On the show today we have… 1031 Exchange – IRS Extension Update with Bill Exeter!
Listen on: Apple Podcasts | Stitcher | Spotify
Show Links:
– Checkout Bill’s earlier show at SIC040
– http://exeter1031.com/ – Phone – 619-239-3091
– PNW Big Badass Real Estate Expo register here
Show notes for 1031 Exchange – IRS Extension Update with Bill Exeter!
The Vantastic Life is…
– is in Enumclaw WA!
Julie
The Clark household had a little incident last night… Julie’s twin daughters were messing around. And Katie Clark was messing around giving herself bangs, and in doing so twisted up her hair in a comb. Well, we couldn’t get the comb out of her hair, and had to cut it out. Oh my gosh!!! Lots of laughing!!!
Joe
I’m hanging out in Enumclaw WA with Emily’s parent after 3 weeks of isolation.
Julie
Bill, welcome, what are you focusing on these days?
Bill
Well the extension is something that’s interesting right now. Because it’s really hard to meet the 45 day deadline because we can’t really get out and identify a new property right now because of the Coronal Virus.
And the treasury recently came out with an extension. But it wasn’t exactly what we were expecting.
Usually with a natural disaster we have a specific date from the disaster. Well, the if your 45th day to identify a new property is April 15th, you now have until July 15th, but if you need to identify your property by July 10th… you now only have 5 extra days to identify a new property.
So, we are writing letters to the treasury to see if they will revise it. But we don’t expect them to. They usually don’t revise things.
And we don’t think we’ll hear anything until closer to July.
Julie
Who’s most impacted by this?
Bill
If you were before April 1st… you’re out. Or not in great shape.
Or if you’re someone that hasn’t sold yet… it won’t help your 180 day window.
Julie
What would you want to have happen?
Bill
If your deadline landed on July 10th and you could add 120 days to that… it would be ideal.
So if they would come back and say that you get 120 days, that would be perfect.
The guidance they came out with didn’t cite the right section.
We’ll see what happens.
It will be at the last min.
If the deadline extension doesn’t help them, I would keep the funds in the exchange account, just in case they do revise the laws.
Julie
Another issue is that determining values is pretty hard right now.
According to our rental friends… the April rents are coming in strong, but who knows what’s coming down the pipe.
If someone is doing a 1031 can they have additional debt?
Bill
Yes, absolutely.
If you buy a replacement property you just need to use your equity to buy straight across or trade up. Buy you would need a loan on the debt portion.
Julie
Dealing with the lenders right now could screw up the closing timelines.
Bill
Yeah, we even had an investor where the lender pulled the money back out of escrow. And this can really hurt the investor.
We’ve seen a lot of issues on the lending side.
Some of the multi family lenders as saying that they can’t handle the volume. So they are raising rates.
Julie
How about seller financing in 1031’s work?
So I found a replacement property but the lender is having issues. And the seller would finance the rest. Does that work?
Bill
Yes, that would absolutely work.
So far, we haven’t see a lot of change in the value of these properties.
Most of the economists that we talk to think that this is a V shaped recovery. But we’ll just have to see how it goes.
Julie
Yeah, I change my mind everyday. I even saw that somewhere in China there was a resurgence of the virus.
When it comes to people’s largest financial assets, they will just keep doing business.
Let’s say that I’m looking for a 1031, can I offer seller financing or not?
Bill
The issues is that it’s considered equity. Normally when you close on a property you get cash. But here you get a promissory note. Your sale has closed and you have proceeds.
Typically what happens the promissory note is drafted into our name. Now we are holding cash and the note. But how do you buy a replacement property…
Julie
So you’re saying that the note… I want to do the exchange with the property that I’m selling. The note is drafted in the name of Exeter 1031?
Bill
Yes. The challenging part is that you need to get a new property.
The seller can buy the note. So they would put the money into the account. It’s boot paid in and boot received. So net zero. But the seller would have to have that money available.
Julie
Could they borrow that money? But that lender has to have security. Maybe off of another property…
Bill
Absolutely. We’ve seen people take money out of another property or borrow from their securities account. But you have to be careful of that with how the stock market is right now. But any other source of cash could fund the carry back.
Julie
What would be the point.?
Bill
You have a creative deal that you want to get done. So if you’re getting the right price and the deal makes sense.
Julie
What about selling the note to a 3rd party?
Bill
You could do that. Selling to a 3rd party or a family or friend. A 3rd party would want a pretty steep discount.
The 3rd option is if you have an investor that has a bunch of good contacts, you say that you need a property and you have a note to apply to the new property. It takes a good investor that has a great understanding of investing to make this work.
Julie
I’ve had a lot of landlords that are trying to sell their properties right now. So they can get into the stock market. And I’m telling them that taking a note back might be the way to go, rather than going into the stock market.
You don’t happen to have a… or do people actually do this?
Bill
You get groups that specialize in it. They are really equity exchangers. That’s their specialty. It’s not a huge niche.
The National Council of Exchangers
Society of…
Julie
What’s the consensus of your clients right now?
Bill
So far we haven’t seen the values dropping. So I don’t know if we’ll see deep discounts on properties.
Julie
What about the DST’s?
Bill
Yeah, the brokers have been calling us. That could be a backup or primary strategy.
DST – Delaware Statuary Trust.
We have lots of contacts for this and that would be a great podcast.
The surprising thing is that we expected an immediate hit, but our March numbers were up. Our April numbers are down a bit, but not as much as we thought.
The numbers are the number of 1031 transactions that we’ve had.
People are still trying to get deals done. There’s too much pent up activity waiting to get out and do deals.
Julie
It seems like it depends on the type of building that you have. Maybe retail… not so great.
I’m hearing that people are thinking of cashing out while the market is still selling well. And they will have some cash that’s ready to go.
In the last few years it seems that you’ve had to have your deal lined up before you start your 1031.
Bill
That’s true. Maybe you find your property first and get creative to tie up the property…
Julie
Yeah, how do you get control of the property.
Where are you at?
Bill
We are in La Mesa CA. We actually drafted our disaster plan years ago and it went great when we put it into place, and started working from home.
Julie
That’s great! We’ve done great with our EXP Real Estate Brokerage.
Anything else that you want to add Bill?
Bill
I think that’s about it. If anyone has any questions people should feel free to reach out to us.
Julie
I’m curious to see how this lending stuff will impact the 1031’s, and I’m going to check back in with you in a few months.
Bill
I’m not sure if it’s going to hit bottom, but if you have a property that takes a hit. Talk to your accountant about if you have a taxable gain. And you could still do a 1031 exchange.
Depreciation recapture. Or if the value goes up and they are pulling money out, pulling money out, and then the value goes out. Well you could look at it as the original price that you purchased even if you don’t have any equity because of the refinancing.
Julie
What I see is that if you have a loan in place and you need to refinance a property that has been having a hard time. Will you be able to refinance…
Bill
Yeah, that’s an issue.
Julie
I had this happen to me in 2008 where I had to write a check when the refinancing comes around.
We want to remind you to always help people with solutions, and don’t be gross, be kind. Let’s do it the right way.
Like introducing you to people like Bill at Exeter 1031.
Started with a laugh and ended with a cry. 🙂
How can people reach you Bill?
Bill’s website exeter1031.com and TONs of good into on there!
Bill
Phone – 619-239-3091
Julie
One last question… as of this moment the PNW Big Badass Real Estate Expo is still happening, will you be there?
Bill
If it happens, we will!
Julie
This will be the place to be, if it happens.
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