David Moore and Bob Nelson share their wisdom on a complicated, yet important, aspect of 1031 exchanges: the rules for identifying property for the transaction.
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David Moore: Hello friends, welcome back. I’m David Moore with Equity Advantage, and I’m blessed to have my buddy, Bob Nelson with me here today. He owns Pacwest Real Estate. Bob, I think we met each other how long ago?
Bob Nelson: 300 years I could guess.
David Moore: 300 years ago. So 1990 I believe it was.
Bob Nelson: Right.
David Moore: He had to deal with us looking around at properties, and hauling us around showing us stuff to see what we were going to pick up. And Bob, you’re at CCIM. You’ve been one of my mentors throughout the years and I am blessed to have you here for the conversation today. We’d like to talk a little bit about tax reform, and we’d like to talk a little bit about today’s market. Is there something you’d like to say before we get started Bob?
Bob Nelson: No, I think as long as it’s oriented towards understanding the 1031 exchange, and how beneficial it is to an individual to be able to sell a qualified property if you do things exactly right. For example there’s some very specific things including David Moore, a facilitator. And if we do everything exactly right, we don’t have to pay the capital gains to either the federal or the state governments, so you get to use all your equity forward as you acquire the next property. It’s a huge opportunity, but we’ve also seen some tax reform recently out of the tax cuts and jobs act that are rather interesting and I think will have an impact on what we do in commercial real estate.
David Moore: We always used to say, “It’s a points free, interest free loan from Uncle Sam for as long as you choose to take it.” Tax reform came and we were afraid that we might lose the entire code. But you’ve heard me say it before, we didn’t, we just lost personal property on it. We did had some refinement, and hopefully we’ll see how it actually works out but it appears that some limited liability companies filing as pass throughs 761 all action will actually qualify as 1031 purposes which that’s a first and it could make my job easier. We’re still working through stuff on it but I think that’ll be very helpful. To your point, somebody comes to you… When would you like to hear from them? People always ask me, when do I want to hear about the exchange?
Bob Nelson: Right.
David Moore: What’s your feeling on that and with your practice you’ve been doing it a long time, you’re the 1031 guru. When do you want to hear from somebody or when do you want to have that conversation with people?
Bob Nelson: Ideally, I would love to meet with them about three months before they’ve decided to sell the property that they’ve decided to get rid of, which will roll forward to the exchange. I refer to that as the down link property. I’d like to meet with you about three months in advance. It’s important to me to understand who you are, and where you would like to be when things are finished, the end game. Most people don’t think about the end game, but at least what you are trying to accomplish with your next move.
Bob Nelson: As you sell the property, what are you going to do that is going to be advantageous to you and how would you go about doing that? It takes me three, I refer to them as counseling sessions. I like to go through those three sessions. They’re about a week apart but I learn a great deal so that I can see things through your eyes. What are you after and then from that point forward, we come up with what I call an exchange strategy. How do we go about doing this because the market is so unusual at this point, we’ll talk about that in a moment. It’s so unusual at this point that if we stub our toe during the time that you have sold the down link property, and the time that we’ve completed the exchange, it could just be a train wreck and you end up paying the taxes. I don’t ever want to be known for doing that. I’ve been doing this for nearly 50 years and I’ve come up with a procedure and it works for me. It’s perfect at that point.
David Moore: So Bob it sounds like you’ve got a real strategy working with people, a plan. I used to do a lot of scuba diving and we always said, ” Plan the dive, dive the plan.” We’re talking about real estate, but it’s really sort of the same thing.
Bob Nelson: Exactly the same thing.
David Moore: I think we can elaborate more on it in the next segment if you stay with us. We’re breaking these up, but bottom line, if you want to be successful, you better have a plan.
Bob Nelson: It’s a tight time frame. I try to always close the transactions during the 45 day ID period. If you’re trying to do that and you’re trying to accomplish the complete and full tax deferred exchange, it is tight, but it can be done.
David Moore: Right.
Bob Nelson: I’m pretty successful at doing just exactly that. You get past the 45th day, you can’t add any other properties if you find out that one is contaminated, one burned down and the third one is owned by a person who states, “I’m in for a nasty divorce. I won’t be selling this property for a while.” Guess what? None of those were caused by my client, but my client gets to pay the tax so we got to avoid the train wreck if at all possible.
David Moore: So be a boy scout, be prepared! And come back, listen to our other segments. Thank you.
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