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at noradacapital.com today. Welcome

1:02

to Passive Real Estate Investing, the show

1:04

where busy people like you learn how

1:06

to build substantial passive income while creating

1:09

wealth for the long term. And

1:11

now, here's your host, Marco Santorelli.

1:13

Hello, my friends, and welcome to

1:15

another episode of Passive Real Estate Investing.

1:17

And I am your host, Marco Santorelli.

1:19

Thank you for joining me. And

1:22

I hope you can pay attention

1:24

to today's episode. It's about 30

1:26

minutes. It is about the

1:29

1031 exchange. And it's something

1:31

I talk about frequently on the show,

1:33

but I don't go into a lot

1:35

of detail. But it's essentially known as

1:37

a like kind exchange. It's a tax

1:39

deferred exchange. It allows you to take

1:41

your equity from the sale of your

1:43

assets and move

1:45

that into other investments,

1:47

like kind investments, similar

1:50

investments, similar assets without

1:52

generating any tax impact.

1:55

No tax liability, meaning you can do it tax

1:57

free. And when you start,

2:00

to understand the power of doing this, you will

2:02

realize that you can keep everything

2:04

you've gained, everything you've earned in

2:06

those capital gains, and compound

2:08

them. Turn them into

2:11

additional gains by multiplying the

2:13

effects of what you

2:15

can invest in, growing a larger portfolio,

2:18

increasing your cash flow, increasing your gains,

2:21

keeping the equity and using that to gain

2:23

more equity through appreciation

2:27

from increasing the size of your

2:29

portfolio. It's not a

2:32

difficult thing to do. It's not a

2:34

difficult concept. It's actually quite easy to

2:36

understand once you wrap your head around

2:38

it. People do it all the time.

2:40

Investors are doing this all the time

2:42

to increase their portfolio size and maximize

2:44

the wealth creation that happens. And when

2:46

you really stop to think about the

2:48

power of compounding, what Einstein

2:50

called the eighth wonder of the world, you

2:53

will realize you can increase your wealth by

2:56

four times or more in a

2:58

similar time period than you would

3:00

or could otherwise. So

3:02

pay attention to today's episode. And

3:06

if it makes sense, talk to my team

3:08

of investment counselors. We can help guide you

3:11

on making this work on how to

3:13

do this. It's not difficult. Investors contact

3:15

us all the time for help in

3:17

executing this because it involves

3:19

the sale of your existing

3:22

property or properties, but

3:24

then identifying the replacement properties within

3:26

a certain timeframe. So

3:28

we're going to talk about all that today

3:30

with my guests. So I hope you enjoy

3:32

it. I hope you get a lot of

3:35

good takeaways from this. And if it makes

3:37

sense, just schedule a call with my investment

3:39

counselor team. Also put a link in the

3:41

show notes here that can connect you to

3:43

some more information and the team that we

3:45

work with on the 1031 exchange side. So

3:47

enjoy today's episode. It's my pleasure

3:50

to welcome Jeff Bemis to the show. Jeff

3:52

was raised in Newport Beach, California, not too

3:54

far from where I live right now. And

3:56

he attended the University of Southern California. And

3:58

after graduating from USC, it's as a

4:00

member of multiple honor societies. Jeff worked

4:02

at Ernst & Young, and he was

4:04

a CPA there. And he

4:06

turned his career towards finance and attained

4:08

his CFEFA designation. He's a very smart

4:11

guy. I've gotten to know him a

4:13

little bit over the last few weeks.

4:15

Jeff then worked as a consultant to

4:17

small and mid-sized companies through a PE

4:19

firm specializing in real estate and in

4:22

the services-based business. Then in 2006,

4:24

Jeff joined Rimrock Capital, boy, I remember those

4:26

guys, a Rimrock Capital

4:28

management, a California-based absolute return hedge

4:31

fund with $4 billion under management.

4:34

Jeff has got a lot more in his

4:36

bio here, but today Jeff is the co-founder

4:38

and partner of 1031 Specialists. And

4:40

it's something that I'm taking a very, very

4:43

close look at because I've been talking

4:45

about 1031 exchanges on this

4:47

show for a long time and how

4:49

you can tap into your existing equity

4:52

in your properties and leverage that up

4:54

into a larger portfolio, into increasing your

4:56

cashflow, into increasing the appreciation

4:58

potential gains that you can get.

5:00

And so what we wanna talk

5:02

about today is two things, how

5:04

to defer capital gains and

5:07

also how to compound your returns

5:09

so you can create wealth exponentially

5:12

faster. So exciting stuff. With

5:14

all that, Jeff, welcome to the show.

5:17

Thanks, Marco, it's a pleasure to be here

5:19

and a thrill to talk to your audience

5:21

about 1031 exchanges. For sure. So

5:24

tell us a little bit more about yourself.

5:26

I kinda went through the bullet points, if

5:28

you will, of your bio and I know

5:30

that you're a very smart guy.

5:32

You have a lot of great experience in

5:34

finance. So tell us a little bit more

5:36

about you. Yeah, it's been an

5:39

interesting career so far. I

5:41

started my career at Ernst & Young as a CPA. So

5:44

cut my teeth there. My father was a

5:46

tax attorney and he himself did

5:49

lots of 1031 exchanges. So

5:52

been familiar with that world and

5:54

an area that always

5:56

codes that he has on his old

5:59

board. five blocks and everything's for

6:01

1031. So it always the things you

6:04

mentioned real briefly always, you know, resonate with me.

6:06

And so I started he encouraged me to go

6:08

into accounting. I did so I stayed

6:11

there for a number of years and then

6:13

wanted to evolve into a more active finance

6:15

related position. So I was

6:17

working as an advisor to private equity firms

6:19

doing a lot of purchases buyouts. Interestingly,

6:22

a lot of the focus of many of

6:24

the buyouts that we're getting done were really

6:26

real estate heavy firms where they could leverage

6:28

the real estate as part

6:30

of those transactions and actually create

6:32

a really interesting entry point and

6:36

roll up opportunity. And then

6:39

from there, just through my network, had

6:41

no real ideas of leaving a firm

6:43

named Rimrock Capital Management was being formed

6:46

and I decided to join them which

6:48

was a more broadly based investment management

6:50

firm. I specialize a

6:52

lot in real estate transactions, a lot

6:55

of really esoteric transactions, really liquid things

6:57

looking to make sort of outside returns

6:59

trafficking in areas where banks and others

7:01

wouldn't be involved, but also

7:03

did a lot of regular way things, a lot

7:05

of turnarounds as well. So a lot of very

7:08

active management elements to my career. And then about

7:10

three years ago, I've been an entrepreneur at heart,

7:13

I wanted to go out and do something on my own

7:15

and different. And a friend

7:17

of mine who's been in a similar position,

7:19

who has a background from gold and tax

7:21

and from called HIG and has been

7:24

an operator itself. We've been longtime

7:26

friends and we were working on

7:28

a project surrounding the entire ecosystem

7:30

of 1031 exchanges that

7:33

includes all the real estate opportunities

7:35

that are available to investors. But

7:38

also how tech can interact and do something

7:40

is a really large project. And

7:42

like many things in my career, some of

7:44

my best ideas come out of working on

7:46

things that are ancillary to what

7:49

is something that I know is really exciting and a

7:51

place where I can add a lot of value. And

7:53

so the world of qualified intermediaries, which I'm sure we'll

7:55

talk about the role in 1031 exchanges

7:57

was something that was integral to the

8:00

this larger project that I was helping

8:02

the central capital firm on. And

8:04

John and I just really felt like

8:06

given the dynamics of that market, who's

8:08

participating and where we are

8:10

in our lives and careers and ambition and

8:12

desire, and quite frankly, our backgrounds

8:15

and our ability to execute. We decided that, you

8:17

know, that was a marketplace. We

8:19

spent about a year researching in Marco to,

8:21

are we really going to do this and

8:23

launch a co-op intermediary? Who are the players?

8:25

How do they interact with customers? What

8:28

are things that we can do that feel

8:30

like they're adding something that doesn't exist? And

8:33

yeah, we decided about a year ago that after doing

8:35

that work for about a year, that we were going

8:37

to launch our own business. And so we've done that

8:40

and it's 1031 specialists. So, you know,

8:42

we are a qualified intermediary to the 1031

8:44

exchange ecosystem. So

8:48

we, as an eye, talk

8:50

about this so-called 1031 and 1031 exchange

8:52

on the show quite

8:55

often. And I would imagine that a lot of

8:57

the people, if not most of the people who

8:59

listen to my show know what

9:01

that is and what it means. But I would like

9:03

to start with the basics and

9:05

for those that understand it, you know,

9:07

let's kind of clarify

9:10

exactly what a 1031 is. And

9:12

for those that are listening that don't know what

9:14

we're talking about, let's define this. I'll tee it

9:16

off by saying this, you know, when we talk

9:18

about this fancy term, 1031, like what

9:21

the heck is that? It simply refers

9:23

to the section in the IRS tax code

9:26

that ultimately is a gift, a

9:28

great gift for

9:30

real estate investors. It is so powerful.

9:33

And I really would love people to

9:35

listen to the end of this episode

9:37

to understand the power of the

9:39

1031 and the ability

9:42

for you to be able to compound

9:44

your gains so you can

9:46

create wealth much faster and much larger

9:48

than you could without it. When this

9:50

sinks in, when you finally get this,

9:53

it's going to be pretty exciting. You're going to start

9:55

to look at your investments in your portfolio in a

9:58

different light because you're now going to be thinking. about

10:00

it in terms of how do I

10:02

take advantage of the gains that I've

10:04

been accumulating over the years to date.

10:07

And there are people in particular that really need to listen

10:09

to this. They're the people in

10:11

the expensive markets and the coastal markets

10:13

like New Jersey, New York, California, Oregon,

10:15

even the pockets of the Northeast or

10:17

the Northwest. I jokingly refer to these

10:19

people as equity rich and cash flow

10:22

poor. They have a lot of

10:24

equity in different properties, one or more, and

10:26

they have no idea what they can do with

10:28

it or how to tap

10:30

into it. So

10:32

Jeff, let's begin with just defining what

10:34

is a 1031 exchange? Yeah,

10:37

I mean, you had the proper lead in with

10:40

where 1031 is referenced. That's

10:42

sort of the term that gets lobbed around. I

10:45

mean, effectively you can, and this is the beauty

10:47

of this, is you can

10:49

swap any property types. That's

10:51

also where a lot of folks find a lot

10:54

of value to where

10:56

they are with their investment

10:58

portfolio or things they inherited or

11:00

things that are owned

11:02

by the family or they have a lot

11:04

of land rights, non-cash flowing assets, or they

11:06

own a lot of mineral rights, possibly if

11:08

you're in certain sections of the United

11:11

States. So you can swap into

11:13

any, so 1031 says

11:15

that you must, to get

11:17

a tax deferral when you sell one property and

11:19

buy another, of which there's rules around how you

11:21

execute that, which we can talk about. It

11:24

must be of a like kind, but that's

11:26

a very broad term that describes any investment

11:29

property or property used in

11:32

business. So you can swap

11:34

between an office

11:36

property into multi-family. You could have an

11:39

investment property that's a single family home as

11:41

long as it's just really investment property and

11:43

swap that into a multi-family

11:46

opportunity, or you could do it all

11:48

the way to very

11:50

different commercial self-storage. All of

11:52

that falls underneath a

11:54

like kind exchange. And so this allows the

11:56

opportunity, given especially what's happened in the last

11:58

50 years of the approach. appreciation of real

12:01

estate, you have built-in capital gains when

12:03

you sell it, the price that you

12:05

sell it over what your basis is,

12:07

your tax basis, of which many are

12:09

getting a double benefit by depreciating the

12:12

property separately, which I'm sure a lot of

12:14

your audience is utilizing. Your

12:16

basis gets rolled over effectively and you defer

12:18

all the capital gains. And so when

12:20

you're in a high tax bracket market, particularly

12:22

California and New York, as examples, that

12:25

can be upwards of 30%, let alone any recapture

12:27

you might have. Is this you? Your

12:30

business gets to a certain size and the

12:32

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12:34

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12:37

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12:39

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12:41

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13:56

So that was a great answer and

13:58

an in-depth answer. Yeah,

14:00

it was very granular. Can I effectively dumb

14:02

it down a little bit for some people

14:04

just to give it, you know, the plain

14:07

English like cocktail party answer to the question.

14:09

I could even give that to if you

14:11

want Marco. Yeah, no, go for it. Okay.

14:13

You say when you have an investment property

14:15

and whatever money you've made on that property

14:17

on your equity, you will pay taxes on

14:19

that if you sell it and don't exchange

14:21

it. So if you sell a property and

14:23

you have a million dollars in cash, you

14:25

can do that. So if you sell a

14:27

property and you have a million dollars in

14:30

gain, you will pay taxes on

14:32

that million dollars of gain that

14:34

you have with your property and

14:36

that basically is the amount

14:38

that you make over what you owned

14:41

it, bought it at or you carried it

14:43

over at from. So instead

14:45

of paying taxes on that, if you wanted

14:48

to modify your portfolio or have any reason

14:50

to sell your real estate and you

14:52

have a gain, basically the amount of money you made over

14:54

what you bought it for, you can use

14:57

all the money to buy

14:59

another piece of property instead of paying taxes.

15:01

So you don't pay any tax on

15:04

any amount of money you made, unlike a stock

15:06

transaction where you would pay capital

15:08

gains on any of that appreciation. Yeah,

15:10

exactly. And the wow factor for me

15:12

in this is this. This

15:15

is an oversimplified example, but

15:17

this is what will really make it click

15:19

for a lot of people. If you're a

15:22

real estate investor, and let's just say you

15:24

have $100,000 of equity, usable equity in a

15:26

property, and you can sell that property and

15:29

move or roll over if you will, but

15:31

move that $100,000 into two properties where you're

15:33

putting, let's say, $50,000 into each of those

15:35

properties from the $100,000. So

15:43

you're taking the $100,000 and turning it

15:45

into not one, but two properties, essentially

15:47

splitting your equity, and you can do

15:49

that tax-deferred or tax-free. Now

15:52

you've effectively doubled the size of your portfolio.

15:54

And if you do it right, and investors

15:56

do this all the time, you're essentially increasing

15:58

the size of your portfolio. from

16:00

one to two properties or maybe even three.

16:03

You still retain the equity, that's the key

16:05

thing to remember here. The equity doesn't go

16:07

anywhere, you're moving it. You still have the

16:09

equity, but now you have a larger portfolio,

16:11

you stand to gain from the

16:14

appreciation in the coming years, not in

16:16

just one property, but from those two

16:18

or three. And

16:20

done right, you can increase

16:22

your monthly and annual cashflow,

16:25

the income you're making from those

16:27

properties because you're repositioning your portfolio,

16:29

you're choosing other properties

16:32

and often they're in other markets,

16:34

but in other markets where you

16:36

have higher gains, higher yields, higher

16:39

cashflows. So you have a lot

16:41

of things to gain, lot of upside with

16:43

virtually no downside because all you're

16:45

doing is putting your equity into

16:47

better use, you're leveraging it, you're

16:50

using it to essentially trade up

16:52

if you will. How's that

16:54

for a description? I think it's great and

16:56

I think you made a great point that

16:58

geography is not a limitation so

17:01

inside of the United States. So

17:03

you can move it around, there's

17:06

been a lot of success with

17:08

folks moving into better yielding or

17:10

better secular situations. Also diversification is

17:12

a huge dynamic. You

17:14

and I, when we were chatting, Marco,

17:16

I was mentioning my mom having, she

17:18

inherited a property and when you look

17:21

at her broad portfolio, it's in one

17:23

sub market in one state and

17:26

it's way too high for her,

17:28

for where she's positioned and her

17:30

risk tolerance, she wanted to diversify

17:32

that and so she was able

17:34

to rotate into a portfolio and

17:36

diversify the geographies. Over a

17:38

20, 30 year period, things definitely

17:40

changed, particularly the yield profiles for

17:42

very specific reasons and those

17:45

are all really well utilized

17:47

and huge profit making

17:49

opportunities for investors across the board. So

17:51

just to tie a loop on this,

17:54

can you briefly explain the types of

17:56

properties that are eligible and ineligible for

17:58

a 1031 exchange? because it

18:00

covers a broad range, but it doesn't

18:02

mean it includes everything. It

18:05

is an investment property that is held for

18:07

investment or business use. And so those are

18:10

the constraints. So for many,

18:12

your primary house would not be a

18:14

part of that. Vacation homes, if

18:16

you use it any more than two weeks,

18:18

will drop out and you need to have

18:20

owned this property for two years is another

18:22

one where you can't be constantly flipping

18:25

it. Also, if you're in the business

18:27

of real estate as a developer, it's

18:29

tricky, if not eligible as well. But

18:31

for the average investor who, and for

18:34

investors who are making big improvements as

18:36

well, there's lots of opportunity in that.

18:39

So it really allows

18:42

for most commercial real estate to

18:44

fall into it. And on the resi

18:46

side, as long as it's for investment

18:48

purpose and not used as a

18:50

primary secondary home, it falls into it too.

18:53

So it really classifies everything and gives a

18:55

question a lot. Does land fall into it?

18:57

Absolutely. Right. Like that's a big common dynamic

19:00

where there's a lot of value

19:02

and it's a negative cashflow, right?

19:04

You're paying, unless it's yielding some

19:06

kind of business purpose, land

19:09

is generally something that is a

19:11

negative cashflow, but has capital appreciation.

19:14

And that's a very good opportunity,

19:16

particularly folks who, you know, see a lot of

19:18

where they get inherited land or the Midwest

19:21

and other areas where folks

19:23

have large plots and there's alternative uses where

19:25

people are going to develop those. They

19:28

can rotate into cash flowing opportunities and

19:30

makes all the sense in the world.

19:32

So 1031 exchanges have timelines attached to

19:34

it. Talk about that because it's important

19:37

that investors understand that once they start

19:39

going down the road of selling a

19:41

property, they need to obviously

19:43

start working with a qualified intermediary,

19:46

someone who's going to handle the

19:48

funds so they don't touch it.

19:51

But there are three major milestones along the

19:53

way that they need to be aware of.

19:55

So let's talk about that. Let's say number

19:57

one, just to lay the foundation. So,

20:00

in a situation for a qualified intermediary, you

20:02

know, as to qualify for a 1031 exchange,

20:05

you can't have constructive receipt of

20:07

the funds. So when you sell the property,

20:09

those funds go and sit in

20:11

an escrow account, which if done right and

20:13

working with a good qualified intermediary are

20:15

done in a way that you can feel comfortable

20:17

and protected that those are yours and you can

20:20

see it, touch it, feel it, but they cannot

20:22

go to you, cannot have constructive receipt of those

20:24

funds. So that's why a qualified intermediary exists is

20:26

we aid in that process. So if you sell

20:28

a property in a forward exchange, you sell it

20:30

to us, which is the typical, you sell a

20:32

property, money comes, it settles into

20:34

an escrow account with us that has your name

20:37

on it and we hold on to it and

20:39

then when you buy the next property, we

20:41

release those funds. As far as timeline goes, you

20:44

have 45, really plan, one

20:46

thing I would say is planning is paramount when

20:48

it comes to a 1031 exchange. There's

20:52

all kinds of things you can do to make

20:54

these timelines feel very palatable

20:56

if you are just thinking

20:58

about it as a 1031 exchange and working

21:00

with folks on the front end. So

21:03

the first is there's an identification period, which is

21:05

the first 45 days from when you

21:08

close. So again, that's when when

21:10

you close. So there's lots of things you

21:12

can do when you're selling your property to

21:14

make sure that you're in a position where

21:16

you're identifying replacement property, but you

21:18

have 45 days to identify

21:21

a replacement property

21:23

for your exchange. So that's the first

21:25

really important timeline. And then the

21:28

other massive one that is really, really

21:30

important and ignores weekends as well. So

21:32

you need to be very mindful when

21:34

these dates come up is 180 days

21:36

from the beginning of

21:39

an exchange, you must close the exchange

21:41

out. So if you are selling a

21:43

property and buying another, you've identified the

21:45

first three properties that are certain rules.

21:47

If you want to go over three

21:50

properties, but three properties you may want

21:52

to buy in the first period of

21:54

45 days, and then you must close

21:56

the replacement property within 180. So

21:58

those are like the two. big ones I'd

22:01

highlight that are paramount to this

22:03

getting done. When does the

22:05

clock actually start with the 45 days and the 180

22:07

days? Yeah,

22:09

so it's when you actually close on

22:11

the property. So you can do contracts

22:14

that extend things. You can work with

22:16

options. You can do all kinds of

22:18

things that offer you timelines that can

22:20

make it so that you feel comfortable

22:22

where you're at. I will say there's

22:25

no requirement for you to disclose that you're in a 1031

22:27

exchange and making sure that the transaction

22:30

you don't want to. My

22:32

experience is offering making sure that you don't

22:34

provide leverage to parties who find out that

22:36

you're on certain clocks or otherwise. So

22:38

that's one thing I'd offer. But yeah, there's

22:41

a lot of ways to make sure that

22:43

the timelines don't start until it actually kicks

22:45

off. But once they do get started, you

22:47

need to be very mindful. And that's part

22:50

of the service that we like to provide

22:52

is being really proactive and helpful to

22:55

our customers of keeping

22:57

them on track so that because obviously

22:59

the tax ramifications for missing

23:01

deadlines are dramatic, depending on how

23:04

much gain you have. Yeah,

23:06

that's actually an interesting question. So what happens

23:08

is let's call it a taxpayer. A taxpayer

23:11

fails to identify or even close on a

23:13

replacement property within that specified

23:15

deadline. Yeah, you're going

23:18

to pay tax on all the gain that

23:20

you have on the sale of your property.

23:22

So for many, I would say

23:24

they're also depreciating the property, which offers them

23:26

other tax benefits because they're

23:28

actively involved in the real estate. And

23:31

so you'll pay tax on whatever

23:33

that gain is and likely somewhere

23:35

between 30 and 50 percent

23:38

if you have any recapture. So if

23:40

you're in California, New York, as an example, where

23:42

there's state tax. So you'll pay a lot

23:44

of tax, I guess, is the short of it on

23:47

the gain, just whatever the gain is, as though you

23:49

just sold it outright and weren't doing an exchange. But

23:51

the flip side is you don't pay any

23:53

tax whatsoever if you do the 1031

23:55

properly and you just do it

23:58

within the time, you know, the timeline. that

24:00

are laid out for you. Right, and

24:02

I would say if you're thinking about it ahead of time,

24:04

you can comfortably operate in

24:06

these timelines. I know it can feel

24:08

tight, but it's

24:11

really for the folks who haven't thought about it,

24:13

that it really catches up with them, that

24:15

they got a really, you know, broke or reached out,

24:17

they're really interested in the property they have, and

24:20

then they sell it, and they're really excited

24:22

about, you know, what they were able to sell it for,

24:25

and then now they're in this time clock not thinking

24:27

about what they're gonna do with the proceeds, and now

24:29

they're trying to find what it would

24:31

be that they would have as a replacement. With

24:33

a little planning, and it's not very far in

24:35

advance, maybe a month in advance, have

24:37

your qualified intermediaries, your brokers, your other advisors

24:40

that may be helpful in executing a transaction,

24:42

of which there's a lot of

24:44

different cool opportunities and layers of people who have

24:47

things that I think can fit a lot of portfolios

24:49

that they may be not aware of. This

24:52

all becomes something that becomes very, very same done.

24:54

There's a lot of folks where it just happens

24:56

the next day. Right, you know, they get it

24:58

so orchestrated, the pieces are put together, particularly,

25:00

you know, when the market's

25:02

not white hot, you know, people, you can

25:04

orchestrate it, like hey, sell one, buy

25:07

the other, you know, done, you know,

25:09

even the same day. Yeah, and I

25:11

don't want anybody listening to this to

25:13

think that this is a difficult task

25:15

to achieve or sweat, you know, the

25:17

timeline. We work with investors all

25:19

the time that are doing 1031 exchanges,

25:23

and it's really just making sure that

25:25

you contact us early enough before you

25:27

sell your property so we can start

25:29

identifying the markets and the properties that

25:31

you're gonna use as those replacement

25:34

properties, the ones you're identifying to

25:36

put under contract as the replacement

25:38

for the property that you're selling

25:40

now. So if you've got a property for sale

25:43

and you've got equity coming out, where

25:45

are you reinvesting that equity? It's gonna be

25:47

the one, two, three, four, five plus

25:50

properties that you're going into, and

25:53

it could be like two in the Midwest and,

25:56

you know, two in Florida or whatever it may be.

25:58

Like we'll figure out how we mix them up. match

26:00

that for you so that way

26:02

you do this effectively and you

26:04

maximize your gains. So I remember

26:07

seeing a slide that your partner

26:09

had at some point that showed,

26:11

illustrated the compounding effect

26:13

of deferring taxes from

26:16

transaction 1 to transaction 2

26:18

to transaction 3 and

26:21

you know there might be a few years between

26:23

the first and the second transaction and then the

26:25

you know the second to the third but it

26:27

was stunning. It was amazing how much more

26:30

you kept, how much more equity and

26:32

wealth you created by the time you

26:35

got to that eighth tenth transaction versus

26:37

just doing a traditional sale where you

26:40

sell, pay your capital gains tax and

26:42

then reinvest what you have left over.

26:44

This is why the 1031 is so

26:46

incredibly powerful. It brings into the wealth

26:49

creation formula compounding. So can you talk

26:51

about that and what investors can expect

26:53

to see or achieve as they go

26:56

from transaction to transaction reinvesting

26:58

or compounding their gains? Hey

27:02

listeners, you know I'm always looking for ways to

27:04

improve myself and my skills in the real estate

27:07

biz. Let me tell you,

27:09

I took Chris Voss's class on

27:11

negotiation on Masterclass and it's phenomenal.

27:13

He talks about various negotiating techniques

27:15

like mirroring your counterpart to establish

27:17

rapport and it's been a game

27:19

changer for deal negotiating. Let's talk

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They got a huge selection of classes, over

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through this perfect gift of Masterclass. I

28:41

mean, like you said in the preamble,

28:43

I mean, it's a gift, right? I

28:45

mean, what a special thing that Taxcode

28:47

is offering in this particular subset that

28:49

isn't available to most other investment products.

28:52

And you know, you see it all, you know, me being at

28:54

the hedge fund days, there's a lot of folks who spend a

28:56

lot of time and effort who invest

28:58

in alternative products, living in other jurisdictions, trying to

29:00

figure out ways to create this compounding because of

29:03

its power. Or in real

29:05

estate, it's just straight away available

29:07

to everybody who owns again, an

29:09

investment property. And so we

29:11

put together an illustration. I mean, the

29:13

other dynamic too is beyond the compounding

29:15

is the wealth that's attained and how

29:17

it can pass down. You

29:20

know, there's in many circumstances for a

29:22

substantial amount of money, there will

29:24

never be any tax paid on any of this

29:26

property. Right, with

29:28

a step up in basis that occurs. But to

29:30

illustrate your point, we put together a table and

29:32

again, you can change these assumptions all you like.

29:34

But what we were saying is 20 transactions. And

29:37

again, we're expecting a healthy return. We're

29:39

just saying if you make 50% on your money

29:42

in a lifetime of 20 transactions on

29:44

each transaction, and you get it where you, for

29:48

each of those transactions, you didn't pay capital gains.

29:51

And then for each of those transactions, you paid a 30% tax

29:54

as if you were in a very

29:56

high tax. You would end

29:58

up, if you had a hundred thousand. invested

30:00

20 transactions, 50% gain

30:03

on each one, you would end up

30:05

with 332 million if you

30:07

deferred gains and 40 million

30:10

if you didn't. So it

30:12

just shows how much money and obviously

30:14

if you get through 10 transactions, you'd

30:17

have 6 million versus 2 million, right?

30:19

So if you did this six transactions over 20

30:21

year period, you have triple the amount in

30:24

your portfolio. And keep in mind, you're making

30:26

yield on all of that incremental that would

30:28

have been taxed, right? So how much rental

30:31

income is coming in, how much cash flow

30:33

is coming into your pocket, all of that

30:35

is triple because you deferred

30:38

the tax. And again, once

30:40

if there is a succession event that occurs,

30:42

which for many families, I mean, it occurs

30:45

at some point for all of us, of

30:47

course, there's a substantial step up in basis

30:49

for a huge component

30:51

of that that's offered as

30:53

well. I mean, not if you make if you make 330 million, you

30:55

want to have it for all of that. But

30:58

point being is for a lot

31:00

for a substantial amount for most

31:02

folks, there is a massive and

31:04

evergreen tax savings in

31:07

a core product that offers great yields and

31:09

a great way to really build

31:12

wealth. Again, it's such a powerful tool. I

31:14

tend to really exchange. Yeah. And you don't

31:16

even need to wait for 20 or even

31:19

10 transactions to see the compounding effect of

31:21

this. It's you see it immediately even with

31:23

your first transaction, because whatever

31:25

you saved in capital gains taxes

31:28

is immediately deployable and investable as

31:30

a down payment into your next

31:32

property or properties. The results

31:35

are immediate. The results are instant. You

31:37

see the impact right away. It's what

31:39

you save in taxes. And it's what

31:41

you can apply towards more property because

31:43

you're going from one property to

31:45

potentially two or three. And

31:47

it starts to mushroom, you know, one

31:49

equals three, three equals nine, nine equals,

31:51

you know, 27, whatever it is, it

31:54

happens quickly. It happens quickly.

31:56

And people have been using it for

31:58

a long time. Right. It's just a new idea.

32:03

It's amazing. One thing I'd say, Marco,

32:05

which I'm surprised by, and it's not

32:07

any fault of their

32:09

own, but just folks, as much as people

32:11

are really sophisticated in real estate and the

32:14

like, many aren't as familiarized with what this

32:16

opportunity is with 1031 exchanges as you might

32:18

think. It's

32:21

surprising, I guess I would say, as we've been

32:24

spending this last year really getting out and talking

32:26

to a lot of folks, just trying to help

32:28

people understand this power. What didn't

32:30

I ask you or what didn't we talk about

32:32

related to the tax

32:35

savings and the compounding of 1031s that

32:39

I could have asked you or should have

32:41

asked you? It's not complicated, but I feel

32:44

like it's so simple, maybe to us, that

32:46

people are wondering, well, is there more? Honestly,

32:49

there isn't. I would say it really is

32:51

about the planning, okay? Because one of the

32:54

things that, as an example,

32:56

if there's mortgage debt, you need to make

32:58

sure that the next property you buy has

33:00

equal or greater debt on the

33:02

property. There's certain nuances that I think

33:04

people will want. That's why planning is

33:06

important. Just get in front of it

33:09

and understand all the nuances you might

33:11

have around what creates the

33:14

deferral of the entirety, but it is very

33:16

simple. I mean, it's a very simple thing,

33:19

right? And there's a lot of use cases

33:21

for it. I mean, folks who are partners

33:23

with others in real estate, using the exchange,

33:25

if somebody is ready to drop out and

33:27

they want to monetize, the

33:29

other partners can still roll their piece over.

33:31

There's lots of different scenarios that play out.

33:33

And so that's where I would just say,

33:35

if I were to emphasize one thing that

33:38

makes it to where the transaction will go

33:40

really smooth and the timelines are very comfortably

33:42

long, it's just the planning. So I

33:44

just reiterate that point, I think, versus

33:46

anything we missed in particular. And

33:49

then obviously, there's gonna be little nuances that

33:51

they can educate themselves on as they embark

33:53

on a transaction, just to make sure that

33:55

they get everything they need out of it. Yeah,

33:59

well, possibly. possibly my last question, are

34:01

there any changes that you see coming up

34:03

or updates to the 1031 exchange

34:06

code or rules that investors should be

34:08

aware of? As

34:11

I've already known, no. There was a big

34:13

modification that happened under Trump where a lot

34:15

of assets that used to be inside of

34:17

a 1030 aircraft, as

34:19

an example, different operating equipment

34:21

used to be all over part

34:24

of the 1031 exchange. But I

34:26

think investors should feel good and

34:28

comfortable that while they look at

34:30

the issue and were considering if

34:32

other assets should fall under it,

34:34

they very specifically

34:37

kept all investment property available and there's

34:39

nothing on the horizon that I'm at

34:41

least currently aware of that. There's

34:44

a lot of noise and certainly there has been noise

34:46

in the past of folks who want to talk about

34:48

this and think that this is something that should be

34:50

considered. But as of right now,

34:53

I don't see that on the horizon. And particularly

34:55

since it was something very talked about maybe five,

34:57

it was about six years ago that that happened.

34:59

And, you know, I think it's nothing

35:02

on the horizon at the moment. Okay,

35:04

sounds good. Any final comments or takeaways

35:06

before we wrap up today? You

35:08

know, the infrastructure while we're a small company,

35:10

the people inside of it, we've done well over 1000 exchanges

35:13

in our respective backgrounds and

35:16

are very seasoned and

35:18

ready to help. You know, we're specifically

35:21

and importantly about making sure

35:23

you get the tax referral

35:25

that you're entitled to and you

35:28

will be dealing with our five

35:30

person team like when you call us, you'll

35:32

be calling me or you'll be talking to

35:35

John, Megan, you know, and or anyone else

35:37

on the team. So for us, it's about

35:39

the people sometimes I just real quick get

35:41

the question of like, oh, there's large businesses

35:43

that do this. You know, when I say

35:45

that those can absolutely handle your qualified intermediary

35:47

work as well. Having said that,

35:49

generally speaking, it's about the person you get. So

35:52

you know, that's where we feel like we're

35:54

really going to be leaning into is that

35:56

service is just we are your qualified intermediary.

36:00

and we are going to be myopically focused

36:02

on making sure you achieve your

36:04

investment goals and tax savings. Awesome.

36:06

Well, Jeff, I appreciate you taking

36:08

the time today. So our company

36:10

and your company, Norata, will be

36:12

working closely with IRA specialists and

36:15

helping investors navigate through

36:17

the 1031 and leveraging

36:19

up their existing portfolios

36:21

into larger, more productive,

36:23

higher yielding portfolios. So

36:26

what I recommend is if you're listening

36:28

to this, you want more information or

36:30

you're thinking about a 1031 exchange, contact

36:32

your investment counselor here. We've got

36:34

six investment counselors available to you. If you

36:37

don't have one already, reach out to us, call us,

36:39

or fill out the form on our website, and you'll

36:41

be assigned to an investment counselor. They

36:43

can definitely be the front line. They're

36:46

your one point of contact. They're like

36:48

the hub of a wheel, and everybody,

36:50

all your service providers, including 1031 specialists,

36:54

are on one of those spokes. So we

36:56

can answer a lot of the questions up

36:58

front and make sure that everything integrates together

37:00

from the property to the financing to the

37:02

1031 exchange to the title company

37:04

and everything else in between. We're

37:07

just going to be the glue for you, and

37:09

then we'll put you in touch with Jeff and

37:11

his team so that way you can talk to

37:13

them when the time is right and

37:16

make sure that you are not missing a step

37:18

or missing a beat and taking care of the

37:20

1031 early enough so

37:22

you don't run into problems with

37:24

these timelines. So we're

37:26

all working together. It's like one big

37:28

great team, and I'll also make sure

37:30

my team puts links in the show

37:32

notes in the podcast episode and on

37:34

our website and everywhere else that we

37:36

can put it so you can reach

37:38

out to Jeff and his team directly as

37:41

well. And that is pretty much it for

37:43

today. Jeff, did I miss anything? I

37:45

don't think so, Mark. It was a pleasure. Always a

37:47

pleasure talking with you, and I appreciate the time. Great.

37:49

Well, thanks for coming on, and I'm sure we'll be

37:51

talking a lot here in the next few days, weeks,

37:54

and months. In the meantime, thank

37:56

you for listening today. Get your free strategy session with my team. Just

37:58

go to the website or give a shout-out to Jeff. Give

38:00

us a call. If you have questions

38:02

about real estate, shoot them over to

38:04

me, AskMarco at passiverealestateinvesting.com. Remember

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38:29

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