There are types of exchanges that are really interesting.
Certainly the forward exchange, that goes without saying. I sell my relinquished property then I go out and buy the replacement property. That’s the one that everybody understands and talks about.
An improvement exchange, is rather interesting other type of exchange that is really very productive from the client’s standpoint. It could be a forward exchange, it could be a reverse exchange but the issue is you have found a property that you either have more money to spend in order to complete the tax deferred exchange or the property that you’ve selected needs help.
If done properly, it’s possible to use the tax deferred exchange to acquire a property, make improvements to the property, completely using pre-taxed money. It has to be done while the facilitator still holds the property. That’s the real key. You have to know what improvements you’re going to make. Number two, the improvements need to be made prior to the time that you receive that property out of the exchange.
Another type of an exchange is the reverse exchange. Unlike the forward exchange where I sold my relinquished property and then went out and bought the replacement property. In this instance I’ve gone out looking for properties I’d like to acquire, I have found the perfect property but the guy’s not going to wait for me to sell my relinquished property. I literally need to buy this property on the spot.
But what I’m going to do is enter into an agreement, an exchange agreement with an exchange facilitator, which will go by a little different title but they’re still exchange facilitators and I’m going to effectively loan them the money to make the acquisition. They buy the property for me, they hold that property until such time as I sell the property that I selected to get rid off to cause the exchange to occur. Use a good exchange broker, use a good CPA that understands the process and use a very experienced exchange facilitator, you would be in good step. The reverse is a great opportunity.
Another one that I use, I call it the golden parachute exchange. Here’s an individual that has maybe acquired a duplex 30 years ago, then exchanged it into a 4-plex, then exchanged that into a 20-plex, then exchanged it into 100-plex. Now they own a huge property. They’re at the end of their investing career and they say “oh gosh, it’s kind of unwieldy. How do I refinance it and maybe live on proceeds? I’d have to refinance the whole thing. How would I sell in order to get to a small amount of money that I want to use to do something different?
What we could do is exchange it one more time into a series of smaller properties. It will still go even or up in value. It will still go even or up in equity but I’m going to end up with maybe 10 different properties. The great opportunity here is I may have debt on the property that I’ve sold and I have to replicate that debt in the replacement properties, I’m going to stack as much of it as possible on 1 or 2 or 3 of the smaller properties and create free and clear properties of the rest of them.
With the free and clear properties, if I need to generate some tax free income, all I need to do is refinance them. The refinance proceeds are not taxable. I can live off of that. The property generates income to service the debt. A little bit later I need more income. I do it again and again and again. A great opportunity using the golden parachute exchange.
The last one I’d like to deal with is the no-equity exchange. It became an issue in our era of short sales. There were issues where value erosion has occurred or a person refinanced too much then all of a sudden there’s no equity left. They find themselves in a position where they need to sell but they don’t have enough equity left or maybe any equity left to complete a tax deferred exchange. So as they sell they have no equity but they have a tax bill. So what do we do? We can do one more tax deferred exchange.
The individual will effectively add cash to the exchange facilitator, enough to go out and buy a replacement property that’s still even or up in value, even or up in equity, they’ve accomplished a tax differed exchange. They have saved themselves the tax consequence of debt relief that would have otherwise occurred with a short sale.
It’s a great opportunity but it takes a lot of planning. This is where your expertise will really come in handy.
Happy exchanging. If you have any questions, contact me. I’d be glad to share what I know over the phone, over the internet. I’m reachable firstname.lastname@example.org, 1031guru.com.