Epic Real Estate Investing - Navigating 1031 Exchanges: The Ultimate Guide for Real Estate Investors | Mike Auerbach | 1297

Episode Date: April 4, 2024

Dive into the world of real estate investment mastery with the latest episode of the Epic Real Estate Investing Podcast, as Mercedes Torres takes the stage from the Rube Cobb Conference in St. Louis, Missouri. Joined by 1031 exchange specialist, Mike Auerbach, this episode unveils the secrets behind maximizing real estate investments through strategic exchanges. Discover the intricacies of 1031 exchanges, a powerful strategy empowering investors to swap properties while deferring capital gains taxes. Torres and Auerbach unravel the mysteries surrounding this tax-deferment tactic, answering burning questions and delving into the benefits and risks associated with it. Throughout the conversation, listeners gain valuable insights into the importance of meticulous planning, the nuances of 'like-kind' investments, and the critical timelines and procedures essential for executing a seamless 1031 exchange. Learn firsthand about Auerbach's role as a qualified intermediary and the pivotal role his company plays in facilitating these transactions. But that's not all; this episode isn't just about dispelling myths and debunking misconceptions. It's a roadmap to financial freedom in the real estate world. Torres and Auerbach address common misunderstandings about property titles and delve into the often-misunderstood realm of partial exchanges, ensuring listeners walk away armed with knowledge and confidence to make informed investment decisions. Whether you're a seasoned real estate mogul or just dipping your toes into the market, this episode is a must-listen for anyone looking to turbocharge their investment portfolio, maximize returns, and create wealth efficiently. So, tune in now and embark on your journey to real estate success! P.S. Whenever you're ready to go deeper and further with your real estate investing, looking into my partner program to help you get your first deal might be the move... take the first step here for free 👉 https://epicearnwhileyoulearn.com/ Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. There's two major rules to do in a 1031. One, the IRS mandates you must use a qualified intermediary, which is what 1031 specialist is. It's an independent third party that has to facilitate the transaction. And two, you can't take constructive receipt of your funds for even a second or else the IRS deems, you know, hey Mercedes, that's a taxable event. We're going to have to tax you because you took control of your funds. For even one minute. even one second.

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Hello and welcome, welcome to the Epic Real Estate Investing podcast. My name is Mercedes Torres. I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire. Now, I am coming to you and recording live from St. Louis, Missouri at the Rupcom Conference. Of course, my amazing friend, Dustin Heiner, from Massive Passive Income, put on this extraordinary conference to network, to connect, and it's really just to build community. And so having said all that, he asked me to come and speak at this event. And this event is no short of amazing real estate

investors. So what I decided to do is I decided to take advantage of all of the people in the room and jump in on our podcast and just really bring them to you. Now, I am honored to be connected with experts that will help you elevate your real estate investing. So I am joined by a very special guest today and I thought it would be ideal to have him educate us on the most common questions to get you to maximize your money and your investment and really to create wealth. So as you know on our podcasts, I often do a segment of Ask Mercedes. And that's where you can send in your real estate questions and I will do my best to answer them. And if I can't answer them, I'll do the next best thing and I will bring an expert on board. So rather than me asking and answering the questions,

we're just going to bring it to the experts so they can shed light on the topic. So today, I am bringing you a 1031 exchange specialist to educate you and to answer the questions and shed light on this very important topic. So without further ado, I am just going to welcome Mr. 1031 exchange to our podcast. So welcome, Mike, to the Epic Real Estate Investing Podcast. How are you? I'm great. Thanks for doing this today. You know what? No one better than a an actual expert to educate our listeners. So why not bring you on board? Awesome. So how was the trek to St. Louis, Missouri? We're from Denver. So there's a huge snowstorm going on right now. So we're, we're lucky to be here now that it's, you know, 70s. But yeah, I mean, pretty easy. Super excited to be

here and network and meet people and just continue to educate people on, you know, the power of 1031s. I love it. I love it. Well, having said that, why don't you do a better job at introducing yourself to our listeners. Tell me all about you and are you a real estate investor yourself. Yeah, definitely. So, you know, my name is Mike Auerbach. I'm a partner at 1031 specialists. We are a qualified intermediary, which is a third party that's mandated by the IRS to facilitate 1031 exchanges for investors all across the country. And so coincidentally, I started my career as a broker, you know, and then I went the investor route. I worked for a large private equity company acquiring apartments anywhere from $50 to $150 million per deal.

And notice while we were doing these 1031 exchanges that, you know, there is a lot of bad customer service when it comes to dealing with some of these larger companies that do thousands of transactions per year. And essentially, we realize that there's a great opportunity to kind of modernize the process. I love it. And so first and foremost, what made you decide to come to a conference like Rubcom? Yeah.

So, you know, we met Dustin about six months ago and we really liked what he was doing with how he was presenting himself to his audience. And, you know, I said, hey, Dustin, I'm trying to meet more guys like you who have a great audience and are educating their communities on the benefits of real estate. He's like, Mike, you got to come to my conference in St. Louis. And I'm like, Dustin, you know, to be honest, I am not a conference guy. It's not something that I want to do. And then he started saying, well, you know what?

This is a conference where no one really is selling you. It's all about kind of connecting and it's about meeting people who are like-minded. And so far we've been here. And coincidentally, I met you this weekend this morning at our breakfast and now we're doing a podcast together. So it just kind of goes to show you how these things can work. Yeah, you know, I will have to say something about 1031 exchanges is they are so underrated and not discussed enough in our space. So when I met you, I was like, I have to have you on the podcast so you can educate. So why don't you tell just the average person, what is a 1031 exchange?

Yeah, quite simply, a 1031 exchange is a swap of one investment property for another investment property without paying a dime in capital gains taxes. That is the simplest way to put it. And it is a great financial tools for a lot of people who are beginning their journeys and even serious investors who've been doing this for a while to kind of compound and expand their portfolio to generate cash flow faster, get a step up in depreciation and realize all the benefits that real estate has without losing equity to taxation, right? Yeah, that's like music to my ears, like not paying a dime. That's like my favorite terminology in our space, putting money in my pocket and not paying a dime. So let's break that down even more. So what would be the benefits of a 1031 exchange for just your average basic real estate investor that's just getting started? Yeah, and I'll break this down pretty simply.

The main benefit of a 1031 exchange is for a real estate investor to meet their investment objectives faster. There's no equity taxation. With more equity, you're able to purchase more property, more productive properties, get a step up in basis after you go through depreciation. And then you essentially generate more cash flow, which is pretty important to people when it comes to real estate investing. So, you know, it's a great tool. 95% of what we do is educate because there's a lot of misinformation out there.

But the truth of the matter is anyone could do a 1031 exchange as long as they own an investment property and are looking to purchase another investment property. Okay, so let's dive into that. You said anybody can take advantage of this amazing 1031 exchange. So let's just say, you know, we have a real estate investor, a W-2 employee, and has two rental properties, and he's just starting off. And he discovered, oh my goodness, I have $80,000 in equity in my property. So I'm just going to sell it. Walk us through what that looks like for that particular individual that's looking to sell that property and benefit from a 1031 exchange. Definitely. So normally when you go to sell an investment property, the taxman comes calling, right? It could be anywhere. There's four

different types of taxes, but mainly the capital gains tax can be anywhere up to 30% or more, depending on what state you live in. You're in California. I think there's like a 13.9 state income tax. Florida, there's none. But the way it works for us is we act as the facilitator. So when you go to close on your investment property, you're not allowed to take constructive receipt of the funds. If the funds hit your account for even one second, the IRS deems at a taxable event. We come in at closing. We direct the funds to our partner bank where the funds will sit in a segregated trust account at our FDIC partner bank while you are going to look for your replacement. property. And when you go to close on your replacement property, we instruct the bank to

wire those funds to the seller, thus completing the 1031. So there's two major rules to do in a 1031. One, the IRS mandates you must use a qualified intermediary, which is what 1031 specialist is. It's an independent third party that has to facilitate the transaction. In two, as I mentioned, you can't take constructive receipt of your funds for even a second or else the IRS deems, you know, hey Mercedes, that's a taxable event. We're going to have to tax you because you took control of your funds. For even one minute. For even one second.

Really? That's interesting. Yeah. So, you know, we tell people, plan ahead. That is the most effective way to get ahead of any timeline risk. I will note that there is a timeline that 1031 exchanges that you have to abide with, right? From the date you close on the property that you're selling, you've got 40, five days to ID identify up to three properties to satisfy, you know, the exchange requirement. You can go from one property to three properties, three properties to one property or one property or one property even more. There's a couple more rules for that. But you have to show the IRS that

you've identified properties. And after the ID period, you get another 135 days to close on the property. So the whole transaction must close within 180 days. And so what we tell people to prevent ahead and plan ahead, start looking for your replacement property while your property is on the market to mitigate that timing risk so you don't feel the stress and the pressure of doing a 1031 exchange. That is excellent information. Okay, so let me run down that. When you decide that you're going to sell a property and you know you're going to be profitable, what needs to happen as the seller? What do I need to do when I decide I want to be profitable? I want to be profitable. I want to be want to do a 1031 exchange. Do I tell the real estate agent that I'm doing a 1031 exchange? Do I contact

the third-party company that's going to facilitate it? What's the first step that an investor needs to know? The first step is you want to talk to a qualified intermediary like 1031 specialists. They are the ones who are going to plan ahead. They're going to make sure what you're trying to accomplish with your investment objectives, that it makes sense, that it's doable. A lot of people call us and say, hey, I've got a second home. Can I 1031 that? And truthfully, you can't, anything for personally use more than 14 days out of the year. The IRS qualifies that as personal use and you can't 1031 that.

It's got to be truly an investment property. So for us, we're just answering questions in educating and consulting before and during the exchange to make sure that, hey, you're going to have a successful output. And also, you know, we get you ready with all of our documents that are in compliance with Section 1031 of the IRS. That way you can report it when taxes are due in that year. Mike, you're saying all the right things. I love it.

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If you're using a real estate agent, I'm sure they have a fiduciary duty. to inform the parties and to keep the deal structured correctly. Then the deal goes under contract. You find a buyer. And now you say, start looking for your replacement properties. Now, that's very important because there has to be a number that the seller has to abide by so they don't get tapped. What's that number, that figure that we have to find as a representation?

replacement property. Yeah, definitely. So let's say you're selling a property for $500,000 and you've got a mortgage on it for $200,000. So you have to identify a replacement property for that full $500,000. So the $300,000 of equity and the $200,000 in debt. So you have to replace the entire value like kind and it has to be at least $500,000 for a replacement property. You can go more than that, but it's got to be from a net proceeds standpoint. It's got to be the full amount to do the full tax deferral. Some people do a partial exchange, which is where they take some money out and pay for some other expenses. But to get the real benefit, really it's the most effective when you do a full tax deferral 1031 exchange. Got it. And when you decide to do the partial, that means that whatever

amount of money you decide to pocket, you will pay taxes on only that amount and not the amount that actually went into the exchange. Correct. Correct. Okay. Great. Now that we have that established, you mentioned something, this is very important. You said like for like. Maybe I'm paraphrasing what you said. Can you explain the like for like? Definitely. So like kind investment, this is one of the biggest myths, I would say, in the 1031 exchange industry. This is why I'm having you clarify. And all like kind means is like-kind investment property. So there are more than 16 different types of real estate someone could swap in and out of. You can go from a rental home to a multifamily property. You can diversify from an office building right now into industrial. You can go from three

properties down to one property. And the cool thing about doing this is you can do this in any state in any city in all 384 MSAs in the U.S. as long as it's held for business or real estate purposes. And it almost makes it seem like there's infinite exchange options out there. So when people say, hey, I don't have that many exchange options. Well, actually you do, but you just aren't aware that what like kind really means. And it just means swapping one investment property for another. Yeah. I love that you mentioned that because it's true. People just think that it has to be from one single family residence to another, but it could be from a single family residence to a duplex

or from a commercial property to two individual turnkey properties. I have built several 1031 exchange portfolios. The biggest one I built was for 27 properties total. I just built another one for eight properties, and that's the beauty of cash flow savvy that I know ahead of time exactly that magic number I was talking about. So I help clients, okay, you need to buy five properties and you need to spend $500,000. I got you. I will do it all for you. And then I bring someone like you, the 1031 exchange specialist to facilitate it. And that becomes turnkey for

our clients. So Mike, that's just like perfect information. Now, one last thing I want to say like for like. And this is a, I don't know if it's a myth and you're going to help me clarify it. But one thing that I have been made aware of is when you sell a property and you're doing a 1031 exchange, let's just say you're selling the property under your name John Smith. That means that you would have to acquire a property with the name John Smith. Is that correct? Or can you buy it under Smith LLC, for example? Yeah. Look, I think the reality is people hold title to these properties in a number of different ways. They put it as their name. Maybe they put it in an LLC. maybe they have a bunch of different members in an LLC.

The way the IRS kind of views it is through that entity, right? So in order to put that replacement property, typically the easiest way to do it is in that same entity. But if you're with a partnership, for instance, there's complications because if one person wants to dissolve the partnership or one person wants to cash out, there are different ways in which we can structure the deal before the purchase agreement closes on the sale

to make sure that person who wants to continue to 1031 can do so. So it's really situation specific, but there's definitely a lot of different ways in which people can preserve their tax deferral status. Again, we just have to know about it in the beginning to plan ahead and make sure that all parties come to an agreement when it comes to this specific deal. Mike, that is critical when you said you have to plan it from the beginning. And I will have to say, I cannot tell you, Mike, how many people contact my office, want to buy a turnkey property and they just closed on their rental. And now they have $80,000 that they're going to have to pay taxes on because they didn't do the work ahead of time to benefit from the 1031 exchange. So thank you for that great information. So now let's kind of

divert into what are the pitfalls of an exchange? You know, what are the risk? Are there any? I mean, I think the only risk really is timing risk, right? So if you don't plan ahead, head, that's when problems tend to come. And frankly, we always say don't let the tax tail wag the dog, which essentially means, hey, you know what, if you can't plan ahead and meet your investment objectives on a replacement property and you have to kind of buy something that you're not excited about or it doesn't fit inside your investment criteria portfolio, it's probably best to just opt out and pay the tax, right? And that's us truly trying to help and align with your client's goals. We frankly don't care whether an investor does or doesn't do a 1031 exchange. It's not our

money. We're there to consult and get them educated so they can make the decision. And worst case scenario, they end up paying the tax, which a lot of people who end up talking to us early were like, well, why would I ever pay the tax? I have less equity left to reinvest. I can afford a lot less of a property because of that taxable gain exposure. So I would say from a timing perspective, that's definitely like the only risk. But really the way to look at it is a 1031 exchange happens just like any other normal real estate transaction with just a little bit more documentation and a little bit of planning. And I think that's the way we want people to start looking at it in the future. And a lot of savings because at the end of the day I use this infamous $80,000 profit.

If you don't have to pay taxes on $80,000, that's money in your pocket in the long run. it's money that you don't have to pay. I don't know about you, Mike, but I don't like to pay. So that works really, really well. So in that scenario that you just shared where somebody does a 1031 exchange and then they don't find the properties to meet that requirement. And you said, you know, we can have them opt out. Is it possible to partially opt out?

So let's just say out of that $80,000, I was only able to find properties and I'm going to use $60,000 of that $80,000. Am I able to only pay taxes on the $20,000? Yeah, but again, during that ID period, when you have to specifically ID properties that you're actually going to buy, it can't just be, I'm going to go through my neighborhood one day on day 44 and just write down three addresses,

you have to actually put down the properties that you're going to invest in. So if those properties tend to, you know, if you've got 1031 and you've got 100,000, and you can only identify 80 and you go through with it, you're definitely going to be taxed on that $20,000 piece that's not the full net proceeds. That you didn't fulfill your obligation to Mr. IRS. Okay, I got that.

Okay. So any other risk involved? What would you say is a risk of this amazing benefit? Honestly, there is no risk, right? I think a lot of times people especially think, hey, I don't want to pay the fee. What if I can't find a property? at our company 1031 specialists, we offer a 100% money back guarantee to our clients.

So if for whatever reason, they can't find a property or they decide to opt out, we refund them the fee that we collect on the closing at the property that they're selling. So all of a sudden, we're all in alignment to make sure that there's a successful outcome. And unlike being some third-party vendors in our industry, we actually care about the outcome

and not just collecting a fee just to collect a fee. And so now people get more comfortable because there's no investment risk to them. And worst case scenario, it just happens, again, like a normal real estate transaction and you pay the tax. Yeah, that's so eloquently said and right on point. All right. So let's talk about your particular company and your services. Walk me through someone reaching out to Mike and saying, hey, Mike, I have an investment property. I'm going to have to pay capital gains if I don't do a 1031 exchange.

How do people get a hold of you and tell me about your company? Yeah. So first and foremost, our whole preface is we're more of a white glove service type of business. I think in 2024, you have to be personalized and you have to be responsive and 95% of what we do is educate. And I've said that a couple times already. But really, you know, it's about setting up a time, understanding what someone's investment goals are, what their scenario is, and ultimately being transparent, informative, and being responsive.

And so whether it's a Friday night at 8 p.m. Or a Sunday morning, you know, while, you know, someone's watching their kids soccer game, investors have top of mind questions at the strangest times. And we do our best via text or call just to either respond right away or essentially set up another time to talk. And the way most people can get a hold of us, there's a couple different ways. There's our website, 1031 Specialist.com. They can go out and fill out a form.

They can also send us an email at 10301. 1031 at 1031 specialist.com. We all get copied on it if there's a question. But we've got great materials on our website. We've got the 1031 Bible. It's all this great information that we've gathered over the internet through the last 20 years. And we've repackaged it and it's bright.

There's pictures. It breaks it down really simple. And we've got these other things like the 1031 calculator where someone can go in and input their basic scenario, what they bought the property for, how much debt is on it, if they put depreciation on it, any renovations. So we've got all the tools that someone can go in and learn. But ultimately, I think the best way to contact us is give us a call. Our number 631, 438, 1031. Oh, I love it.

And you know, you'll get a call back within the hour and, you know, we'll set up a time of talk and just determine like, hey, this is something we can either educate you and answer a question or if you're ready to do an exchange, we'd love to. to help you out and make sure you have the best seamless experience out there. Yeah, that's perfect. So just for that listener that's driving or is on their morning run, I will include all of this information in our show notes so that you can click on the links and download his 1031 Exchange Bible, which I think is genius. I don't know how I didn't come up with that. I will say, though, to you really quick, what are your fees of this 1031 exchange? Yes, great question. if you think about just a real estate transaction in general, there's a lot of fees involved

from a brokerage fee, a lender fee, all this stuff. Our fee is really de minimis in terms of the overall transaction. We charge 1195. It doesn't matter if you're going from one property to three properties or three properties to one. It's just 1195 flat. There's no additional processing fee. There's no additional wiring fee or attorney fee. We are a flat fee. And like I mentioned before, we are one of the only qualified intermediaries out there that if you start the exchange and for whatever reason you decide that you don't want to go through with it or you can't find a property, we will refund that fee 100% money back if you don't have a successful transaction. So from a fee perspective, you know, there's really no risk unless you have a successful outcome. I absolutely love it. And so when you reach out to Mike and the company, you just let him know that you heard it here at the epic real estate investing podcast. And what's going to happen in an idea world is you do your 1031 exchange and then you need cash flow savvy's turnkey properties to satisfy that requirement for your 1031 exchange. Mike, it has truly been super meeting you this morning, getting educated on a 1031 exchange.

Did I miss anything that is extremely valuable to listeners considering a 1031 exchange? No, I think for the most part, I just want people to feel like they can approach it just. like a normal real estate transaction. It's really not that scary, guys. I promise, we will walk you through it and answer questions and you guys can do it. It just takes a little bit of planning. And planning ahead makes you more successful in the future as we know with real estate investing. And, you know, if you want to get educated, we're happy to do so. Yeah, planning is key. And, you know, as we often say, real estate is the final frontier where the average person has a legitimate chance of creating real wealth, and a 1031 exchange only

contributes to that wealth. Mike, you have been phenomenal. I truly hope you continue to enjoy this amazing conference. And to the listener that missed this conference, there's another one next year in 2025. If you have any questions for me or have any information or any questions that you would like me to address, please feel free to email me at Mercedes at Epic Realestate.com, Mercedes at Epicrealestate.com. And if you want to reach out to Mike, all of our information will be in the show notes so that you can reach out to get your 1031 exchange completed. Mike, a pleasure. Thank you so much for joining us on the Epic Real Estate Investing podcast. And to all of our listeners, what do you want to say? I think as a real estate investor,

one of the 1031 exchange is really like the eighth wonder of the world. And I implore you to explore it. And, you know, Mercedes, thanks for having me. It's been a pleasure getting to know you. And I look forward to working with you in the future and nothing but success for everyone out there in terms of building their portfolios. I love it. Thank you for joining us. And if this can benefit a friend of yours or someone in your real estate community, please share us. Please give us a comment. Tell us what you liked best. And don't forget to subscribe to our podcast. And from the Rubecom Conference 2024 to your years where cash flow is queen. Have a great day. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone

else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings and success to you. I'm Matt Terrio. Living the dream. We got to get as low This podcast is a part of the C-suite radio network For more top business podcasts, visit c-sweetradio.com