Jack Shea explains what reverse and construction 1031 exchanges are and when they make sense to use.
1031 tax exchanges are a great way to save money on taxes as a real estate investor, as Jack Shea shares with us.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investment industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Jack: Hi. My name is Jack Shea and I’m a 30-year plus real estate and note investor and a 1031 Exchange Accommodator. I’ve been doing 1031 exchanges since 1986. We do thousands of them coast to coast, large corporations, individual people. And my son, Daniel, and I are both Certified Exchange Specialists. We’ve studied, we’ve taken tests. We’re also investors. So we know what rules are important to investors, being investors ourselves.
Mike: This show was sponsored by passiverental.com.
Jack: So the basic 1031 exchange, which a lot of people are aware of, it’s a straightforward exchange, you send the money to the intermediary, that’s us, you have 180 days to spend your money, we send it to wherever you want, and there’s no tax. It’s been the law since 1921 and it’s still in full force.
So a couple of variations on that, which a lot of people aren’t aware of, that you can do a reverse exchange. Sometimes people have an opportunity to buy a property, it’s a great deal, they need to buy it right now, and their property they’re intending to sell has not sold yet. So the tax code revenue [inaudible 00:01:52] 2000-37 allows for reverse exchanges. We did them before, but they finally codified it and wrote exactly the detailed rules.
What is involved is that the intermediary has to hold title to the new property. The investor has to put up the money. Say he’s got a $200,000 investment property or duplex, whatever, he sends the money to the closing. We take title to the property and we hold that in a trust for safety and privacy and out of the way of the public records. We’re adept at forming trusts in all 50 states. And then we lease it back to you. We don’t operate it, you run it, you can manage it, and then we wait for you to sell your relinquished property. You’ve already bought the replacement property. It needs to sell within the 180 days. So say, two or three months later, four months later, your other property sells. The money comes to us, we pay you back the money that you invested and give you a deed to the property we’re holding in trust.
So it’s a reverse exchange. It has a few more moving parts, it’s more expensive, but we do them all the time. We try to help people adjust the schedule with notes or with options. If that’s not possible, you direct us, and we’re happy to do it.
There’s another variation not well understood, is a construction exchange. The law allows you to build a building on property you already own. So that involves the QI, that’s us, taking title to your land and we hold that. Then, there’s a QEAA, a Qualified Exchange Agreement, between the parties explains what everyone’s doing. So we take your 1031 exchange money and pay the contractor, the general contractor.
We’re doing right now a steel building. It’s fairly easy to put up and get completed in 180 days. We built an $800,000 office building for someone. So it’s doable, has to get organized ahead of time, and we make payments, make draws to the contractor as it goes along, and it has to be wrapped up before 180 days. So at the end, when you get an operating permit to occupy the property, we spend all your money hopefully, no tax, and then we close down the trust and give you a deed to the property that you built the building on your own land. And that’s not well understood.
For further details, you can look at jackshearealestate.com, where there’s a link to our 1031 website, which is 1031taxfreesale.com. It has all the rules and that. So we’re available to do this anytime for your investment career. Thanks and happy investing.
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