 Nicely, and I am a real estate agent with team K-squared at Keller Williams Honolulu. Today I have Tiffany Davies, who is the vice president, regional account executive for investment properties exchange services. She is here to talk about 1031 exchanges. Welcome Tiffany, thank you so much for joining us. Thank you, I'm excited to be here. So go ahead and tell us a little bit about yourself and your background. I know our viewers like to know a little bit about everyone. Yeah, so I came over from California and I guess it's been about 16 years ago. Me and my family have been here for the last 16 years, so I've got real estate experience in California and here in Hawaii. My background is really before I got into exchanges all title and escrow and then in 2006 I went into exchange and I've been doing it since. I love doing 1031 exchanges. No two are alike, so it's pretty challenging. There's a lot of rules that you have to try to navigate through and I just really enjoy helping investors kind of learn how to do this. Okay, so go ahead and tell us what is a 1031 exchange? So a 1031 exchange is a section of the tax code, so it's not a loophole, it's actually a section of the tax code that investors can utilize when they own true investment property to sell a property and buy a replacement property and pay no capital gain staff. So is it only for investment properties or can people use it for their primary home? Well it's really only for investment properties, but sometimes, especially here locally, we do have mixed use properties where you might live in a portion of it and rent a portion out or if you think about a duplex where you might live in half and then you rent the other unit out, that does work. So what's really important about that is that you have to meet with your CPA and designate which portion is primary residence, which portion is investment property, but it is possible to take advantage of both of those tax codes. Okay, so yeah, I didn't know that, that is a good thing. So who do we primarily see using 1031 exchanges? Is it people that live here on the island? Is it mainland owners? Who's using them? So it's really the mom and pop investor. You know, we've got a lot of investors here locally that are doing exchanges, but everybody loves Hawaii. So we've got a lot of mainland buyers coming in from places like Florida and Texas and Seattle, Washington, California. A lot of people are leaving California right now, easy surprise, and coming here and buying. And then we have people that are selling here and going to other places. So there's a lot of movement here right now. A lot of 1031s going on, but we've been very busy. So it's, so see, I owned an investment property and I was ready to sell it. How do I use a 1031 exchange? So yeah, I kind of wanted to talk about what is the life of an exchange, right? So how do you, how do you get this thing going? And you kind of know a little bit about this because you're a real estate agent, but you know, the first step goes into when you're actually listing the property, you add that 1031 exchange addendum to let anybody know that at no delay or extra expense to you are planning to do a 1031 exchange. And then when you're actually in escrow, that's when we get involved in the process, right? When escrow has actually been opened, that's when we get in there communicating with escrow, we request a couple of documents like the preliminary title reports, the contract, we draft these exchange documents. Those exchange documents are so vital to doing an exchange. Those have to be in place before closing occurs. Then let's say closing happens and tomorrow's day one of our exchange. So then you're in this exchange timeline, you've got 45 days to identify, right? That's the hard part. And you've got in total 180 days to close. And then there's a second leg of the exchange. So when you actually pick out your replacement property, we work with that other escrow and we do the same thing. We draw another set of docs, they're signed, and then we send that money over there and close out the exchange. And if that all can happen in a timely manner, then you've met the qualifications of a 1031 exchange and you've been successful. So can I do, can I sell my investment property that I own here in Hawaii to buy a owner occupant property that I want to live in in California? Unfortunately, no. Yeah. So 1031 exchange is just for, you know, it's investment for investment. So it's for investment or business purposes. So you would want to sell an investment property and replace with another investment property. So one of the, you know, a lot of people get kind of hiccups on what is like kind of property, right? So they think if I'm selling a condo, I can only buy a condo or I'm selling a single family home, I can only buy a single family home. So you can buy any type of real estate asset, you know, it can be a vacant land, it can be a condo, it can be multiple condos, it can be a home or it could even be industrial or commercial property, but you can't just move right into it. So I've run into this as an agent. I had a client who inherited his parents' property and he sold it and wanted to do a 1031 exchange. Is that something he was able to do or not? Well, with those clients, we always want them to meet with their CPAs. And just quick disclaimer, I'm not a CPA, I'm not an attorney, I'm not an accountant, so I can't give specific tax guidance or advice. But I can say that when there's, what happens when you sell a property that you've inherited, you get a step up in basis, right? So whatever the value is, say my mom leaves me a property, she passes away today, she leaves me a property that I inherit tomorrow, and it's worth a million dollars, which I would really appreciate. But it's worth a million dollars, I inherit it today, and I get a step up in basis to a million dollars. So if I sell it today, I pay zero capital game tax, I can pocket that money, walk away, you know, no tax on it. If I hold on to that property, and I say I rent it out because I don't want to live in it, I just rent it out. And then I sell it in two years, and it appreciates from a million because I inherited it, but it appreciates just let's just say 1.2 million. I would pay tax on the 200,000 portion, not the million. So just whatever it appreciates beyond what that step up in basis is. So yeah, it's really tricky when you have people inheriting properties, sometimes they need to do an exchange, sometimes they don't. And they would check with you about that or their CPA? They can talk to us and we can help them, but we are usually going to push them back to their CPA because we always want the CPA to put their stamp of approval on it. So yes, so you know I work a lot with investors who buy properties, rehab them and put them back on the market. Is a 1031 exchange something they can use to bounce from investment property to investment property that they're flipping? Is that something they can do? Typically no. So you know, people that do flipping, that is actually what the IRS might consider a developer. They live on that income that they receive from those flips. They're moving very quickly. You know, they're trying to just buy a property and turn it for a quick profit. 1031 exchange is more a buy and hold strategy. So it's, you know, you're buying an investment property, you're holding it for a period of time, let's say two years, and then you can sell it and do a 1031 exchange if there's appreciation there. But typically flippers are moving so quickly, they're not holding for two years, right? Or even maybe a year in a day. Some people would say you need to wait at least a year and a day to two years before you sell an investment property. Because after a year and a day, then you're technically in the long-term capital gains bracket. Anything under that, it's a little more risky. So we're not the exchange police, we don't tell clients what they can and cannot do, but typically we just know, you know, 1031 exchange isn't really for flippers. But you do have investors that do flips, and then you have investors that buy and hold and rent them out for a period of time, right? Yeah, we did. We had a show on that with CJ about the the burr. So with a burr, where they're buying it, they're rehabbing it, they're renting it out, they're refinancing it, that is something that they can then come to you when they're ready to to let that property go. And yeah, absolutely. Yeah. So what are some of the pitfalls of doing a 1031 exchange? The pitfalls can be, you know, the 45 days comes and goes very quickly. So the faster that you're lining up the sale and the replacement property, you know, the property, we call it the relinquished property, the one that's being sold and then the replacement, the closer that you can work those to the sale and the purchase together, the more chances of success you're going to have. So that's one area where you, you know, that can be a pitfall is the 45 day identification period. Not knowing the basic rules of reinvestment. So if I'm selling for 500,000, I need to buy for 500,000. A lot of people think that they just need to move their equity over. So they sell for 500, you know, there's a payoff of 250,000 to a mortgage, and then there's, you know, actually coming into proceeds, 250,000. People think that they only need to replace the 250. But it's actually sales price for sales price. And when I say sales price, I mean net sales price. So you do get to minus our closing cost and commission. But after that, that's what actually needs to be replaced in the new property. That can be a pitfall. And then there's lots of others, you know, we covered that in the last talk that we did for your investors there. And there are a lot of pitfalls, you know, some of the other ones are maybe not utilizing all the exchange funds. So say I'm selling for 500,000, but I want to take $100,000 of proceeds out of that, which is totally possible. But then clients don't realize they're just going to pay tax on that 100,000 that they hold back. You know, so pre-planning, a lot of pre-planning goes into this and make it, you know, we don't charge for our consulting and kind of talking about the 1031 exchange or how we go about structuring it. So we're always happy to meet with clients and talk about it. So if I sold a property for a million dollars, can I then purchase two $500,000 investment properties? You can, which is a great way to leverage, right? So you can sell multiple and buy one, or you can sell one and buy multiple. Okay. So what if I'm, you know, driving around the North Shore and I see this property and I fall in love with it and I put an offer on it. Can I then, after the fact, decide to do a 1031 exchange, just sell one of my investment properties to buy the property I just fell in love with on the North Shore? Yeah. So there's a couple of ways to structure something like that with, you know, we always try to, you know, work everything as a forward exchange if we can, where, you know, just finding a property, actually, we did something very similar. We found the property we loved first, just like you were saying, by driving around, we found a great property and we hadn't even listed the properties we intend to sell. So what we did is we made an offer and that didn't make it necessarily a reverse exchange by making the offer. But we worked with the seller on our, the one we wanted to buy while we listed our other properties and they allowed us about three months to get our profits, our listings sold. And then we could move in a forward 1031 direction and buy our replacement property, right? So that was not a reverse, but it kind of was, it felt like it because we were making the offer first, and then we, you know, got our property sold. But there is something called a reverse exchange, you know, where you actually can physically buy your replacement property first, you can close escrow on it, and then that starts your clock, you've got 45 days to identify what you want to sell, you've got 180 days to get your property sold. So you bought what you wanted and then you have six months to sell. So that's a reverse exchange and they are costly and, you know, not only the fee to us is more, but the fees to escrow and title can be more because there's an additional third closing on the backend. So they can go ahead and purchase and then sell their property. So, so what happens if the market isn't as hot as it is right now, and it doesn't sell within that 180 days? So they don't have a taxable event, right? Because they didn't sell anything. So that's kind of the good news. And if they're investor that can afford to hold both properties, you know, they just own two properties. Now they own the one they purchased and they own the one that they intended to sell. They can still do a forward exchange into something totally unrelated to what they purchased. So they still have the ability to do a forward exchange. So it's not the end of the world. They own both properties. They don't have a taxable event. But, you know, not everybody can afford to do that. So the other thing that I want to point out is that we are doing what's kind of a little unusual, but non-state harbor reverse exchanges. So we do those at Ikea. And that is where sometimes people move outside of that 180 days to sell. Now we don't do this on forward exchanges, just reverses. But the non-state harbor reverse exchange is where we're going to venture outside of the six months to sell. They've got up to two years to sell. And yeah, it's possible to do that very costly. You know, we're taking on a little bit more liability at Ikea to put together something like that. There's a lot of work that goes in behind the scenes. But it is something we're doing. So are you seeing a lot more of 1031 exchanges now with COVID and unemployment the way it is? Our real estate market, we're going to talk about that event too, it's still going strong. But are you seeing more landlords wanting to 1031 exchange out of their rentals? We are. We are seeing a ton of movement right now. I would say this market feels very similar to like 2007 and 2008, where things were just moving very quickly. Our numbers have been really good. You know, we did see a lull right around April and May. I think because people were stuck at home and not sure what was going to go on, they couldn't even get to open houses because there weren't really open houses going on, right? But now there's just, you know, before COVID hit, things were just flying off the shelves. A lot of investors listing their properties and selling, doing 1031. And I can say this not only from a local perspective, but IPX 1031 is a national company. So we're the largest 1031 exchange company nationwide. And all of my counterparts all over the nation are extremely busy. So yeah, so that's what we're seeing on the real estate side. Also very low inventory, something comes on, multiple offers. So how is the market impacting the speed of these 1031 exchanges? See, are you seeing it? So we were just talking about this today. Everything right now is a rush. So, you know, a new order comes in, they're closing in 10 days, they need exchange documents. And we're working, you know, around the clock to get them out. We're working on the weekends. We are busy right now. So our people are really filling it. But yeah, a lot, you know, like we're just hoping for new listings, you know, so that we can keep that inventory moving for you guys that help. But we are seeing a lot of movement in exchange. And I think for a lot of different reasons, maybe even how they changed the short term rental stuff here has, you know, made some investors want to sell and go to other markets too. So yes, I've seen that on my side in the real estate world. I do have investors who are selling condos. So do you know where these people are? I don't know if you guys can break it down to are people selling here in Hawaii and and doing the exchange to purchase on the mainland or is it mainland exchanging to mostly purchase here on Hawaii? You know, it's really a mixed bag. I would say it's pretty down the middle. You know, you've got local investors that are just not going to buy on the mainland. They want to stay here locally. They're going to do that. We're seeing, you know, maybe 30% of our clients are leaving and going other places. So I am seeing a lot of a lot of Vegas, a lot of Seattle, Washington, you know, that area, a little bit of California, maybe people have moved to California and now they're taking their investment properties with them. So it's really a mixed bag. You know, we've got a lot of a lot of local sellers just want to stay here locally though. So it's beautiful. So what other advice would you give someone that is brand new to investing or brand new to this and is thinking about, you know, their future? What advice would you give them? Well, I would tell them to pre-clam, you know, kind of have an idea of where you're going in the future, where you really want to see yourself or see your investment properties. Which direction do you want to move in? Do you want to buy multiple or would you rather just, you know, sell off multiple and buy one bigger one? You know, think about things like how are you going to end this 1031 exchange cycle? You know, because this is a way to build wealth for yourself. It's really the last greatest wealth-building tool that we have. You can leave money to your heirs this way. So this is a way that investors can plan to leave money to their children basically either through real estate or like the step-up and basis where they inherit the property and they can sell it and get, you know, a large chunk of cash, paying no tax on it. Or, you know, kind of, you know, another way to end the 1031 exchange cycle is to move into the property. You know, a lot of people forget about that and don't realize that they can actually move into their rental property and live there for a period of time. So they would rent it out first, right? They rented out first, then they can move into it and they can stay there indefinitely and kind of end that 1031 cycle to where they don't end up having to pay tax on that property. So I can buy a rental in Orlando. Say I want to go to the world when they open back up and COVID is over. I can buy a rental property in Orlando and then in five years I can move into that property, go to Disney every day and not pay my capital gains taxes. That's correct. If you stay there indefinitely, never leave, you will never pay tax. And then after you live there, you know, you rent it out for a couple years, then you move into it, you start this conversion process. And after you live there for two years, that's technically your primary residence. And then you can start claiming the 121 homeowners exclusion. So you know, that's your primary and you can actually even sell it five years later. And you can claim that homeowner's exemption, 250,000 if you're single 500,000 if you're married and you can't sell it again and get that 121 homeowners exclusion. So I guess the rental property that I've lived in. Now how long do I have to live in it? You have to live in it for two and own it for five. So it's two and five. You've got to live in it for two and own it for five. But I can sell it and avoid the capital gains taxes. That's correct. So we keep talking about capital gains taxes and we've not really given anybody a number to make sure it's worth doing a 1031. So right now, what are capital gains taxes? How much money? Yeah. So a lot of clients call and ask me that, you know, like, Tiffany, what am I going to pay if I've got to pay my capital gains taxes and just not do this exchange, not mess with it. So I tell them somewhere upwards of 25%. Really? So 25% it's broken down by, you know, you have to pay to the federal government. You've got to pay to our state government. And then there's something called depreciation recapture. This is the hidden tax. So, you know, federal anywhere from 15 to 20, 22%, then another 7.25 to the state of Hawaii. And then depreciation recapture is 25% of all the depreciation that we took. So what that is is the IRS allows you to depreciate residential real estate for 27 and a half years. They allow you to depreciate commercial real estate for 39 years. At you every little year, you get this credit back to you. So every year, let's say we do that for 10 years, and then we sell an investment property, we took $3,000 for 10 years, that adds up to 30,000. Then the IRS is going to recap 25% of that. So when you're talking about what am I going to pay in capital gains tax collectively, somewhere upwards of 25% to 35%, you know, and that scale is based on your, your, how much you earn based on your income. So if you're a lower income earner, you're going to be at the lower end. If you're a high income earner, you're going to be at the higher end of that property. So this is 25 to 35% of the entire sale price or what you make. What you gain, what you gain. So if you're selling a breach front for a million dollars that you purchased for 300,000, you're going to pay 25% of that $700,000. That's right. Wow. So you are definitely worth getting in touch with. So, and what, what, if someone does want to do a 1031 exchange, how would they get in touch with you to save that, that couple hundred thousand dollars? So we're easily reachable by phone. You know, our phone numbers 808-387-4140, they can email us, they can easily find us on the web at ipx1031.com. But basically just pick up the phone and call me. You know, I try to be very, you know, talk about this in really simple terms that makes it easy to understand. But I'm easily reachable by phone. And then we can just talk about what you're selling, what you're buying. I don't need a whole lot of information. You know, again, we really want clients to rely upon their CPA to guide them on things like, you know, how much they should be buying for, because sometimes investors are carrying forward losses and losses cannot set gain. So maybe they don't need to spend the full sales price. And that's just not something that we can tell investors when they talk with us. So basically we're just going by the general rules and guidelines. We talk about things like how much they're selling for, what they intend to buy, how long they owned it, you know, where the escrow company is that they're working with, we get in touch with that escrow. And then we just start moving forward very slowly. I try to make it very simple for people now. Say yes. And I can always get you in touch with Tiffany. So does your company's investment property exchange services do anything but 1031 exchanges? Or is that, that's your primary focus? That is it. That is all we do at IPS. We are just processing 1031 exchanges working with investors. And I really enjoy what I do. It's, you know, we're kind of the hero, because we just help people learn how to navigate something that's really complicated. Well, great. So like we talked about, the market right now, we definitely need more inventory on the market. Properties are flying off the shelf. Single family homes, especially over asking. So if you're thinking about listing your home or you're thinking about listing your investment property, please reach out to one of us because we would definitely love to talk to you. And right now the market needs it. I know some people are afraid. We definitely do take a lot of the COVID precautions. So, but these properties are just going like crazy. So thank you so much Tiffany for joining us. I've learned these shows because I always learn something. I try not to sit here with my mouth open. Thank you so much. This was the life of the land is in its real estate. And I will see you all in a few weeks where I will have a property manager talk to us about how's it going right now? How is the rental market or tenants taking their rent? What are we seeing? So I will see you all in a few weeks and thank you again. All right. See you all. Bye.