Discover the most significant challenge in the world of 1031 exchanges – vesting. There are five different types of property vesting, and each could mean something different for you. Tune into our August episode of Advantage TV for all you need to know about satisfying your exchange cornerstones.Read the Full Transcript
David Moore: Hello, David Moore with Equity Advantage, and it is August of 2023. So, we’re going to talk about a few things today that are sort of period pieces. And one of the biggest ones I would say is vesting. And the vesting issue gets to be very, very complex very quickly. It’s the second biggest problem we’ve got in 1031, but it’s causing problems today just because the lending world is different than it was six months or a year ago.
Those with the gold make the rules, and you’ve got to understand that the taxpayer that relinquish in a 1031 exchange has to receive the replacement and a partnership interest specifically prohibited from 1031 treatment. We’ll follow this up with another quick talk on drop and swap, swap and drops, different partnership issues.
But we’ll just start off talking about just the lending requirements and getting the money to go buy something. So, it’s really important that from a deals inception, or people ask all the time when I want them to think about an exchange, I’m going to say, when you buy the property, because we know you’re not going to own it forever and the idea is buy it in an entity or a manner that allows you to get out when you want.
If a group of five of us go to buy a property, it might be common to have the five of us own that property via limited liability company. But the issue is how often you think that five years from now the five of us are going to want the property, and if we don’t want the property, are we going to want the same replacements, and that taxpayer in that transaction would be that limited liability company. So that leads us to, once again, a follow up video talking about swap and drops, drop in swaps.
But even with spouses, for example, I’m in Portland, Oregon, and Oregon is not a community property state, so it’s very common for spouses actually to go out, own a property, get a second property a third, then their lawyer says, Hey, you know what, you ought to shove them into a limited liability company for protection purposes, which is pretty benign suggestion but the issue is when you go to sell that property, you go buy the replacement property if it’s four units or less, typically, financing is going to require that you take ownership personally, not via the limited liability company.
So, and in a non-community property state spouses are considered a legal partnership. If you’re looking at California or Washington, for example, it’s not a problem but Oregon it is. So we really need to investigate these topics sooner rather than later, and that’s why one of the first questions out of my mouth when somebody calls us up asking about an exchange is how do you own the property? And I will throw this out at you too. Title doesn’t necessarily indicate ownership.
If I were to sell to you on a land sale contract, for example, I’ve got title till you pay me off, a known trustee, you might have title directly, but it’s not uncommon at all for somebody to come to us saying, Well, hey, we own this property, and then I get a title report and only one person’s on there. So then if your spouse is once again that title doesn’t necessarily indicate ownership benefits and burdens of ownership do, so we’re going to want see that thing up front, make sure that title says what we think it should say or we want it to say. And if it doesn’t immediately, maybe we’re going to have a change in that vesting predisposition so we can go forward with the people on title.
The other thing that comes up, like I said since we’re talking about with those with gold make the rules, is, is I’ve had people in transactions quit their job halfway through an exchange. Well, it’s pretty hard to get financing, so please complete the exchange and then quit your job. So, if you’re having to add somebody else to a loan, let’s say even if you wanted to, you gave up the property, the relinquished property personally, now you have to add somebody, the replacement property just to get financing. Well, that’s possible, you just have to do a tenancy in common.
I would say, let’s put that person on as a guarantor to the loan initially if we can’t do that, then we’ll have them on title and let’s reduce their ownership to maybe 1%, and you’re at 99%, so the money’s going to you, or they’re going to come in with money representing that 1%.
So here I am I said it’s a simple topic and then we’ve probably rattled on for five minutes already on just the complexity of a basic transaction, but that is why vesting gets to be so problematic. It is just a situation where the taxpayer that relinquish has to receive sounds like a simple deal but that’s definitely a conversation we want to have early on.
And, if you’ve watched our videos in the past, you’ve heard me say the only dumb question is the one that’s left unasked. So, we want talk about these things sooner than later, and we can fix them up and help you get where you need to go. 1031 is over a hundred years old at this point. It’s a pretty easy process, but you do have to think about things in advance. Don’t wait till the 11th hour to put a deal together because, simple issues like this vesting thing can come up and bite us. If we only have 24 hours to do the deal, if we’ve got time, then we can fix this stuff and make it all right for you.
So, I hope I’ve actually answered more questions that I’ve caused you to think about in this short time. And once again, David Moore Equity Advantage, 1031exchange.com. Look forward to talking with you soon. Thank you.
The Guys With All The Answers…
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.