As I progressed in any career as a Realtor I became very interested in Real Estate Exchanges – Exchanging one property or properties for another. If you are not familiar with this technique I will give you a brief explanation how it works. Section 1031 of the Internal Revenue code states that if you exchange a property that you hold for business or investment for another property that you intend to hold as a business or investment - then you do not have to pay taxes on your gain; your taxes are not forgiven, they are deferred. However, if in the exchange a party receives an “unlike property”, such as cash, mortgage relief, etc., then that “unlike property” is taxable. Cash received in an exchange, is like Kryptonite is to Superman.
Now, I am not a CPA or Tax Attorney so please don’t take any statements that I may make as gospel. I am not in any way, shape, or form giving tax or legal advice. What I want to do is relate to you an example of how exchanging can work as an investment tool. I am going to do this with the following story from my experiences.
At the time of this story I had a listing on a 40 acre, 200+ space Mobile Home Park in Southern Arizona for, as best I can recall, about 2 million dollars. You can tell this was a while back. The price today would probably be around 5 or 6 million. Taking my property information with me, I attended a Society of Exchange Counselors market session. These sessions happened 5 or 6 times a year and lasted usually 3 to 5 days. The average headcount at my session was probably around 50 exchangers. This group, which is still going strong, was made up of around 100 Realtors from all over the country. I was a member of this group for 15 years and during that time I met and learned from some of the brightest minds I have ever encountered in the Real Estate industry. The group has a website: http://www.societyofexchangecounselors.com/.
One humorous thing I remember about this group was a comment made by our secretary who, among many other things, was responsible to find a meeting place for the Marketing Sessions which were held at various cities around the country; from Hawaii to New York. Her comment was, “It’s difficult to find a room large enough to hold all these egos.”
Anyway, back to my story. At the same meeting was a very professional lady, Margaret, from Pasadena, California. Although these transactions actually formulated over several weeks, or maybe even a month or two, I will outline it to make it easier to follow:
1. Margaret had a doctor client in Pasadena who had invested in an Apartment Complex (I think 8 Units) some years earlier. He now had a cash offer to sell the Units at a huge profit. However, if he accepted the offer he would have to pay a large portion of his profits in Capital Gains tax. He really didn’t need or want the cash anyway. He really wanted a larger investment property. Margaret negotiated an agreement between the cash buyer and the doctor to sell the Units to the cash buyer only if she could find another investment for the doctor; wherein the doctor could receive a Tax deferred exchange under the provisions of IRS Code 1031.
2. Margaret then located a 40 Unit Apartment Complex in Riverside, California which the doctor liked and would accept with the proceeds from his 8 Units. The owner of the 40 nits would like to move is equity into a larger investment; however, he also did not want to take the cash for the same reasons as the doctor.
3. So now – along comes Jack, who has a client that doesn’t mind taking the cash at all. In fact, he preferred it, as he was trying to liquidate assets of a Family Trust to the beneficiaries of the Trust.
The end results were as follows:
1. The cash buyer got the 8 Units in Pasadena.
2. The doctor got the 40 Units in Riverside.
3. The Riverside investor got the 40 acre Mobile Home Park in Southern Arizona.
4. The Mobile Home Park owner got the cash plus a first Trust Deed carry-back on the park.
5. Margaret and Jack each received a nice commission – Well-Earned, I might add.
As a tag on the commission bit, it turned out when we were almost ready to close ALL these transactions, the Riverside investor needed $50,000 to close his end of the deal.
After a lot of haggling, I reluctantly agreed to use $50,000 of my commission in exchange for a 10% interest of the equity in the Mobile Home Park. In less than a year I sold my 10% interest for $90,000 to the investor’s brother. As you can tell, I like successful and unusual stories from professionals in Real Estate or Investors.
I would like to hear your story. Maybe we could publish it on my Blog, giving you credit as a guest writer. If interested, email me at jr1@RealEstateJack.net.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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