David Moore 0:00
You wouldn’t believe how often even after 100 years of existence, we get a call on a deal, the day is closing, or maybe unfortunately the day after it’s closed, but using a third party exchange company, you’re literally free to sell whatever you don’t want and buy what you do want it’s exchange company’s job to step in the middle of the transaction and turn it into an exchange. So So one you’re going to give us some we got to give you some back to what’s been received have to be of like, kinda like kind definition. And, you know, I joked about this 30 years ago, I had a lot more hair on my head, but in those days, people say well, I remember what it meant a house for house land for land, it’s never meant that okay, like kind in 1031 context is nature rather than form so any real property held for investment is going to be like kind with any real property acquired with the intent to hold for investment.
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J Darrin Gross 1:11
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin gross. This is the podcast focus on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is David Moore. David is the CEO and co founder of Equity Advantage. In 1991. He and his brother Tom started Equity Advantage after a successful real estate investment career. David is a nationally recognized expert on 1031 Exchanges, and a former board member of the Federation of Exchange Accommodators. And in just a minute, we’re going to speak with David about how to execute a 1031 Exchange. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you’d like to see a handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, David, welcome to CRE PN Radio.
David Moore 2:38
Thank you, Darrin, good to be here. Thanks for the opportunity to join your show.
J Darrin Gross 2:43
Well, I’m grateful you’re here and I’m looking forward to our conversation. Before we get started, if you could take just a minute and share a little bit more with the listeners about your background.
David Moore 2:53
Sure. I typically jokingly say that my brother and I were the the original Property Brothers. We just weren’t smart enough to start a TV show. So in 1990, I was minding my own business in California, Santa Cruz, where we grew up and and one of my father’s actually patients he was a dentist but one of his patients happened to be a very successful real estate investor. And he had started a company called Starker Services that was the largest exchange company in the business during the 80s. And when we had the World Series earthquake, his house went down mountain sideways in a board meeting and decided they were all he didn’t need to do that anymore. So he sold sold the most of the business and was just working on the investment stuff and and he asked my brother and I, well, what are you guys doing next week and, and our response was something that opened the door for him to drag us north to Oregon and at that point in time we knew in 1990 we’d missed sort of the turn, typically state capitals like the rest of state’s economy. And we knew the turn it happened in Portland roughly 88. And so we went and started working in Salem and Olympia and bought some property and actually down in Eugene area two. And our sort of model was it was a modified flip and and what we’d be doing is we buy a property, improve it, get it stabilized, get tenants in there, rent it for a period of time, do a cash out, refinance, keep the property for long enough where we would then be able to do another exchange in the short term. And the refi money was typically going to be an amount that would be in excess of what you’d realize after paying taxes if you just flip the property. So I think what happens is people get into the whole flipping thing, and we all know it’s a huge business these days, but anything that you’re holding for resale is going to be taxed at normal income tax rates and does not qualify for 1031. So using the structure We did, it allowed you to buy the property, do the improvements, take advantage of what you do with with a flipper type property. But by keeping the property and seasoning it as an investment, that the refi money get out and allow you to leverage and do what you wanted to without having to pay the tax and take some money and you’re not paying yourself, you’re not paying normal income tax on it. And then after holding that property for, let’s say, a year, two years time, whatever it was a comfortable period, or whatever allowed us to stabilize the thing, we then do an exchange out of that in the next asset or assets.
And so what what happened is, the opportunities were good, we thought we’d be here for a couple of years. And we ended up putting the exchange coming together 91, because nobody was here to do it at that point in time. And the idea was, initially, it’s just going to give us opportunity to find more property and you know, work with more of a professionals in the community up here. And, and really take advantage of more opportunities, but it’s sort of stole our lives, I guess I should say. And I say that tongue in cheek, because it’s been a great ride, but but something where we thought we’d be here for a couple of years, it’s now been 30 years. So it’s funny how life changes. And one of the obvious big changes for me was a year after I moved up here, I ended up finding a girl and getting married. And so that was another anchor for me to the northwest. So it’s funny to think you’re going to live your life in a certain place, and things happen and boom, you’re somewhere else. So it’s been a lot of fun. We’ve had a great ride, it’s been, we’ve definitely taken our lumps that last big crash in 07 08 that was not much fun. But over time, it’s been a great business. And we actually put a company a sister company IRA Advantage together in the mid 2000s. And now was very good going into the recessionary period, because that side of the business really sort of blew up during that period of time with people losing jobs or needing to find a that all of branch the future, whether it was doing what we call rollover business startups to get them into something new using their retirement account, or they just wanted to diversify out of Wall Street into hard assets. And all our accounts through that side of the business, allow people to take their retirement funds and go buy real estate or make loans by notes, a whole variety of other things, too. So it’s one of those things where you think you’re going one direction and 20 years. 30 years later, you’re in a different place, but it’s definitely been a lot of fun. And we’ve met a lot of wonderful people. So
J Darrin Gross 7:40
No, it definitely sounds like a an action packed career there. I’m curious you mentioned Starker was your your kind of entry into real estate in that? Am I correct? Was Starker not the name of the case that you heard of the exchange?
David Moore 7:59
You’re definitely correct Darrin and then TJ Starker was an Oregon company. Right. I mean, Crown Zellerbach and Starker had the case and tech advice courts and prevailed and and that was sort of the, you know, obviously 1031’s 100 years old. So a lot of people say well, Starkers one started now, not at all but Starker was sort of the framework that allowed that decision allowed this whole industry really to get started. And if you look at historically, and exchange might have been, you’ve got a property, I’ve got a property and we’re going to each you want what I have, I want what you have, and we just swap, that’s a true swap. That’s an exchange and you don’t need an exchange company to do that transaction. But what Starker ended up opening up is you got a third party assignment company that can step into a transaction and make things happen. So the final the final guidelines or the last major revision was in 1991. And it was right about the same time that we put the company together which had just sort of happened to be luck at that time but yes, you’re right it’s the roots of 1031 are on the West Coast definitely.
J Darrin Gross 9:08
And was your your
David Moore 9:10
No yeah yeah, no relation to it, but he knew a good name. And it was funny because he always joked that you know, people would call up and thank you so much for what you’ve done for that about it and and you know, they really had nothing to do with the court case but they knew a good name and and you know, the company is still in existence it’s just not what it what it used to be but it was he was he’s a very smart guy his name just if you’re curious as Ron Stache and he’s he’s really just amazing guy he’s he taught my brother I all the basics mentored us and investments and and it was great because we’d have these these 10 12 hour download information downloads to and from we drive back and forth from Santa Cruz and his little Chrysler minivan and and and we Write offers during the day on properties. And you know, at night we’d sort of talk about what we looked at. And you know, sort of figure it all out. But yeah, he’s a wonderful guy. And he’s really interesting because he really put a lot of sort of psychology into transactions and really knew how to make things work. But he looked at things differently.
An example I always give of sort of his mindset is that there was a there’s a, an apartment building in the Bay Area, that was one of the classic courtyard type apartments. So you’ve got your a pool in the middle of it, and it’s just all open around it. And so he always told the story of, of a building that could not be occupied, and they just couldn’t get the thing leased up at all. And so somebody came up with the idea, well, let’s just make it clothing optional. So, so now you’ve got a whole different audience of people in there was nowhere to go. And now and suddenly the buildings full and and I just think that’s sort of you always like the highest best use. And the other thing, he always says, like, look, never buy anything until you can answer three basic questions. What am I going to make? How am I going to make it? When am I going to make it? You can’t answer any of those don’t buy the thing. So and I always joke that he would always give us a hard my brother and I have a hard time because you know, investments outlived their usefulness. I mean, soon as you get to a certain equity in a property, your return on investment drops to level you can’t afford to keep so we buy a property and we answered the questions, we put the plan in place, by the thing, fix it up, get it rented out, the equity is there. And you know, really at that point, you’ve got two choices, and that equity gets too high, the ROI drops, you either have to cash out refi, get that leverage where you need it to be or you do with the exchange. And the decision between those two is have you done everything you can you can or you need to to maximize value of the asset. And that’s where obviously, the 1031 stuff comes in is is just a tool to keep your money yours and and so that’s where that got integrated into it. But Tom and I would be happier with an investment and you say, Well, you know what you pay for that what you put into it? How long ago was that? What’s your rent? What’s going on with it? Oh, you can’t afford to keep it and it’s like, okay, Ron, you just wrecked another investment. Now we got to shame us into going and doing the next deal. So anyway, but he’s just a great guy. And really, we’re blessed to have him at a very important time in our life. And yeah, he’s a neat guy, still around, I still talk to him, we do a lot of business together, even today.
J Darrin Gross 12:36
That’s awesome. Because I think that, you know, so often that people do get comfortable, you know, you do something, you get all the work done. And you know, you’re in I know, even myself just a little bit of investing that I’ve done. My first view of investments was, you know, you buy it, and over time, the tenants would pay it down, and there wouldn’t be any money owed against it, and then I’d be able to keep the rent, that was a limit of my investment, thought, you know that that was where the money was not in the appreciation, and then the role in you know, actual cash flow, but it was just like debt reduction.
David Moore 13:12
Well, and what I mean, what you’re talking about is a prime example of I mean, if we look at the market today, what are people trying to do? They’re trying to get hard assets, and intangible assets. And we all hear the ads for gold and silver, palladium, whatever it might be. But I would say the ultimate tangible assets, real estate, and and, you know, one of things Ron always taught us and never bank on appreciation, if you buy gold, you’re banking on appreciation, right? And that influx, and that appreciation might be only inflationary driven, which is the big problem today. But if we look at a piece of property, it doesn’t have to go up to make you money, right. I mean, as you just said, somebody else paying the debt service on it, you’re gonna end up owning the thing. Whether cash flows or not, whether it goes up or not, you’re making money on it. And in addition to that, that, you know, that debt pay down, you’re going to have interest deductions, depreciation, other things going on, too, that you can always take advantage of. And then the best thing about that real estate investment is at the end of the day, you’re either I mean, as we said, If you flip a property and sell for resale doesn’t fit, you’re gonna pay normal income tax, but at the end of the day, after you realize those objectives, you’re either gonna sell and pay the tax or you do an exchange and kick that tax liability down the road. So it’s just a wonderful opportunity for people and it’s something if they really look at what’s happening in today’s world, you know, hard assets, everything’s going up. I mean, we’ve got tax laws that really if we look at the tax liability on sale of a primary residence today, and you think about that section 121, the universal exclusion that was put in place in 1997. I don’t know what you lived in 1997. What it cost y’all to buy that thing. But if you look at what 250 or 500 in exclusion mat in 19 $97 versus 20 $22, it’s an entirely different world. So, you know, one of the issues that that, you know, comes up in this last year, I mean, if I look at my 30 years in this business, unfortunately, every four to six years, we’ve got somebody gets elected, and they want to get rid of 1031, which, as I said, is 100 years old. So, you know, the the problem is one of my big worries is always the government getting in the way and changing the rules on stuff. But, you know, you’ve got to sort of use these things while they’re there. And, and 1030 ones been there for a long time we did with Biden’s build back better plan. 1031 was once again in the crosshairs. And at this point in time, it’s been actually cleared of everything, and it’s going to be preserved, and we don’t have any caps. But the reason I bring that proposal up is there was in the initial drafts, they wanted to cap people’s annual deferral to half million dollars per person per year. And and that would have been very problematic. I know, there are some regions in the country where half million dollars means a lot, but anywhere on the West Coast, or most of blue states, it’s not going to do much. And and if you look at those numbers, and and I think that they were looking to the half million exclusion based upon section 121, saying, Well, hey, on a home sale, you’re entitled to half a million, so we’re just going to give you the half million on 1031. And I would argue that the 250, or 597, probably would be a million million five today. And that would be a much more logical number for 1031 if they were going to do something like that, but anything that stifles market velocity is not ultimately a good thing for even the government with their tax realized taxes. So that’s their conversation.
J Darrin Gross 16:57
No, no, but But it all kind of ties together here. And I think just to kind of orient this conversation to make sure everybody’s on the same page here, the 1031 exchange, he if you could just summarize quickly, briefly, what it is, and then the benefit of it.
David Moore 17:16
Sure, so So the great I look at 1031 is sort of an IRA or 401k, for real estate, alright, and what I mean by that is, you know, traditional IRA or 401k, you’re looking at pre tax money growing tax deferred, your Roth is just tax money growing tax free, if we look at 1031, you when you buy a property, your basis, and that property is what you paid for it plus the capital improvements, you do to it during time units, every dollar you put into something, you’re either capitalizing or expensing the expense that you write it off capitalized increases in basis. And then furthermore, if it’s an income property, if let’s say it’s a rental property, you’re going to have a depreciation that you, by law are supposed to take. So it’s interesting, because, you know, as the world gets more complicated, I think good tax people are one of the most important people for any investor. Alright, if you’ve got investments, you better have good tax people, because there’s so many things there that you’re not going to be aware of. And honestly, even your tax, people may or may not be aware of some of this stuff. But you’d better have good tax people. And we’re going to want to talk those people to during the transaction, if we’re doing something that’s a little aggressive. But you got to understand what the liability is going to be before you ever dispose of anything. And the great thing about 1031 is that you’re able to when you buy something, you improve it, you hold it for a period of time, you now have this increased value there. And the question at that point is, when you realize your objective, do you want to just sell and pay the tax, which is always an option? Or would you like to keep the money yours and keep it rolling forward. And 1031 is just a tool, it’s going to allow you to do that. And I like simplest, always breaking exchange into four basic components. As far as you’re concerned, Aaron, you’re just gonna list a property and sell as you normally would, but before it closes, if you have actual or constructive receipt of the funds are going to have a tax liability. So the exchange has to be set up predisposition. So typically, people ask, well, when do I want to hear about transaction, let’s say, ultimately, before you buy the thing, because how do you own something, it’s going to me it’s going to drive how you relinquish it a future. And then that’s another conversation but but at least when you get the property a sale pending at that point, you want to be thinking about it. And and it’s important, for example, if we have a transaction where let’s say you and I own a big building, are we going to own it directly, tenancy in common? Are we going to own it via a limited liability company? Now each of those things might have an upper down to it. But the reality is that, let’s say 510 years forward from now, what are the odds of both of us You’re gonna want that asset. And and one of the biggest issues, the biggest headache with anything in the 1031 world is time, you’ve only got 45 days from settlement to IDX, what you want to buy in a total of 180 days, those times both started settlement of the relinquished property. Now it’s possible to do a reverse exchange where we buy first and sell later, you’re still looking at that 180 day timeline, we can do an improvement exchange where we build stuff too. But but if we were to own, let’s say, this building, and we now go to sell it, we own it as a limited liability company. Partnership Interests are specifically prohibited from 1031 treatment, so we’d have to drop into what you know, we tick it out. And that that’s slang for Nintendo everyone industries, we’re going to do a drop and swap. So ideally, maybe your pre sale, we’re going to decide, okay, hey, Darren wants to go left, I want to go right and and we know upon a sale, we want other things. So at that point, if we own it as an LLC, we want to have deed from the LLC, each of us tenancy in common, and we’ve held it for a year predisposition. And now we’re free to go do what we want to do on the acquisition side, if we if we did not do that. And really, back to my comment on tax people, don’t use your tax person, April 14, use them before you know you’re in talk to him before you do anything before you ever go to sell something, talk to him. But you wouldn’t believe how often even after 100 years of existence, we get a call on a deal, the day it’s closing, or maybe unfortunately, the day after it’s closed. So you got to plan ahead. Now, as I said earlier, I like simple. So I’m going to break the exchange in four pieces. One, it’s got to be an exchange, as far as you’re concerned, you’re going to sell something and buy something, the only thing different is you’re going to include a cooperation provision stating your intent to do an exchange. Lot of the state forms have boilerplate in them that allows this to happen. But phase one of the exchange you give us something phase two, we give you something back now when I was talking about a true swap earlier, that’s that’s an exchange in the most basic sense, and you don’t need us but using a third party exchange company, you’re literally free to sell whatever you don’t want and buy what you do want it’s exchange company’s job step in the middle of the transaction and turn it into an exchange. So So one, you’re going to give us some we got to give you some back to what’s gonna receive have to be of like kind the light kind definition. And, you know, I joked about this 30 years ago, I had a lot more hair on my head. But in those days, people say, Well, I remember what it meant a house for house land for land, it’s never meant that, okay, like kind in 1031 context is nature rather than form. So any real property held for investment is going to be like time with any real property acquired with the intent to hold for investment. Now in 2017, we used to do lots of personal property transactions. And and most of those honestly, were high end cars. And and one of my favorite transactions was a we exchanged a 1957. Fiat rappy, I think it was, it was like a three and a half million dollar fee, believe it or not, so we exchanged a Fiat for, I think, two Ferraris and Maseratis, so when do you think that would ever happen, right? But that was a situation where it was a great investment nap. And I we had somebody work with a McLaren f1, which I don’t know if you’re a car guy, but McLaren’s were the McLaren f1 Adrian Newey design. I mean, it’s the most amazing road car ever built from my perspective. And we had a guy make $4 million on one of those in two years. So in 2017, we lost personal property transit, we used to do lots of aircraft and planes, planes, helicopters, even fishing boats, stuff like that, our work, but it was sort of victim to the one percenter stuff the personal property transactions went away and honestly we lost personal property ended up with the opportunities on the OSI is sort of its replacement I’m so so I’m not a real fan of the OSI because I think that’s the reason we lost personal property. But I understand why things were going on the OSI is there to stimulate development in areas that need development and I think it’s great tool for people that are selling other things other than real estate to get it into real estate but I just sort of sidetracked into that whole conversation but you know what, it’s got to be an exchange to what’s gonna receive your light kind and so you know, that that personal property stuff’s all gone now. And and so, so real property you can exchange from dirt into office buildings into strip mall, places, places Beach, retire into all those things are going to be of lifetime. So I want to mention to back to my comment on now. Tene 97 on on section 121, universe exclusion, before that, it was 1034 on that, if you were 55 or older, you had a one time lifetime exclusion on gain on the sale of primary residence. And, and that was 125,000. And that was it, it was a one time deal. And and but but the great thing about was if you sold a home, you had two years to buy new home of equal or greater value, if you did that, you’d be totally tax deferred. Now, you think about the world today, section 121 says an individual’s got a quarter million dollars excluded gain on the sale of a primary residence they’ve lived in for two out of the preceding five years, married couple gets a half million. So in 1997, like I said, those numbers meant a lot. And in today’s world, they don’t. So the reason I bring this up is it’s possible to convert a primary residence into an investment property. And it is possible to convert an investment property into a primary residence. And there’s reasons to do both of those things. And, you know, we have lots of people that do that. And will they on the retirement side of the business, even we’ll have people go out and acquire a property in Florida, maybe they want to retire into and we can do that also with retirement money if somebody wants to do that. Now, you know, that’s another conversation we’ll have another day. But But I just it’s important for people to know this stuff. And I think one of the most fun aspects of what I do over the last 30 years is that so often people think there’s no black and white answers you can or you can’t do these things. And rarely is that the case with tax law is more often the case of how we’re going to get it done. So it’s really a lot of fun when when we’re sitting there looking at a process or looking at somebody’s objective and finding a solution that say, Well, gee, I didn’t know I could do that I thought it was going to be stuck with this or that or whatever it might be. But if we could sort of, you know, I call them little nuggets of knowledge, right, we give people the opportunity. So that like kind thing is one of the big misunderstandings in 1031. Because people think I gotta go house for house land for land, it’s never been that way. So. So the third of my my sort of four cornerstones is what we call the napkin test. And that just says that for total deferral and I want to stress 1030 ones, not all or nothing but to be totally deferred, you need to go across or up in value and equity between the relinquished and the replacement property. And the value of net equity numbers or net closing costs. Finally, we’ve got to have continuity investing. And that means the person re the gave us something has to be given something back. So that example I gave of the two of us owning a building. If we own that building as a limited liability company, the entity can go forward into whatever we want, that’s fine. But if we sold as an LLC, and you want to go, you know, left, and I wanted to go right, we could not do that, because a partnership interest is specifically prohibited. Now, as I said, the biggest problem with any exchange is time that 45 180 The second biggest issue is fasting, because think about I mean, I’m sitting here in Portland, you know, we’re both in Oregon, Oregon’s not a community property state. So if we look at even spouses imagine this, the number of clients I have that will start off, and most people’s first investment is their home, right? And then they you know, get married or have a kid or get a dog or whatever, and the house is not big enough. So they end up either selling the house or they move out of the house keep the thing as an investment property, they’ll buy the next property. So you know, when we’re looking at at people’s ability, because so that’s a conversion from residence into investment. And that’s totally fine. As I said, we can go forward and switch the thing back the other way. But if we look at somebody, they start with one investment property, then they get another investment property, then they get another then their lawyer says gee, you know, now you’ve got three, four or 510 different investment properties, you’ve got a fair amount of liability there. So Let’s shove them into a limited liability company.
Great, fine, that works. That gives you some protection. Now let’s fast forward a couple of years. So you’ve you’ve gone through your investment plan, it’s now time to relinquish that property that’s owned by the limited liability company, you want to go forward into a new property if the property is four units or less, what’s it financed as fast as a residential loan? And if we try to finance the LLC versus the spouse’s, the money is going to be more expensive guy. A lot of people say we can’t finance an LLC, that’s totally wrong. It’s just going to be more expensive money typically. So suddenly, I get the call because our clients who have an exchange setup as a limited liability company are now upset because the cost of money for the acquisition is more and since they live in Oregon, I cannot give them the new property personally. They have to take ownership via the limited liability company. Now if we go to Washington or California Now we can have a husband wife, give us a property and LLC and take ownership of the new property personally, and that’s going to be fine. But you know, that’s just that shows you how easy or how easily that that whole continuity investing issue could be a problem. So I just gave you two scenarios where it’s problematic.
J Darrin Gross 30:19
You know, I didn’t realize the states vary on their vesting rules. That is I want to understand well,
David Moore 30:26
it’s just whether states community property, state or non community property. So that’s going to dictate what happens with the vesting to your point, that’s going to dictate how we can move forward in the exchange.
J Darrin Gross 30:38
Gotcha, gotcha. I’m fascinated me just saw all the things you were talking about there? The I was curious. Yeah, pre 97, when personal property was still in play, what percentage of your your 1031 business was personal property as opposed to real property?
David Moore 30:59
At the top, maybe it was about 20%. I mean, it was a, the car side of it was probably the one that was growing the most just because I mean, and you can see the results of that right now. I mean, if you think about the cost of a car today, and what’s happening, and I think that was just a precursor, because I think anytime we’ve got bumps in the road, in the economic world, people are looking for hard assets, right. And so I mean, sure you go buy a painting, you hang it on the wall, but I mean, an investment car you get to play with the whole time you get to use it and and the things going crazy in value. And you can see, I mean, if you look at any of those auction houses, you know what, what they’re doing, and whether it’s the you know, the Japanese cars, or you know, hot right now, because the other stuffs gone up so much. But you know, everything sort of coming in play, and you can look at any segment of that collector car world and see what’s happening very easily right now. And it’s just, it’s a different place. So that’s what really impacted things there. Obviously, if we’re talking about aircraft, and the other thing is like, for example, hills book, Hillsborough helicopters here in town, you know that they are the largest, or they used to be the largest Bell Helicopter dealer in the country. And so you think typically, if we’re talking about aircraft, the gain is not. And everybody out here understand that the game has nothing to do with profit, right gains simply tax calculation. So it’s your basis subtracted from the sales price. So does a does an asset have to go up in value to trigger tax consequences? And the answer’s no. Depreciation is going to trigger tremendous gains in certain circumstances. And and and if we look at a an economic collapse, we might have a situation where you think you might lose a property foreclosure or a short sale, and you’re thinking, well, not only did I not make any profit on this thing, but I lost everything in it. Well, if you lose a primary residence foreclosure, or short sale, you’ve got some tax relief that’s there on income properties, you do not. So you’ve got to understand that if we have a short sale or foreclosure the sales price is is not quote unquote, the sales price and the government’s eyes, the debt on the property, or whatever is greater sales price is the debt, the debt could be the considered sales price. So if you’ve got a debt over basis situation, you’ve got what’s called phantom gain, and use lost, NASA lost all your equity in it, and you get hit with attacks on top of that. So that’s one of those things where people get, you know, confused, because they don’t well, I didn’t make anything I lost everything. No. Gain has nothing to do with profit. So it’s merely a tax calculation. And the reason I bring that in because personal property stuff, you asked about what percentage of the business was personal property, we used to a lot of heavy equipment to say, okay, heavy equipment does go up or down in value. You know, typically it’s going down in value, but depreciation on that stuff’s gonna trigger again, even on a dramatic decrease in value. You know, when we’re looking at the content I was making on Hillsborough aviation. If you look at a lot of those helicopters in the heyday, the helicopters that the wait to buy one, and you can see that even with watches today, a new watch is cheaper than a US watch, because the new watch you can’t get right so and we had that same scenario going on with aircraft. So it’s really interesting looking at these different things and you might not have an increase in value. It’s just a decrease, but it’s a depreciation driven gain rather than appreciation driven. And by the way, the government’s position on this on depreciation is you should have therefore you did so you You could be a person that said, Well, I don’t want to take depreciation on it, therefore, I’m not going to be liable on on recapture on disposition, government doesn’t care, you could have not gotten to the benefit of depreciation and still pay for the tax on something you didn’t get the benefit of.
J Darrin Gross 35:15
Yeah, I get that. I mean, the totally the I mean, the whole idea, at least the beyond the the reduction of the principle, which was my original idea on investment, once I recognize a depreciation as a holy moly, that that’s really where I’m at. That, to me was the secret of real estate.
David Moore 35:33
Oh, definitely. And to further exemplify that, once again, back to my comment on on who is actually, you know, doing your tax work, if you could just go buy a simple rental house, who makes the allocation, dirt to improvements, and what happens to your return on investment, if you jack up the value of the improvements or decrease the value of the improvements, right? So the more the improvements are worth, and that that’s, that’s the most basic form of cost sag is just dirt to improvements, right. But if you jack up the value of the improvements, you got more depreciation, your return is going to be better. If you look at a commercial building, you’re going to be looking at a situation where you’ve got cost said Cost Segregation studies done. And you know, we were both at that event, one month ago with all rich and that was great event. And but because sag is is one of those big issues there. That’s that’s sort of going to manufacture return, let’s say, Okay,
J Darrin Gross 36:33
it’s, again, the kind of as the investment lessons go, the longer I invest, the more I find that the need for 1031 Exchange exist, and in the understanding and then actually utilizing one. I’m curious, in your experience. You mentioned like when you guys first got started, how you would improve the property, refinance, and then recognize a you couldn’t afford to keep the property rolled into another property. Is there an average hold time that you find that that your customers will hold a property before they’ll take advantage of an exchange? Or maybe if they don’t hold it very long? If it’s newer that they would elect to just go ahead and pay the tax?
David Moore 37:24
Well, I mean, typically, you’re probably ideally looking at three to five years. I mean, unless we have some abnormal event going on out there, that’s going to change things. And the the thing that’s sort of, you know, you look at our market today, and you do the show regularly, but you think about cycles on economic cycles, and how often? How many years typically between some type of bump in the road? Right? And and if you look at our current situation, we’ve we’ve been pretty much going up, up up up since what? Oh, 809 I mean, II think about people’s typical hold. Now there are institutional investors that that have held assets that normally would hold maybe five to seven years. If you look at Delaware statutory trust, for example, or institutional tenancy in common. So DST is Delaware statutory trust, it’s typically a fractional passive ownership and in a pool of assets. tics are typically a value add situation, they’re not stabilized assets. DSTS typically are but you’re normally looking maybe five to seven year hold in the institutional world, most of our clients probably their their more hands on doing seven is probably three to five years. But I would say there’s lots of institutional assets out there that have instead of the five to seven, they might normally have are sitting here looking at assets, they normally have a five to seven year old on and it’s now been a dozen years. And they’re still sitting here so and if you drive around like office buildings, you’ve got a bunch of shadow inventory, they might publish a number say well gee, we’ve got 80% occupancy but drive by him at night. You see how many are lit up you know what percentage of buildings lead and and so it’s very interesting at this point in time to see where we are people’s attitude about it and I don’t when we have changes in the economy, typically it’s Wall Street people are concerned about Wall Street, our Ira business Ira 401k Business increases because people are looking at hard assets once again. And what’s interesting to me in the last six months bad side of business is definitely increasing. So I’m seeing concern from that side. Meanwhile, the real estate world sort of like well, it’s just gonna keep going. I don’t know there’s lots of people out there, they’re a lot smarter than I am but I don’t know how long we can keep going the way we are. So
J Darrin Gross 39:53
I find it interesting how, you know the cycles when you map them out on a chart or whatever they you can see See him on a regular basis kind of thing. But but, you know, like you said in the situation we’re in now, where how much of it is natural versus how much of it has been altered based on, you know, the printing of money. And just the change in the situation based on how COVID has changed, you know, things so much based on people’s desire to live where, wherever, as opposed to just where their job is, or live in a house versus in a, you know, more of a concentrated, you know, unit structure or, or, or retail, or like the office, like you mentioned, you know, how many, how many spaces are actually occupied versus not? I mean, there’s just a lot in play that I don’t think that, you know, have you looked at the cycle from the end of the last cycle? So say 2008, I think most people would have thought we would have been through another major dip by now. Yeah. And so, you know, it but based on all the demand and in the the hot or, you know, the the asset classes that are the most automating the multifamily and, and industrial seem to be, you know, there’s there’s just not enough supply. You know, will it be a, a across the board crash? Or will it be a segment crash? You know, and what’s not to say that what we went through with the front end of COVID? Wasn’t that that dip that, you know, the the market was looking for, or, you know, the cycle was looking for?
David Moore 41:49
Definitely? Well, I think, I mean, historically have Wall Street crash or real estate crash, right? And then that, oh, 708 thing, Wall Street crash, and took real estate with it. And from my perspective, it was just a question of available funds, right? I mean, if you don’t have the ability to move an asset, you’re not gonna move it. And and one of the sort of objections that Wall Street has with respect to self directing a retirement account putting in real estate is that they’ll say well, gee, real estate’s not a liquid asset. So what happens when you hit in today’s world? 72? And you’ve got to take required minimum distribution RMD. And you have, if you don’t have any money there, how do you take the RMD? Well, we’ve got an easy solution, just taking in kind distributions, you just take a piece of an asset or pieces, shares, membership interests, NL C can be done to and there’s benefits to that also. But but you know, in general, you’re right, you don’t want to stock yourself, right. If you don’t want a piece of real estate, you got put on market. And and we had, you know, some huge Unfortunate examples in our region during that crash, where you had very large institutional investment companies that just went away. And and that’s what sort of led us into that whole phantom gain issue that I mentioned earlier, where you had an institutional investor, and it was a passive investment for the taxpayer. And then the thing goes belly up, and now they’re got nowhere to go. But But if we look at so the question is, you know, right now, if we have a meltdown and hurt in Wall Street, let’s say, does it destroy our ability to move assets and in the real estate world, and if the money is available, then we’re going to be just fine with whatever happens there. If money’s not available, then you got obvious tremendous erosion of values. And and unfortunately, today, I would say that a lot of people’s gains are not there. They’re not gains, but they’re not based upon a true increase in value. It’s inflationary, driven, right. I mean, you’ll look at me I joked with my wife about Christmas time this year, I went and went to one of the the real nice butcher shops here locally and walked back into the house was several several $100 worth of beef, right? I mean, I’m thinking, Okay, that should be $30 worth not 200 worth but so you know, it’s a different thing. And, you know, so unfortunately, the the exclusions, let’s say on the prior on the sale of primary residence, they just don’t cover things like they did. And obviously, the laws need to change but nobody’s really interested in doing those things. So that’s what leads us to my comment earlier about people assume there’s black and white answers to things. You know, if you take a home that you’ve got a gain of a million dollars on and you’re married, well, you get a half million of it covered the other half you’re gonna have exposure on does that mean? You’re you’re going to actually have to be stuck paying that and the answer’s no move out of the house, treat it as an investment property for a period of time. You People want to say, well, there’s a set period of time while the code says two years, you got to hold the two years to qualify for 1031. That’s not true. Temporary one doesn’t contain any hard hold requirement. Now, if you and I are brothers, and we swap properties, we’ve got two year old in that scenario. But if it’s an arm’s length transaction, it really has to do with intent. And what’s going on, you mentioned COVID, earlier. So imagine if you bought a property just pre COVID, you closed on it, March of 2020, let’s say now all sudden, wham COVID hits and your tenants, you know, in Oregon, you know, our governor’s Well, gee, the tenants don’t have to pay, right. So now you’re sitting there having to pay the debt service, you can’t afford to pay it. You bought it, you thought it was going to be fine. Could you sell that property a month, two months after you bought it? And in that scenario, I’d say yes. Yeah. Because your your intent was to hold it, circumstances dictated different course of action. So that’s what you know, makes me uneasy these days is when we look at things that we don’t have control of, and the government getting involved with things where they’re just changing the rules with, you know, on us overnight.
J Darrin Gross 46:06
Yeah, definitely some interesting political stuff. And hopefully, we’re through with the shutdowns. And we can, at least, you know, go forward without any more of the overreach there. But I will tell him, David, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we’ll see if the way if there’s a way we can minimize the risk. And when that’s not an option, then we look see if there’s a way to transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation. And it could be their clients, the market interest rates, political, however you choose to frame the question, but and ask you, what is the biggest risk? And, again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, David Moore, what is the BIGGEST RISK?
David Moore 47:25
The BIGGEST RISK for an investor on assets, so the biggest risk in an exchange or what what in what?
J Darrin Gross 47:33
I let you I’ll let you frame framing how you how you see what is the biggest risk could be there are.
David Moore 47:39
So I My biggest concern right now is just government changing the rules on my clients, you know, in the middle of a transaction or after somebody purchased something, and I just see so many situations today where you have to look at somebody’s intent and what they’re trying to accomplish versus what the laws are actually there allowing them to do versus what those laws were actually intend to do. Now, if I look at just complexity, and I’ll just say as far as insurance products, I’m not a huge fan of limited liability companies for holding property. And and if you look at what was proposed, and Biden’s build back better, it You rarely ever see an asset held by a corporation these days, because if you and I own an asset and a C Corp or S corp, we just want to go different directions, just taking the asset out of the corporation is going to trigger taxes that that nullify any benefit of an exchange, you’re stuck in that entity, they want to go mark and mark it on distributions from limited liability companies to so where we talked about community versus non community property states, even with spouses with LLCs, I’ve got clients that will have a single LLC for all their properties, I’ve got clients that will have an LLC for each property, I’ve got clients that don’t use any old C’s, I would say, good stout insurance policy, I’m a bigger fan of than the old C’s because of the complexity of moving assets with the LLC. Now, as I said, if we’re in a community property state LLC is a lot easier to work with, and it is where we live. So, you know, that’s one of my concerns. But my biggest concern right now is just the government changing the rules on stuff. And an example of that would be here, we’ve got the City of Portland and once more housing, and you can argue whether you think VRBO is housing are not, you know, obviously people have sort of shifted instead of long term rentals and renting to people directly. They’re going to use that mechanism so they don’t have to deal with some of the rent control laws. So you know, the Multnomah County changes rule says Okay, so we’ve got a number of clients with the retirement with retirement accounts, self directed IRAs 401k plans that buy rental houses and they were using VRBO for that thing and it worked very well. So they’ve got these assets. That’s property that’s available and all sudden the city can Any state somebody makes a law change. So no, boom, now you can’t own these things you can’t VRBO unless it’s owner occupied property. So now every client I’ve got that had properties used that way with a retirement account, by law, they can’t occupy your, you know, use that property anyway, so that no longer fits. So everybody that had those things now has to sell them and go do something else. So it’s, it’s tough when when we’ve got bureaucrats out there changing laws on things they don’t understand at all. And they change the rules. And then so rent thing, you know, that vacation from Brent, sorry to sound callous on it, but nobody’s giving the landlord that property owner, a vacation from paying the debt service. And everybody assumes that landlord is wealthy person. And I will be the first to tell you, I’ve got so many clients, they are land rich cash for everything they’ve got in that stuff, they’ve worked their tails off throughout their lives to accumulate some pool of real estate. And, and they’re not wealthy people, you know, they need that that’s what they live off of. And they’re good people. And the other thing I’m seeing a fundamental shift in is, with the rent control laws and the changes and what property owners are able to do, you’re seeing a lot of those people put up the the white flag and they’re exchanging out of these assets they can no longer afford to deal with and into these passive investments, the DSTS, the ticks, that type of stuff. Now, what the government people don’t understand, I would say is that the mom and pop that owned the property, they cared about the tenants, they knew the tenants, they really it was a different situation for them, they cared and by the way, you know that $4,300 Move out charge if you don’t do it correctly, that hurts the mom and pop, well, what do you think of REIT a real estate investment trust, I’m seeing a fundamental shift in the ownership of our local property going from local people to institutional ownership from somewhere else. They don’t care, it’s a different deal. So it’s just there’s lots of things happening out there. And and I think it’s all calculated. And so my concerns are just rules changing on people with with really no thought from the government of the true repercussions of those changes. And I see firsthand how it impacts my clients, and it’s not good. So that’s what really bothers me. Most, you know, as far as the insurance, the liability stuff, the LLCs, like I said, a good insurance policy is going to take care of that. You know, the other thing that is always out there to is with, for my businesses, we’re moving money all the time. So, you know, we’re concerned with all the wire fraud stuff, I mean, that’s a huge thing. So having the policies, the insurance policies in place that are going to protect us, because, you know, the business owners got a lot of responsibility, let’s say out there in liability if it’s not taken care of correctly. So that’s something unfortunately, it’s just out there and seems to be growing and growing. And I really don’t understand how they can’t put a stop to that with a flip of a switch. Anything that’s wired has to be received by somebody. I mean, you just locked down that money for 48 hours or something, don’t allow it out. I would think that would change that whole thing a lot. But you know, nobody seems to be looking at solutions like that.
J Darrin Gross 53:27
Yeah, nobody asked you or me. I get it, I get it. I like both of those. I think the the, you know, the government changed the rules is definitely a concern, I think across the board for everybody. And I think that most people that I deal with, they just want to know what the rules are. So they can go forward. Not always being like, a sense of limbo, like, yeah, you know, what, what are we gonna do? What are we gonna do? And then that cyber stuff to the fraud thing? It’s just scary, because it’s just so far reaching and, and it’s, it’s everywhere. So good stuff.
David Moore 54:02
Yeah, it just seems to get worse. And I mean, just change the laws with respect to wire transfers and holding and I mean, you know, I always think about when we’re doing when we do different transactions, we’re doing improvement change or reverse sometimes we’re doing different bank accounts or we do some somewhere else what you have to give the bank to open a bank account today, right? You think okay, that in and of itself should be stopping some that cyber fraud just because to get the account itself, what you have to you practically have to give them your firstborn. And okay, well, you’ve got this account, somebody had to put that information forward. And, you know, whoever put that account together, that money’s going in or out of that account, lock it up.
J Darrin Gross 54:48
So no, I hear you. I hear you. Well, David, I can’t say thanks enough for taking the time to do this. today. Before we shut this down. Where can listeners go to connect or learn more?
David Moore 55:03
Well, I think the probably they say YouTube’s sort of the ultimate search engine these days. So I if you want to learn more about what we do 1030 ones all different aspects of the process. And actually, we we’ve worked hard to have information on our YouTube channel. So just type in Equity Advantage 1031 on YouTube, or IRA Advantage, Self Directed Retirement Acounts on YouTube and our pages will come up. And there’s videos on everything from life, life policy, sales or investments, charitable remainder, trust cost, seg DSTS, tax all kinds of different aspects. It’s not just us talking about why should use Equity Advantage for an exchange, our channels are all up there for informational purposes. A lot of the information doesn’t even have anything to do with 1031. We just want our clients to be informed and understand what’s possible out there, because so often, they’re told you can’t do this, or you can do this and both of those answers can be totally wrong. So you know, as I said earlier, I like just break it down to those four basic elements. If it’s an exchange, it’s got to be an exchange, like kinds got to be satisfied across or up and value in equity, and investing and in retirement accounts. It’s really even more basic, I mean, you’re just looking at what the person wants to invest in, and who are they transacting between for the benefit of and those two things are going to dictate whether you can or can’t do something. So I like as I said earlier, simple. So we try to get the information out in a format that’s going to allow people to understand instead of getting into the weeds with the legalese of it, but I like to say there’s no absolutely no such thing as a dumb question. Right. So you got a question. Reach out to 1031Exchange.com is our URL and just reach out anytime with questions you may have. Even if you’re working with someone else, we’ll do what we can to help y’all so.
J Darrin Gross 56:58
Awesome. David, I can’t say thanks enough. It’s been a real pleasure speaking with you today. I’ve learned a lot and I look forward to doing it again soon.
David Moore 57:08
I enjoy it. Thank you very much for the opportunity, Darrin and Happy New Year to you and everybody out there and and look forward to working with you going forward.
J Darrin Gross 57:18
All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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