Exploring Current Trends in the 1031 Exchange Industry | Co-Founders’ Insights

David Moore: Hello, David and Tom Moore, Equity Advantage, once again, I’m happy to have my brother here with me in the studio today. And, Tom, we just wanted to hear from your perspective, you’re on the operation side, you’re really in on the deals that are happening. What kind of trends do you see going on right now? What do you see our clients doing and sort of what’s the catalyst for those actions too?

Tom Moore: I think more so now than ever before, we’re seeing people that are moving their investments across state lines. It just seems to be more and more common all the time. People get concerned with the rent control that’s happening in certain cities. And they just feel like they’re losing control of their assets. They don’t have the rights as a property owner, as a landlord that they want to have or that they once had.

So, they’re moving to the states that maybe are a little a bit more landlord friendly. And so, we see a lot of that. I was talking to a gentleman this morning and he has a couple of properties, a fourplex and a tenplex here in the Portland area. And he’s moving his properties down to Georgia and done a lot of stuff in Georgia lately.

Tom Moore: Texas has been a hotspot for quite some time now. I think we did more people moving into to Texas properties than we’d ever seen in the last year. And of course, Florida has always been a kind of a hotspot. We see more people moving properties there from states like New York and New Jersey when we had sales in New York and New Jersey, and in the past, it seemed like they were always reinvesting in those states again. But more and more of those people are moving into Florida now.

David Moore: So, when we put the company together in the early ’90s, Oregon had some different laws with respect to what would happen that they actually… When we first opened doors, you’d probably remember, we had the one client that sued the State Department of Revenue because the state actually discriminated between residents, non-residents moving stuff out. Anyway, it led to some other legislation which ultimately led to Oregon clawing back.

So as Tom explained, there’s a variety of reasons for people to move from one place to another. We’ve got, like he mentioned, the rent control issues. We also have a lot of people that sort of stems back down to when we got started where people are thinking, “Well, at the end of the day, I’m going to pay the tax on disposition. I don’t want to do an exchange. So, I’ll exchange out of Oregon into Washington, Nevada, Florida, Texas, someplace like that.” And would you mind explaining to everyone out there why that maybe it is not as an effective solution as it used to be?

Tom Moore: Well, we end up with people that will move, a lot of times they’ll move from a property that has income tax into a state from state that does to a state that does not have income tax, like Washington. And then they think, “Well, down the road, I sell that property, then I don’t have to deal with the taxes that I had in Oregon.” Correct?

And that’s not the case because the state will want you to continue to report back to them and let them know if you still have that property, did you sell that property? If so, did you do another exchange? If not, then they’re going to want their taxes. So yeah, they have these claw back provisions, and there’s a number of states that do that, California, Oregon to name a few. But you will end up having to pay those taxes. And again, they ask for, basically, an accounting, where that money has gone, and have you sold, did you exchange again or not? If you continue to exchange, you can certainly continue to defer those taxes, but upon a sale, the state’s going to want their tax.

David Moore: So, it only applies when you’re triggering a gain.

Tom Moore: Yeah. Exactly.

David Moore: Got it. So, with that said, another idea, sort of along the same lines, is people that want to give up an income property, maybe go buy a place that they ultimately convert into their primary residence. What happens in that scenario?

Tom Moore: Yeah, so if they do that, there’s no tax triggered upon the conversion. So, if I were to sell a property and wanted to retire in Hawaii and I bought an investment property there and maybe rented it out for a couple of years, if I decide I’m going to retire now and move into that property, you can certainly do so there’s no holding period requirement for these properties.

So, I can convert that property to my primary residence now, there’s no tax upon that conversion. And in doing so, I can now convert my existing residence here into a rental property, and I will have up to three years to sell that property and still take my Section 121 Primary Residence Exemption. So that’s good. And if, with respect to that primary residence exemption, 1997, I think is when they created that $250,000-$500,000 exemption for single or married couple.

Tom Moore: A lot of people have well over that. And so, you can have a situation where you have both, a Primary Residence Exemption and a 1031 if you’ve got gains that are over those exclusion amounts. Back to that conversion though, if I move into Hawaii, then again, it’s not a taxable event. And as long as I live there, fine. You don’t expect though, to be able to sell that property that it was a converted property from investment to primary.

Don’t expect that you’re going to be able to sell that after two years of living there and be able to take that capital gains exemption as a primary residence. Now, the IRS has an amendment to 121 that deals with these converted properties, and it’s kind of complicated, but they have this whole prorated figure of the time you’ve lived there, versus time that that property and previous properties were investment properties. And it doesn’t work out in your favor unless you’ve lived there for quite some time.

David Moore: So, you might think you’ve got a great idea, you’re going to get rid of the tax, but the government have figured that out. We had couple years, we had from ’97 to like around 2000 before they put the five year hold, and then they put that wonderful housing assistance tax act of 2008 in place, which shut it down. And then you’re looking to gain attributable qualified versus non-qualified use periods.

Tom Moore: Yep. Yeah, exactly. So, there was a period of time there that people could do that, they buy a new investment property through an exchange, rent it out for a while, move into it, live there for a couple years and take that exemption. And so, people were able to do that for a little while. But like you said, the IRS caught on and they’re going to get you now.

David Moore: So, I think both these topics, we just covered two topics really in this segment. We’re going to sign off in a second, but I think they’re both examples of… Call and ask the questions. There’s no such thing as a dumb question. And a lot of this stuff, there’s not a black and white or maybe a hard yes or no on it. It’s maybe how you’re going to get to it. But over time, these opportunities that used to exist get stopped, and then we look for the next way around it, and then it’s like the ants on the path, right?

Tom Moore: Yeah. Exactly. There’s not a lot of ideas that are really original ideas, unfortunately.

David Moore: Like Colin Ron used to say, right? Yeah.

Tom Moore: Yep.

David Moore: Very few new ideas, it’s just repackaging of them. So, thank you very much for that answer. Once again, David and Tom Moore, Equity Advantage, 1031exchange.com. Thank you. We’ll be right back.