes to us on IRA Advantage side how often have we had some advisors say, well gee, you shouldn’t take your IRA 401k and go buy real estate because you lose long-term capital gains tax consequences. You lose depreciation of those different things. But I would argue if some of this stuff goes through the only way you could afford to own real estate is maybe with an IRA or a 401k.
Tom Moore: Yeah, there’s a lot of different ways you can make money but if you’re making money the government is going to want to take it. So, you’ve got to like you say pay attention to these proposals and who’s proposing what and make your own informed decisions.
David Moore: Do searches with different search engines and clear your cookies so you’re not getting your new search contaminated by the old search and everything else. But really ask the questions. The only dumb question is the one you don’t ask, but really take advantage of the resources you’ve got. It’s endless out there today. But Tom it was a lot of fun to sit here with you today. And if anyone’s got questions that they’d like addressed please reach out to see more at 1031Exchange.com with your questions. We’re happy to address them either directly via the phone or direct if it’s something that we think is going to be of value for the greater good for all out there we’re going to do something like we’ve done today. I had a lot of fun with you today bro. It’s been too long. And I’m a blessed guy. I got my brother sitting next to me. I got my daughter sitting there filming and taking care of the audio for us so it’s family fun.
Tom Moore: Yep. Yep. No, you’ve got a great staff in here and give us a call. We really would appreciate the opportunity to go through transactions with you, ask questions that are relevant questions because they do need to be asked. And if you don’t need to do a transaction we’ll let you know from our perspective anyway here. And it’s just super important to talk about these things before you act.
People, a lot of people don’t want to talk. I mean they just want to email or text you and say, “Hey, put it together.” But we really, you don’t know what is necessary or what, we want to know why you’re doing the deal and the opportunity cost that transaction is, you got to get it done in that 180 day timeline. You got 45 days to figure it out. And that’s part of the problem with this, that transaction yesterday. That was a problem. And it’s really communication and understanding that if you choose to do this one, we don’t want to do a deal to do a deal. We want to make sure it’s getting you where you want to go and the opportunity cost of the transaction is that finite period of time.
Tom Moore: Yeah. And we fully understand that plans change and it’s just the nature of real estate that somebody finds something initially it looks like a great acquisition, it’s going to fit their needs, and then as they go through inspections and all the due diligence process, it’s not working out for them. And so yeah, we certainly understand with real estate that plans change midstream. And we’re not saying you can’t change plans, just let us know and if not working with a company that does have the staffing, that can take the calls and answer questions. And if you just don’t have that communication, that’s where trouble arises.
David Moore: So, in the marketplace today, I mean obviously if we look at since the last crash, the market just continued to increase more and more. And then during COVID, I think we were both, you’ve got a lot more hair on your head than I do. I think I pulled mine all out, but we had so much volume going through, it was really, it was sort of craziness and people are just making things happen. But today, deals are harder to create and we’ve got more complex transactions occurring. But as far as somebody coming in and looking to do a transaction, what are the typical things that you want to know, Tom?
Tom Moore: Well, first off, as you had mentioned, we want to know, why are they doing the deal? Do they need to do the deal? So, that’s where there’s going to be a number of questions that we’re going to ask them because there’s a big misconception about what even gain is in a transaction. And this is a tax deferred Exchange, so we’re trying to defer gains on property transactions, but there’s a big misconception about what gain actually is. And a lot of people just think that it’s the cash they’re walking away with. They don’t have the information a lot of times themselves, either from their tax or legal people, to know whether or not they even have to do an Exchange. We can through a number of quick questions, figure out pretty quickly that, whether or not they do have gains on that, particular transaction.
Tom Moore: It may make sense, but they also have to look at what else has gone on in their life, gone on in their life for that year. And do they have other losses maybe that can offset gains? It’s not always the right thing to do. The Exchange is not always right for people. And we both handle transactions or phone calls all the time we’re they just don’t need to do an Exchange and we don’t have a problem in letting them know that. So, a lot of times we’ll take a phone call and they want to know what they’re going to pay in taxes right away. And that’s not an easy answer either. We might know after, getting some information from them what their exposure might be if we’re looking solely at this deal.
Tom Moore: But again, there’s a lot more going on in their life than just this one real estate transaction. A lot of times they’ll pop in and say, well, yeah, this property also is a property that I used to live in. And that brings up other questions, how long ago did you live in it? If it was recently, they may be able to take advantage of both the section 121 and the 1031 tax codes, take their universal exclusion on the property for the time that it was a residence. And for anything that they’ve got over that if they’ve got over the 250 and 500,000 capital gain amounts, then they can do an Exchange on the property and hopefully defer the balance.
David Moore: So, along those lines, we got a question actually it looks like this morning from somebody that, emailed in, just had a question regarding a conversion of a property from their primary residence into investments. So, the exact scenario you just mentioned, and they gave us some details, but they’re wanting to know what they need to spend as a replacement. And really, if you look at the message it, it talks about, their gains and talks about 250 or 500, and then they’re asking, is the 500, what needs to be spent or what do they have to spend going forward? But they didn’t give us the value of the house or any of the closing costs or anything that was going on. I mean, so for us to answer what they have to spend in a transaction, I mean, you’re really sort of stuck. I mean, so they’re married. So, they got a half million exclusions. So, whatever the thing sold for, I mean what, how would that work?
Tom Moore: Yeah, so, and it’s great to at least get this much information going forward. because now we know what questions to or where to start with our questioning back with them. But they, if they’ve got, if it’s a married couple and it is a property that they had lived in, and it’s, and they had lived in that property, two of the last five years, so really they moved out of it three years ago or less, if that’s the case, then they can take that exclusion and in which means that they can, they really could go down in value as far as the Exchange is concerned by about a half million dollars and still, defer all their taxes. because they can get the $500,000, if they sold a property that, let’s say they sell a property for a million bucks and it’s got, $800,000 in capital gains, then they could take the $500,000 exclusion and do an Exchange on the remaining $500,000. So, they buy a $500,000 property and that’s going to allow them to defer the balance of the 800 in capital gains.
David Moore: So, 121, I mean if we look at 1031 and 121, 121 the universe exclusion, and we, when we got in business, that didn’t exist. So, that was 1997. And I guess what I’d say is 1997, 250 and 500 gain meant something. If you just look at what’s happened in the last few years just with inflation and the values, the 250 and 500 is woefully inadequate. It probably ought to be a million five or a million or two million or something like that. But I mean, the 250 and 500 is woefully inadequate for people in today’s world. But when you’re looking at that stuff, 1031 is going to apply to what something is at the time of acquisition or disposition where 121 just simply applies to any property that meets that two out of five occupancy.
Tom Moore: Yeah. And just to be clear on what I was just going through. So, again, that the property at the time that the sale occurred was a rental property, but it used to be the primary residence and then, and it was the whole property was the primary, but it’s now all been rental property and within a time period that will allow for the section 121 exclusion, we also deal with properties all the time that are mixed use properties that will, that people can have an allocation for the primary residence portion and also the investment property portion. And that can be a, it might be a duplex, it might be a fourplex, it might be a ranch or farm property, that the client’s living on. And so, they have to have the help of their tax and legal people to determine allocations for the investment portion and the primary residence portion.
Tom Moore: Bottom line, they can do both 1031 and 121, and again, hopefully they can defer all their taxes, but section 1031 is certainly not an all or nothing proposal or transaction. And it’s very common to have people that are either wanting to pull money out or the property that they’re looking at as a replacement property is just not up to the same value as what the investment portion may be. And they’ll, it doesn’t disallow the Exchange. They still have a valid Exchange, but they may have some tax on, the difference if they’re going down in value. In the industry it’s referred to as boot. And so boot occurs if they’re getting something back in the transaction that is not real estate. If they go down in value, they’re either going to have, boot as a result of cash that they receive and they’re not spending, or they’re going to have boot in the form of debt relief because they’ve got a loan on the acquisition that is less than what they previously had.
Tom Moore: There’s a lot of different ways that they can go about these transactions. There’s a lot of different ways that the section 121 and 1031 can be applied at the same time in property transactions. And you’re absolutely right for these numbers to stay for the last, what, 27 years unchanged [laughter] 500,000 is not worth what it was then.
David Moore: So, it’s funny, I don’t even hear anyone talking about the politicians. Nobody talks about bumping those numbers and it’s really sort of intriguing to me. But, I just want to clarify. So, you talk about relinquishing, let’s say an asset that that could be a single asset with allocations both investment to residents. So, what about people? So, I was on a flight home the other night, and I’m sitting next to a girl that the VRBO is her house, so she travels a lot when she’s gone. She’s got that, but then she also, VRBO is just a room in the thing all the time. So, in that situation, you’d be looking at whatever portion of the house is being used in that context and I mean with depreciation or I mean, what are you doing. And carving it up obviously gives you the ability to allocate things different ways.
Tom Moore: Yeah. And that again, is something that they’re going to really have to look to their tax advisors and hopefully there’s, the taxes have been treated for, several years or however long they’ve been doing this, where they’ve got the percentage allocated, the tax people have got the percentage allocated. They’re taking depreciation on the property for that percentage. And it’s very well documented. But yeah, that can certainly happen. It happens all the time. There’s such a big, a lot of people with the ADUs now. Probably…
David Moore: That’s what I was just going to say.
Tom Moore: Yep. Happens all the time, and the dollar’s not going where it used to go. And so people are looking for other income sources all over the place. Look at the number of people who are going back to work that thought they were retired and, if somebody has a room or a separate unit on their property, maybe they can rent that out and avoid having to go back into the workforce.
David Moore: So, if they’re renting out a portion of their house or they got the ADU in the backyard, you just, you just commented about depreciation. What’s the government’s position on depreciation?
Tom Moore: Well, they feel that, if you have property, if it is indeed investment property, rental property, and it’s depreciable whether or not you have taken that depreciation, they can treat it as though you have. And so, you may end up with a lower basis and depreciation recapture that you didn’t know that you really had so…
David Moore: And never had the benefit of it.
Tom Moore: Yeah. Never had the benefit. So, if you can take it, it is a great benefit. If you can take depreciation, certainly do so.
David Moore: I mean, they hear me a lot more and on the presentations all I always say, look, good tax people, I think are some of the most important people period in your life these days. And we’ll talk a little bit later about some of the tax proposals in, the Harris side, the 24 party platform and what they’re proposing. But if you look at these things, if you think about, I was talking to a buddy this morning and Eric and I were talking about the need for good tax people and what’s going on in these different situations. And you start thinking about just a question, I had a… Yesterday I got an email from somebody wanting, he said, I looked at 24 different, I think it was like 24 different capital gains calculators. And he says, they’re all giving me different answers. And I’m laughing because, you just said it. I, you want a good tax person, period. But if you look at your return on investment, you might, if people are interested about Cost seg, take a look at our YouTube channel is there’s a series of videos on Cost seg. It’s Cost seg is just sort of the basic, delineation of the investment property.
David Moore: The rental house most people are going to say okay I bought it for X and I’ve got… So, that’s a $250,000 purchase. Maybe the Dirt is 100 and the improvements are 150 and you’re going to write the 150 off over 27 and a half years. I just threw numbers at you but who makes up those allocations? And that’s an opportunity where you’ve got to work with your tax people to do that. And the more you shove to the improvements the better your return on investment is going to be. And I just don’t think people think about that, that much. Cost seg is just out on steroids. Instead of two allocations you’re going to have 50 or whatever it might be. And we can look at one of those videos on Cost seg that we’ve got online if you want to know more about that stuff. But who puts the value on the ADU? Who puts the value on the room? Who’s helping you with that stuff? And I just see such an aversion. People don’t want to pay for those answers and think about your basis on a property.
David Moore: Basis is simply the purchase price plus capital improvements minus depreciation you better keep track of every receipt you’ve got for that property from the time you bought it or through your investment life because in 1031 we’ve got a basis carry forward right? 1033 involuntary conversions basis carry forward. As you said earlier 121 when it came in before that we had 1034 basis carry forward.
Tom Moore: Yeah. And a lot of people will say well is my basis really going to be that important if I’m not going to ever sell it if I just keep exchanging? And yeah, it is because it’s going to determine how much you’re going to be able to depreciate on the acquisition of the new property because your basis is carried from one property to the next and it may be adjusted upward if you’re going up in value certainly go up in value by another 500 grand. You may have up to that much more depending on the property type but you may have that much more to depreciate moving forward. And again, big benefit if you can. Those allocations are going to have to be something that’s agreed to between tax maybe legal it’s going to be determined a lot of times by brokers help coming in and giving some comps in the market and it’s just a number of different things that are going to play into that equation. But it’s certainly very important to figure out for the life of the investment.
David Moore: So, when you’re looking at a basis in a property like I said it’s that acquisition. Probably the acquisition varies dramatically depending on how you got the asset. And then your capital improvements. How often do you talk to somebody when you start talking to them about buying a property putting… Whether they put money into it during the time they’ve owned it whether it’s been expensed or capitalized?
Tom Moore: Well, almost every time we talk to them because people will say I bought this property for X. I put Y into the property. And then basically the next question that comes out is well, were those monies that you put into the property, were they capitalized improvements or was it just expensed items? Were they major remodels items, new kitchen, new surfaces, new siding, things like that or was it a lot of repair because that’s going to affect their basis because they may think that they put 100 grand into the property and that instantaneously bumps their basis by that much and bottom line maybe none of it does. If it’s all expensed then certainly it was a benefit to them in that tax year but it’s not going to affect their basis and therefore gain on the sale when that occurs.
David Moore: So, earlier you were talking about numbers a little bit the basis and you started looking at how people allocate things to improvements or capital improvements or just writing it off as expenses. And I think there’s so much confusion. People just… You ask them well how much money did you put? I put 100 grand into it. Did you write anything off? Oh, I wrote it all off. So, in that context that situation there’s no change in the basis period but that’s where they could tax people and also what happens sometimes, the capital improvement might just be an expense if it’s part of the closing right?
Tom Moore: Yeah, it could be. Yeah. If they’re getting the property ready to sell and yeah.
David Moore: So, what happens how often do you talk to somebody that’s prepping a property… I laugh because our friend Chip is… He was complaining that they’re selling their house and that the broker listing for them they want to do like $50,000 worth of work to it. And he’s like oh it got to come out of pocket all that money and it’s like, okay, so what happens for somebody that maybe they took money off their HELOC, put the thing in or maybe bought a property with a HELOC instead of going to get a loan? What’s HELOC look like on a disposition and what happens with the Exchange?
Tom Moore: Yeah, so that’s a good question. People…
David Moore: A HELOC for those who don’t know is a home equity line of credit.
Tom Moore: Yeah. So, they borrowed money for the property acquisition, and they probably want to pay that back when they sell their property but it’s not a recorded lien on the property. It’s probably a lien on their primary residence. So, as far as the banks are concerned that property is a debt-free property owned free and clear and you sell it for half a million it’s all equity. Everything would in an Exchange transaction less closing costs of course title escrow fees and commissions and things like that all of the cash would come into the Exchange and they cannot take any of that money without having to pay taxes on it. So, it’s certainly a conversation that if they want to pull money back out and pay back that loan we’ve got some things that we can certainly discuss with them to help them out. But it again takes planning and that’s where we come back to questions and answers and having those conversations it’s really important. Somebody may contact us initially and tell us yeah, they bought a property for 500 grand they borrowed 250, they got a 250 loan.
Tom Moore: They may just say it’s got a 250 loan on it and we see settlement statements or the title report and no there’s no recorded lien there’s no debt against the property and it shows it’s all cash coming out. And so that comes back to having those really important conversations and getting down to the bottom of exactly what’s going to take place when closing occurs.
David Moore: So, you probably agree with me after doing this for so long that when people ask us when we’d like to know about the transaction I tell them when they buy the property not when they’re selling it because you and I were taught the same strategies with investments. What are you going to make? How are you going to make it? When are you going to make it? If you can’t answer the questions, don’t buy it. But with 1031 in mind it’s really that form of ownership that’s critical. If you and I go buy something together and we do it via a limited liability company, what do we own? And if we go to sell it going forward are we going to go forward together? And what happens in that situation if we want to go separate directions?
Tom Moore: That’s a question that comes up all the time. Whenever we see somebody come in and they’ve got a property that’s held under an entity like a limited liability company again one of the first questions we’re going to ask is how many members are there? Who are the members? Does everybody want to go forward together or do they want to split up and go their own separate ways? And yeah, we want to get the phone calls well ahead of them ever listing properties for sale if we can. It takes planning especially in those cases where you and I own property together in a company name and you want to take your money and invest into something else and maybe I want to take my money and I don’t mind paying taxes. Maybe I’ve got losses that I can offset for that year and I want to go on a vacation or something.
David Moore: Maybe you just want to buy a boat.
Tom Moore: Yeah maybe I want to buy a boat. And a lot of times with these partnerships people will initially start out with the same goals in mind and they might go through several transactions but they eventually always end up getting to a point where they want to go separate ways. And we see it all the time and we don’t want to see it a week ahead of closing. But if that is a situation they’ve got a partnership, partnerships and Exchanges. We’ve done so many. We’ve done tonnes of videos on this stuff. We’ve got all kinds of articles that have been written. We send out information on partnerships in Exchanges to potential clients all week long every week. And it’s a big question. It’s a big deal super important to talk about because it takes planning and a lot of times these LLCs are going to have to be dissolved and switch it over to a tenant in common ownership. And sometimes that’s done a year or two in advance. It all depends on how conservative people want to be about it but that’s a very hot topic in the Exchange world.
David Moore: So, Tom is the deed or title of the property does that always indicate true ownership of the property?
Tom Moore: No. No. No. We’ll have people that will tell us that they either own property individually or they own it in a partnership and we’ll get a copy of the title report and it doesn’t reflect what they’ve been telling us. And they said well, yeah, we deeded this property we just never recorded it but they have treated it tax wise as one way or the other partnership or individually owned assets. And if that’s the case then great. It’s a matter of getting that deed recorded and hopefully they have been treating it tax wise as however they ultimately think they have been. But if they’ve got a partnership and they say that now we dissolved it years ago and it’s not been treated that way then it could have other issues.
David Moore: So, we got a deal last month. And this is I think a great example of having the conversations and why we used to talk about the difference between in the Exchange world what we do is called, I mean we’re called QIs, Qualified Intermediaries we’re called facilitators, accommodators. And we always just with our roots thanks to Ron, we always called ourselves facilitators acting… Taking an active in the transaction. But there are many people that just sort of handle the… Take the paperwork and put it together and don’t ask the questions. And a deal that comes to mind is one that came up last month that was actually put together by another company. I don’t know how the other company got involved but they just put it together and it was just in the gentleman’s name Oregon couple and been married for years and filed jointly. So, both have been enjoying the benefits and burdens of ownership but they just set up the Exchange in the gentleman’s name because that’s how the title read. And nobody bothered to ask them if that’s the way they wanted to do it or if that was the way it had been handled through the years.
David Moore: And fortunately their broker’s the one that sent them to us and we got involved in the transaction and actually had the deeds corrected to get both people… Get the spouse on the title as well before the disposition. And those changes were all being done the set properties were being sold because he was terminally ill.
Tom Moore: Yes. There was concerns over his health.
David Moore: Yeah. Concerns about his health and they were trying to get some planning done and he actually unfortunately passed away a couple of weeks ago. And so if she hadn’t been added.
Tom Moore: Yeah in mid Exchange. Yeah, the sale had occurred and thankfully she is on the title. And so it certainly is going to be a great benefit to have that moving forward because she does have to complete the Exchange for her portion.
David Moore: Do you want to talk about that a little bit because the way the law is today you get stepped up basis for now take a look at the ’24 policies but at least today you’ve got a stepped up basis. But real quickly…
Tom Moore: Yeah she would for his portion of the property if they’re both on the title and he passes then they’ll establish what the fair market value is for the property currently at the time of his passing. And now the basis will be adjusted accordingly to give it value appropriately.
David Moore: But they’re still going to have to complete the Exchange and meet the value and equity requirements they were looking at while he was alive otherwise, they’re going to have to tax it.
Tom Moore: Yeah, yeah. Moving forward the basis will change into the new property acquisition. But yeah it’s complicated. And again it’s a good thing that everybody did get involved with that. The topics were brought up. There was concern over his health and you don’t want to hide from this stuff.
David Moore: So Tom when we were much younger and we were getting into this business one of our mentor Ron’s statements was that keep your eye on the politicians that they’re going to come after us over and over again even though the quote’s over 100 years old at this point final guidelines were issued what? Fall of ’91 right? As we put the company together we’ve had changes, we’ve had revisions on reverse Exchanges we got that. We got second home stuff, we lost personal property in Trump’s tax reform in 2017 by the way for everyone out there that thinks that his reform was for the wealthy it took all the personal property away and shoved it into QOZs and all. So, you used to be able to Exchange. We had so much fun doing cars and boats and planes and stuff.
Tom Moore: Yeah. We’re both car guys. Those were fun to see what was coming through.
David Moore: All that went away. So, right now we’re facing a situation yet again where they want to screw with 1031. I think last time when Biden was elected in his early budget they were wanting to cap annual deferrals. You could keep 1031 but they wanted to cap it to a half million per person per year. The ’24 party platform actually does away with 1031 and also does away with long-term capital gains tax rates. So, we’d have a tremendous… Basically going from 20% on appreciation 25% on depreciation at the top end up to 37% would be normal income. We’re looking at… So, you combine that with elimination of 1031 and what’s going to happen to market velocity you’ve got the taxation of unrealized gains which on Wall Street would do one thing but on… Imagine people owning homes or ranches and would they even be able to keep the properties they’ve owned for years?
David Moore: And especially considering that a lot of the gains are subject to like I said earlier not appreciation per se but inflationary gains especially when you’re looking at the 250 or 500 and then elimination of the stepped up basis. I would argue any one of those things is really a doomsday situation for investors. But if we combine a few of those it’s catastrophic. And just the sheer… Can you imagine the sheer cost of implementing that taxation of unrealized gains is one thing on Wall Street where you’ve got a value of every stock at any given second. But what’s real estate worth? I mean our youngest brother for those of you that don’t know out there he is an MAI appraiser. I mean that’s top of the heap in the commercial appraisal world. And I’ve asked him if you watch our videos you’ve heard me say before it’s like, Hey Greg, how do you know when you’ve done the right job? And he’s like well, it’s easy. I say, what do you mean by that? Nobody’s too happy or too mad. But those values are totally subjective. And could you imagine the sheer cost of trying to value those things?
Tom Moore: Well, I guess you could look at it another way and say if they do pass all this stuff then all the values of everything’s going to plummet so much that nobody will have any gain. [laughter] That’s kind of… You laugh but at the same time it’s going to result in stagnation in the marketplace in all the different fields of investments, real estate, stocks, everything you mentioned. We have had to fight this every couple of years it seems for quite some time. And the politicians come out with these proposals and they think well, these are going to be winners for us tax wise. We’ll get all these additional tax revenues. And it always turns out to be a loser. It always does. They think they’re going to get taxes on every transaction. Well, you know what? Those transactions are just going to stop. Because if somebody has to pay such a huge amount of their net equity in these things. Maybe it’s not even equity they have if they’ve got tax exposure on these transactions that are just through the roof every time and they’re not going to sell.
Tom Moore: If they don’t have a way of deferring taxes they’re not going to move from property to property. They may do it one time and then they’re going to sit on them. And now what goes away? All the tax income all the revenues on appraisals and inspections and escrow and real estate commissions we look at settlement statements every day and the number of different fees that are all taxable fees the government gets their cut on on a settlement statement is tremendous. So, if all that stuff goes away so does the income.
David Moore: For all those people, the tax revenue for all those people.
Tom Moore: Yeah. All those people. So, the private industry is hurting, the government is going to end up losing money on it. And again our industry the FEA, Federation of Exchange Accommodators we pay for a lot of people to do a little lobbying in Washington and they are always coming out with all of these studies and these proposals always end up in big tax revenue losses for the government. It’s the total opposite of what they expect. These people are not… They’ve not been business people they don’t live in the real world and they should be consulting with those that do. That’s the bottom line. And they apparently always know more than we do. So, they’re not going to.
David Moore: They wrote a white paper on it Tom, they went to Ivy League school. They wrote a white paper on it.
Tom Moore: Yeah, I don’t remember anybody calling me ever and asking my opinion about stuff. Anybody that I know that would be a great source of information for them.
David Moore: The last time the proposal to cap the gains ultimately leading to stagnation of the market but ultimately the way that it was really fended off was to show… When was the last time that… Well, anytime you and I buy a property together we are always improving. But I mean think about for those of you out there think about the last time you bought a property where you didn’t put any money into it. So, the vibrancy of the market there’s all these cries for low income housing in a market where the government hits you with all these SDCs all these fees it costs you so much to get a shovel in the ground per unit where you can’t afford. And now the cost of building the cost of the Dirt, everything is so high, they want low income housing and it’s just you can’t build it in the current marketplace, at least up and down the west coast. But you think about the buildings those and the stuff that we liked I mean sort of the garbage real estate we’d buy and improve. So, you take something we can all drive down the street and we can see a property and know whether the owner wants it or not.
David Moore: So, there’s ways if you’re an investor and you want to buy a property that’s sitting there rotten on the sidewalk and if you just go ask the person to list it you give them a place to go tell them Hey, go buy a Delaware statutory trust or something. Get the check in the mail, defer your gain, do that stuff. But really the last time the proposals happened we started looking at the industry NAR thank you. You start looking at how 1031 was successfully defended at that point was just that market velocity. And what happens to low income housing which would be those BC apartments not the big shiny new ones that the real estate investment trust and everybody buys or builds but it’s the old stuff.
David Moore: And so, if it can’t be sold either because we have insurance issues now where insurers aren’t insuring older buildings. So, if you can’t insure it how’s anyone going to buy it? But also just the vibrancy of those properties to keep them working. Every time somebody buys it they’re shoveling money into it. So, it is really critical when you look at this stuff understand really educate yourself. Our father always used to say anytime you read anything about something you know something about you know how wrong it is. So, I would challenge everybody out there really take a serious look, whatever side you’re on or I think more of us are probably in the middle just tired of all the politicians. But if you’re looking at this stuff really take the time to understand what candidates are trying to do what and what the ultimate impacts are. Don’t just listen to the talking heads and believe them.
David Moore: Really think about it rationalize what’s going on. And what do you think the impacts of these different measures are going to be? Obviously for the two guys sitting here today I mean we look at… And we are sort of unique honestly because we also have… We’re talking to you today from the context of a 1031 side via equity advantage. If you’ve got retirement money and you want to take that money to go out and buy things wall Street doesn’t sell. Give us a call IRA Advantage is going to take care of that. And when they were talking about taxing unrealized gains I started thinking and it’s like, okay, well if somebody comes to us on IRA Advantage side how often have we had some advisors say, well gee, you shouldn’t take your IRA 401k and go buy real estate because you lose long-term capital gains tax consequences. You lose depreciation of those different things. But I would argue if some of this stuff goes through the only way you could afford to own real estate is maybe with an IRA or a 401k.
Tom Moore: Yeah, there’s a lot of different ways you can make money but if you’re making money the government is going to want to take it. So, you’ve got to like you say pay attention to these proposals and who’s proposing what and make your own informed decisions.
David Moore: Do searches with different search engines and clear your cookies so you’re not getting your new search contaminated by the old search and everything else. But really ask the questions. The only dumb question is the one you don’t ask, but really take advantage of the resources you’ve got. It’s endless out there today. But Tom it was a lot of fun to sit here with you today. And if anyone’s got questions that they’d like addressed please reach out to see more at 1031Exchange.com with your questions. We’re happy to address them either directly via the phone or direct if it’s something that we think is going to be of value for the greater good for all out there we’re going to do something like we’ve done today. I had a lot of fun with you today bro. It’s been too long. And I’m a blessed guy. I got my brother sitting next to me. I got my daughter sitting there filming and taking care of the audio for us so it’s family fun.
Tom Moore: Yep. Yep. No, you’ve got a great staff in here and give us a call. We really would appreciate the opportunity to go through transactions with you, ask questions that are relevant questions because they do need to be asked. And if you don’t need to do a transaction we’ll let you know from our perspective anyway here. And it’s just super important to talk about these things before you act.
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David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
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