 I've been a licensed real estate agent since 1973. I'm the owner of Century 21 Iproperies Hawaii and work with close to 100 wonderful agents in real estate sales. I started AB seminars in 1980. I have taught over 11,000 students to help them get their real estate licenses and have taught continued education classes for licensees to renew their license every two years. Our show is dedicated to helping buyers and sellers understand the process involved in a real estate transaction. Our special guests will talk about legal issues, escrow, title, getting a loan, surveys, home inspections, insurance, contracts, Woojin Trust, and much, much more. And today we have a very special guest. She's not only pretty, but she's an expert in what they call the 1031 Tax Deferred Exchange. So we have Judy Bratton with us today. Judy, thank you so much for taking time out of your busy schedule. Thank you for having me. All right. So we're going to ask Judy a few questions and then she'll answer because she's really good at this stuff. First of all, why don't you give us a little background about your education, where you grew up, and how you got into exchange business? All right. Well, thank you again for having me. I am from LA, Los Angeles. And when I graduated college, I went on vacation to Maui with my mother. And long story short, I loved it so much, I ended up moving there. And that was almost 34 years ago. So that was a long time. And I've done various professions, even working in a restaurant. I was a dental assistant once. And but when I worked in a restaurant, I had a group of real estate agents that used to come in all the time and said, you should become a realtor. You should become a realtor. And I was like, no, no, no. But they finally talked me into it. So I became a realtor. So I sold real estate for a little bit. And then I became a transaction coordinator, meaning assisting a lot of the brokers in that brokerage firm at that time. And then Old Republic, Title NS Gross, scooped me up to do a similar program. And then 1031 Exchanges came up. And that was 23 years ago. So I've been doing 1031 Exchanges with Old Republic for 23 years. So that's the short story. You did it since you were 10 years old? Yes, pretty much. Okay. That's my story, and I'm sticking to it. So Julie, I know that 1031 Exchanges is near blood. And I've done transactions with Julie, both for my clients and for my own transactions. And Julie's had to guide me along as I get a little too creative in what I want to do. So I've been instructed wisely by Julie's years of experience. So tell me, what's the history of the 1031 Exchange and what is it? Well, a 1031 Exchange is a way to defer paying capital gains tax. It's not a get away from paying tax forever, but it's a vehicle for you to just deferring the taxes down the line. Until the end. And then at the end, you inherit the, your kids inherit the properties at a step up and basis, and that's how it ends. But it started way back in, I think it was 1984, 1979, there was a Starker Exchange. And then in 1984, I believe they changed, they adopted the timelines that we have to follow, the 45 and 180 day timelines. And here we are today having to follow those rules. As long as you follow the rules of the out of trouble. Okay, so it can give us a scenario. What happens with an exchange and what do you step in to help a realtor that says, hey, I've got a client that wants the exchange. And they have no idea what they're doing. If you have a client that owns investment property, you should be asking them have they considered doing a 1031 Exchange? It's a way to defer paying the capital gains tax. And it's just for the sale and the purchase of investment properties. You have to sell investment property and buy investment property within a specific period of time. So if an agent is working with a client who is selling investment property and they decide that they wanna do an exchange, as soon as they open up escrow is when I really need to know about it, the qualified intermediary. But they do have to negotiate the contract first. In the contract, they put a 1031 Exchange addendum to show intent to do an exchange to the other parties. But once you open up escrow, I will get a copy of the contract and the title report and I draft exchange documents and I send them to escrow. But an exchange needs to be set up before escrow closes. I can't stress that enough. Some people have afterthought. They close on the relinquished property and then they realize how much taxes they're gonna have to pay and then they call me up and say, is it too late to set up an exchange? And the answer would be yes. So they have to do this and follow the IRS rules. So do you want me to get into those rules right now? You bet. I can. Yeah, go ahead. All right, so we set up the exchange before escrow closes but the day of closing is when the clock starts ticking and this is the black and white of 1031 exchanges, these timeframes. The day of closing, you have 45 days to identify in writing what you think you're gonna buy and 180 days to close on it. So the 45 days is included in the 180. You don't get 45 and then an additional 180 and every day counts. So if 45 days lands on a Sunday, Easter Sunday, you would still have to identify what you think you're gonna buy by midnight of Easter Sunday. If 180 days lands on Christmas, you might have to close on the 179th day or the 178th day depending on where we are in the holiday. So there are no extensions on these timeframes. People call me all the time, what if I can't find a replacement property in 45 days? Well, if you cannot identify anything in 45 days, then you're gonna have a failed exchange and pay taxes. So these timeframes are very strict. We have to follow them and so does the taxpayer. I know there's several methods of identifying exchange properties. Can you give us a brief introduction to the different ways that you identify properties and they have to write you and email you the information. They can't just call you on the phone. Exactly. So the identification, I'm a little bit of the identification police because it has to be done timely and correctly. So there's two common ways to identify property. The first way is the three property rule where a client can identify up to three properties. Now they might only intend to buy one, but a lot of people put backups just in case. So you can buy one, two, I don't care all or all three, but you have to purchase something that's on the list. And by the way, we provide an identification notice to the clients for them to complete. If they wanna identify more than three properties, they have to use the 200% rule. And that is where they're gonna identify four properties or more. But with the four properties or more, here's where the 200% rule comes in, the fair market value of the entire list combined cannot exceed double or 200% of what they sold their relinquished property for. Example, if they sold a property for a million dollars and they wanted to identify four properties or more, they can, but that entire list combined could not exceed one penny over two million. It's as if they cannot go out and identify an entire neighborhood and then pick one later. So it's really important that the 200% rule is followed. The three property rule, it doesn't matter what the values are, as long as at the end of the day, you have purchased something that's equal to or greater than what you sold that relinquished property for. So the identification notice needs to be time stamped by midnight of the 45th day. Now, it's not a requirement to have an accepted offer when you identify, but you have to purchase something on that list. And you can make as many changes to that list as you want within the 45 days. But on the 45th day, I need the final list of what you think you're going to buy. When you identify, I'm sorry, this is a long-winded answer. When you identify, you need to list complete addresses, street number, street name, street, avenue, boulevard. If you're buying in a project, it needs to be a specific unit number, city and state. So it really needs to be a complete address. I was just going to ask you about that. Can I just say I want the building at Okua? No. It has to be specific units. If you identified the address of Okua, it would look as if you're identifying the entire building. So if you only ended up purchasing one unit, the IRS could come back and say you did not substantially purchase what you identified. So it needs to be a specific unit number. All right, so we got identifying the properties by midnight of the 45th day. In the 180 days, you have to close on or before that 100th AD estate. You're right. And remember, Hawaii has a lot of funny holidays. So for example, every year I have a few exchanges affected by King Kamehameha Day. Some of our clients that are from the mainland, they don't know that King Kamehameha was very important and we don't, the bureau is closed that day and we don't have recordings. So if their 180th day lands on that day in June, you might have to close the day before. Now, I understand that there are some exceptions for national or international disasters. What are those exceptions? So if you are a victim of a natural disaster that the federal government recognizes, they're pretty good about providing extensions for those people. I'll give you an example, Maui and the Big Island. They did get extensions from the IRS for their 45 and 180 days until February 15th or 16th, one of those two dates. And so if their 45th day was today, they really have until February to identify property. So they are very generous about that. They also had this last year for all of the weather that happened in California. So there were 44 counties in California that got extensions as well until October 16th this year. So hopefully we're not a victim of a natural disaster, but it pretty much needs to be that to get an extension on your 45 or your 180 days. So let's say I had major heart surgery and I'm about to die, can I get an exception? Sorry, no. I didn't think so. Okay, so now, like-kind properties, there's so much misconception about like-kind properties. What is that? Absolutely, it is such a misunderstood term. Real estate professionals, the consumer, it really translates to them as like-kind as like-kind, condominium for condominium, single family for single family, commercial building for commercial building. And although all of those examples are just fine, it's really any combination of real property. So first and foremost, it needs to be investment for investment. And then it needs to be like a real property for real property. So you can sell a condominium and buy a single family home. You can sell a commercial building and buy condos if you want. As long as it's real property, you can do an exchange with it. So for example, you can't go out and buy a boat, okay? A boat is personal property. Two things that I like to point out that are a little tricky about like-kind are leasehold property. And we have a lot of leasehold property in Hawaii. Leasehold property has to have 30 years or more remaining on the lease to qualify for an exchange. And also vacant land. When you go from depreciable property, depreciable property is a type of building of some sort, a condo, a single family home, commercial building, and you wanna buy vacant land as your replacement, you can, you can defer paying the capital gains tax, but you will have depreciation recapture to pay and that's taxed at 25%. So it's a little bit of a silent killer. It has nothing to do with the exchange, but it runs right alongside of it. So I like to bring it up. But yes, like-kind is a very misunderstood term. So just know that it's any type of real property that you can do an exchange with. How about if someone buys a property, bought it for a million, it went up to two million, they have to buy something at two million or higher. Correct. But what if it is at 1.8 million that they buy, they sort of to, they buy something for 1.8, is there a possible tax on that $200,000? There's a possible tax. However, keep in mind that it's the sales, if they sell for two million, they're allowed to subtract commissions and escrow fees. Those are considered customary closing costs. And then that would be their magic number. Now, if they buy less than that magic number, then that difference would be exposed to taxes and it would be a partial exchange. Okay. It's okay to buy lower. If you wanna buy too far down where it's a wash and you're gonna pay the same amount of taxes anyway. Okay. So can you sell one big property and buy smaller properties or can you sell a bunch of small properties and buy one big property? Absolutely. So when you sell one property to buy several, that's fine as long as you've identified those properties. You either use the three property rule or the 200% rule. If you're going to sell multiple properties to buy one, that can be a little bit tricky. You go off the time frames of which the first property closes. So let's say you're selling four properties, property number one closes, the clock starts ticking. They have 45 days to identify what they're gonna buy and 180 days to close on it. The other three just have to catch up in time to close on that first 180 day time period. So timing can be tricky if you're selling multiple properties to buy one. And if you're selling two to buy one, it's a little more manageable. If you're selling four to buy one, gotta make sure your timing is correct. Otherwise you'd have to do a reverse exchange if one of them didn't make it. So tell us about a reverse exchange. I think I opened that door. So just so you all know, there's four types of exchanges. There's the delayed exchange where you sell first and then buy, that is the most common exchange you'll do. It's the least expensive exchange you'll do. It's the most common. Then there's a reverse exchange where you buy first and then sell. They're becoming a lot more popular these days because people are having such a difficult time finding a replacement property in this market because the inventory is so tight. They're like, you know what? I just wanna find it first because I know I can always sell. Then there's the simultaneous exchange where you close the relinquished property and the replacement property on the same day. And then there's an improvement exchange where you sell your relinquished property and you buy a new property that you wanna improve or build on. But the reverse exchange is buy first and then sell. It's more expensive to do and you have to be able to come up with a minimum amount of cash to purchase that replacement property first. So the time frames are the same, but in reverse, 45 days usually doesn't matter because we're going to probably take title to the property that hasn't sold yet but they have to sell it in 180 days. I think that's a good start. Yeah, and what do I get to detail? Cause for the normal late person that's never heard of an exchange, they're like, what the heck? Yes, that's what I get to into it. But a reverse exchange, they are more popular but they are more expensive. So from a fee perspective, if you can do it in the right order, sell first and then buy, you should work on that process. Can you take some cash out in an exchange or is that the money that you took out taxable? Yes and yes. So if you want to exclude some money from coming into the exchange, you can do that. You'll just tell escrow. You know, I want to exclude $50,000 or $100,000, whatever that amount is. But if you exclude money from coming into the exchange, that money that you touch will be taxable, exposed to taxes. I mean, maybe you have something else in your portfolio to offset that gain and that's why you took those funds, which is fine, but whatever you touch is exposed to taxes. But when you do that, if let's say you did exclude $100,000 from coming into the exchange and you know you're going to pay taxes on it and you do an exchange with the remainder, when you do an exchange with the remainder you can reduce what you need to buy by $100,000 because you took $100 and you're already paying taxes on it. Okay, so. So what's the difference between an escrow company and an exchange accommodator? And do you work with all the escrow companies or is it just with over a public company? Okay, great question. So the escrow company, you're always going to have escrow when you're doing an exchange. They're different from us. They are a disinterested third party that for lack of a better expression that closes the transaction. They make sure that they have checked all the boxes to convey clear title to the new buyer and they collect all of the funds. So you'll always have escrow in any real estate transaction. The exchange company is separate. So you might have an escrow company in Hawaii because you're selling in Hawaii. You might have an escrow company in Nevada because you're buying in Nevada but you'll have me the exchange company the whole time. So basically for like Old Republic National Insurance Company, it's a family of companies. There is a family of companies. So you have Tidal and Escrow. You have exchange. You have home warranty. You have financial services. There's a lot of companies that are under the Old Republic National Insurance umbrella. We are one of them. But what is great about us also that you pointed out is I get to work with all of the escrow companies. So it doesn't matter where your escrow is. You can always use Old Republic Exchange for your 1031. So you mentioned that if there's any money that goes from the Tidal company to the clients and goes into the checking account and then they change their mind and say, hey, Julie, I'm doing exchange. Is that too late? Too late. Okay. So I do recommend all of you agents and brokers out there who are listening. If your client upfront says they are not interested in doing an exchange, I would do a little temperature check with them throughout the transaction and probably up to closing and get something in writing because oftentimes it's usually Monday morning I get a phone call saying I closed on Friday. Is it too late? And the answer is it's too late. So just get something in writing. I mean, I think clients are just so anxious about selling and buying these properties. They forget about what their tax burden is gonna be or could be and they sometimes decided the last minute which is fine. We can do documents in 20 minutes if we have to but it just still needs to be done before closing. So let's say I have a house that I bought. I lived in it for 10, 20, 30 years. I got tremendous gain and I'm gonna get taxed. Can I do an exchange from personal residence to an investment property? No. Investment property for investment property. So what the personal residence is, they have their own exclusion. It's called a 121 exclusion. And if you lived in the property too out of the last five years, if you're single, you can take up to 250,000 tax free. And if you're married, you can take up to 500,000 tax free. So that is the 121 exclusion. If you make more than that, the above and beyond is exposed to taxes. So is there a way for me to rent out the house for a year or two as my personal residence and then do an exchange and then rent that house for a year or two and then move into it? Yes, you're getting creative. But yes, you can do that. So you have an investment, you have a personal residence and you are gonna make over and above the 500,000. So you decide to move out and you rent it out for a while and then you sell it and you wanna do an exchange, correct? Yes. You can do an exchange with it, but there is a certain formula that clients needs to just talk to their CPA about it because they still may be able to take advantage of taking the $500,000 exclusion and doing an exchange on the remainder. So that's a cool thing. And but that, you know, our clients need tax advice. I mean, for example, everyone has their lane. So the brokers and the real estate agents, they have their lane, they sell real estate. My lane is 1031 exchanges. And you know, just cause I'm doing 1031 exchanges doesn't mean I can give tax advice. We can't give tax advice. So the CPAs and the tax advisors really need to guide them on, especially those types of formulas, what I can take advantage of and what I cannot. And that is one situation where that is. So let's take an example of a new agent that has a rich uncle or aunt or friend and they say, hey, you got a license. I need to do an exchange. Do we recommend that that new agent take this on or make sure that they're working with somebody that knows what the heck they're doing? I always recommend that agent should just have me handle the exchange. I mean, you know, they know enough to be dangerous. They know about the 45 and 180 day rule. And I think they know that they need to set it up, but there's so many little things that could come to play and you don't want them to come to play right before closing. So, you know, related parties, are they buying high enough? Are they identifying properly? You know, what is their story? You know, everybody has a story, but the rules are still the same, but sometimes the story is very telling and there might be something in that story that makes them not qualify for an exchange. So I think it's really important for the agent or the broker to bring up an exchange, but then, yes, hand it off to me so I can make sure they're doing the right thing. Well, they also need to make sure that their broker that they work with, he's experiencing this area. Otherwise, the broker could be leading their agent down the wrong path, because they're not experiencing it. Absolutely, absolutely. And I'm sure you've heard some stories. You know, just identify the business and pass it to the person who knows what they're doing. Like a lender, like brokers don't know how to give loans, so they call their lender to get to have them qualify for loans. So that's what I mean. Everybody has their lane in a transaction, but when there's an exchange going on, all the professionals involved need to talk to each other because something that they do in their everyday business could affect the exchange, just like that. Now, I know there's a whole lot more you do with this and you teach a three-hour continuing education class. Is that open to the public? Yes, I think the public can take the class. Yeah. It's much more than the line. And sometimes I do them on Zoom so people can hop on whenever they want and you provide that service for them, Abe. We've done seminars, I don't know how many years now. I know. And ever since you were 12, so we've been doing this for a while. But I highly recommend that you look up Julie and see what seminar she's doing and even email her and say, hey, put me on your email list and when you're doing a seminar, I'd love to join. You don't have to be an agent. You just have to be an interested party that wants to know more about exchanges. Any last-minute advice, Julie? Call your professional as soon as possible. I find that especially with exchanges, clients really don't talk to their CPAs or their tax advisors until they have to and that's in April, right before tax time. When you're buying and selling property, I really think you should talk to them before you do it so you know what your issues are, good, bad, or indifferent. If you need to do an exchange, you don't need to do an exchange just so you're up because I can't tell you what my calls sound like in April. What did my client do? So it's really important to get tax advice. Again, everyone has a story. The rules are still the same, but your story could make or break your exchange. Unbeknownst to you, so. Thank you so much, Julie. I know you're busy, especially at the end of the year, but lots of people are trying to see if they can do the tax exchange, tax deferred exchange before the end of the year. So please look up Julie on her website and just look up under OREXCO, or just her name, Julie Bratton, and she pops up everywhere. Over public exchange. Over public exchange. Thank you so much. And those of you that wanna have more videos that are on our archives, please go to thinktechkawaii, ably, and you'll see a whole bunch of wonderful guests that we've had over the past year. And if you wanna know more about real estate school, then go to ablyseminars.com and call me or email me, and I'd be glad to give you any information that I have. Julie, Merry Christmas, Happy New Year. Thank you so much.