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REVERSE 1031 Exchanges... What They Are & How to Use One Today - YouTube
Channel: Equity Advantage 1031 Exchange
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Hello, David Moore with Equity Advantage,
1031exchange.com.
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And today I've got Tina Colson from my firm
joining me.
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Hello.
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And she's going to be testing Tina.
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Yes.
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So what do you got for me today, Tina?
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So today we're going to talk about reverse
exchanges.
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Properties are flying off the market right
now.
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And so the problem tends to be that somebody
may not be ready to sell a property before
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they find their property that they are looking
to purchase, and they want to purchase that
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property really quick.
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So with a reverse exchange, people think,
"Well, what's the big deal?
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I'm just going to buy first and sell later."
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What they don't realize is that they, one,
need to come in with cash for the property
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before their other property sells and they
have the proceeds from that.
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And then secondly, by law, they cannot take
title to both the old property and the new
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property at the same time.
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So, therefore, we have to warehouse either
the relinquished property or the replacement
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property during the exchange.
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So I want to talk today about which property
we warehouse and how that decision is made,
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and the rules between whether we take the
relinquished or take the replacement.
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David?
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Great.
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Good question.
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I mean, it's really a crazy time.
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As we discussed yesterday, one of the brokers
we work with had posted something stating
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they got, what was it, 75 or 78 all cash offers
in one day, and they were just saying that
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has to be some type of record.
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So what that means to our clients is, obviously,
the 45-Day ID period is so problematic.
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In today's world, is really tough.
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I mean, for the brokers out there, if somebody
came to you with contingency offer today,
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I mean, what would happen?
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You'd say, "Heck no."
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So the reverses are very, very popular, and
we've been doing reverses since 1991, and
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for the first nine years there, until we got
the rev proc 2000-37th for reverse exchanges,
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as Tina said.
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One of the safe harbors in that rev procedure
is that you cannot have ownership of the new
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and old property at the same time.
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Before that was in place, we used to do what
we'd call a true reverse exchange.
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And I'm not going to burn any time on it,
but it was really just the opposite of a delight.
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And the first thing I've got to say about
any reverses, if you don't have the financial
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ability to buy the property, we're not going
to buy it.
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We're not going to do the transaction.
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We don't loan money.
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So any reverse is going to require you, the
taxpayer, to have the cash to make the deal
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happen and it's going to be a question of
how much you have available.
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And as you were asking, Tina, it's like a
reverse warehouse replacement means that we're
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going to create a limited liability company.
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In the exchange world, it's called an EAT,
an Exchange Accommodation Titleholder.
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We certainly do live in a world of acronyms
these days.
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But the bottom line is a single member LLC
that the exchange company is a member of.
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So a warehouse replacement means we're going
to warehouse the replacement property.
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Warehouse relinquish means we're going to
warehouse the relinquished property.
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Your question was, how do we decide which
way we're going to go on it?
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Absolutely.
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One of those factors is personal preference.
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What do you want to own?
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Two, the question is, if there's financing
that's involved, what are they going to allow
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us to own?
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So we're always going to be balancing that
decision to warehouse, to relinquish a replacement.
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It's going to be driven by whether you've
got the cash to buy it outright, whether you're
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going to finance it, how much money you have
available for the purchase versus what you
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actually have coming out of the relinquished
property.
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And we're going to do a warehouse replacement.
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And by the way, warehouse replacement is really
the same structure as an improvement exchange.
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So we're just going to create the entity.
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It's going to take ownership of the asset.
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An improvement exchange just means we're going
to be going vertical on the thing during the
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time we "warehouse it" or "park it."
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So just for those out there that are confused
with the term warehousing or parking, again,
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the reverse does not allow you to own both
at the same time.
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So we're going to create an entity that's
going to own one or the other and warehousing
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or parking are just words that are used to
describe which property we're taking ownership
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of.
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So if you've got less money available to buy
than what you expect to net, typically, that
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means we're going to warehouse the replacement
property.
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So what would happen if you've got a half
million dollar deal and you have 1000 to put
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down on it, you have 200 coming out of the
old property, you're going to show up to the
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purchase with 100 to buy that property.
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We're going to have a note drawn between you,
the taxpayer, and we, as the [inaudible 00:05:05]
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saying basically, "We borrowed 100,000 from
you, and we're going to close on that property."
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And that's going to require, in that scenario
we're going to require a lender that's going
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to allow us to take ownership.
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And that loan is going to look something like
this.
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It's going to be a loan to the limited liability
company we're the member of, secured by the
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property, but guaranteed by the taxpayer.
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The taxpayer is going to go out and secure
financing as though he or she were buying
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it.
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Ultimately, it's going to be theirs.
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Now, using that structure, what I like to
do is name the entity in a name that the taxpayer
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ultimately wants to own the asset.
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And if we can do that, and it's a single member
person or entity that's coming into that transaction
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to complete the deal, we're just going to
sign a membership interest in the LLC back
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through their client to complete the exchange
instead of having to deed that from our entity
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over to them, completing the transaction.
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So now they hold that property in their own
LLC at the end of the day?
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Yeah.
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And the beauty of it is if there's transfer
tax, we can get away from additional deeds.
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We don't have to have the deeds drawn.
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We don't have transfers occurring.
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If loans are in place, the loans don't have
to be changed.
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Everything stays the same.
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Title policies, this is something that you've
got to understand too, if we're doing warehouse
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replacement, the title policy is written for
the entity we're closing it in.
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Mm-hmm (affirmative).
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Unless you're going to pay for a second title
policy, you need to make sure you're additionally
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insured on that policy.
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So that's something that you really need to
be aware of too in a warehouse replacement.
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But the beauty of the warehouse replacement
is using the scenario, you've got 100 to put
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down, 200 coming out.
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We're going to sign the note.
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We owe you 100.
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When your property sells, we're going to take
100 repay the debt to you that we have.
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The other 100 is going to be used to pay down
the debt on the replacement property, and
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then we will, after paying it down, convey
ownership of that property back to you, completing
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the transaction.
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If you want to buy additional property, we
can do that via an effective delayed exchange
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at that point from the date your property
sells.
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So the reverse exchange, just like a delayed
exchange, gives you that 180 day timeline
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to sell things in a reverse instead of buying
things in a delayed.
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But if you wanted to take the additional money,
go buy additional assets, you'd just be starting
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the clock on a delayed exchange at the date
that thing goes away.
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But the beauty of that warehouse replacement
is it allows us to put money into it, paying
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down the debt, getting it taken care of.
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The downside is that the money's probably,
if you have to get a loan, the money is probably
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going to be more expensive.
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You're going to need a portfolio lender because
the ultimate owners, not the owner at the
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time the loan is being put in place.
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So warehouse replacement means we're warehousing
the replacement property.
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That's sometimes described as an exchanged
last transaction to.
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A warehouse relinquish means that when we
buy that replacement property, that 100 that
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you come in with is going to buy the property
and we're going to immediately give you that
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property when your property sells, and we
will have been deeded the property that's
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to go away.
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When that property goes away, using the numbers
we've been using, let's say 200 in equity,
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500 sale, the 200 comes into us, we're going
to take the 100 and pay back what you have
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loaned us, and then the additional money we
can't put into that property at that point.
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You already own it.
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So at that situation, we're going to have
to go buy something else in addition to that
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or you're going to have tax exposure on that
difference.
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Great.
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Thank you.
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Sure.
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That's just one of those things that comes
up all the time and with respect to which
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way it's going, I just think there's a lot
of misunderstanding out there with respect
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to what happens.
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And sometimes people think that we loan money,
and, obviously, we're not going to do that.
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And I want to stress once again, you've got
with a reverse exchange, you're going to have
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45 days from the date of acquisition to identify
what's to be relinquished and 180 days to
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actually have those go away.
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Now, the other question you didn't ask that
comes up is, "Well, what happens if I never
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sell the property?"
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Oh, yes.
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Now, I've got a "failed" reverse exchange.
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Well, there's no tax consequence on that transaction.
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You didn't give up anything.
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So all that's happening is you're now the
proud owner of another asset, and you no longer
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have the ability to exchange into it.
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So if we are warehousing the replacement property,
and we now have a failed transaction, we're
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just going to transfer that asset back to
you, making you whole.
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If, on the other hand, we are warehousing
the relinquished property and it never goes
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away, we're just going to transfer it back
to you and you don't have gain because you
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didn't realize gains because nothing went
away.
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Right.
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And one last comment, we're talking about
reverses and this comes up, so you can dig
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through our video library on seller finance
in a transaction.
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A lot of times people will say, "Well, you
can't sell and do an exchange using a note
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and trust to your land sale contract."
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That's untrue.
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There's five ways we can do it.
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But if we're looking at a seller, carry back
in a reverse exchange, it's beautiful.
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Because think about this, when we buy that
property, once again, using the 100 number,
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so you show up at that purchase with 100K,
and we have a debt to you for that $100,00
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that's paid back with the disposition of the
relinquished property when it happens in the
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future, well, if you just carried a note,
we're just going to use the note to repay
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the debt to you.
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So a seller carry back with a reverse exchange
is very, very easily taken care of.
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Works great.
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If you've got additional questions, concerns
on reverse exchanges, the only dumb question
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is the one you don't ask.
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So ask the questions.
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And that leads me to this fact, and we've
got a pretty thorough library of videos, but
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if you've got a topic that you want to know
more on, please don't hesitate to reach out.
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Send us an email and we're going to be happy
to address any questions or concerns you may
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have.
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Absolutely.
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Thank you, David.
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And so, again, any questions, reach out to
us.
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Equity Advantage, 503-635-1031, or 1031exchange.com
on our website.
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And, again, David Moore and Tina Colson.
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Thank you for joining us today.
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I always hate that when we go, "Punch that
like button," but please punch that like button.
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And if you like what we're presenting, please
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We'd love to have you join us for all of these,
and look forward to doing business with you.
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Thank you very much.
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Thank you.
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