Ritter on Real Estate The Good, The Bad, and The Ugly of 1031 exchanges (Part 1)
If you are in the syndication space, you will have likely heard of 1031 exchanges, and while they may leave you scratching your head, they are an incredibly useful wealth-building tool. Today's guests, Michael Brady, and Alex Shandrovsky join us for a deep dive into these exchanges and demystify some of the misconceptions around this powerful tool. Michael and Alex both work at Madison 1031, a leading qualified intermediary that helps clients through the exchange process. We kick off the show with a definition of 1031s. In their simplest form, they are viewed as swapping one property for another to defer capital gains tax. After this, we get into the importance of the intermediary. While it could be tempting to go at a 1031 alone, using an intermediary is built into the swap structure, and Michael gives us some tips on what to look for to find one of a high caliber. From there, we take a look at when a 1031 does not make sense. Some of these instances include no capital gains, a bad deal or for a flip. Following this, we explore when a 1031 is advantageous. We wrap part up one with a discussion of how passive investors might use a 1031 out of a deal, and some of the complications this could bring.
Key Points From This Episode:
- An introduction to Mike and Alex, including their respective professional backgrounds.
- The definition of a 1031 exchange and how it encourages real estate reinvesting.
- How 1031 exchanges allow for capital gains tax deference.
- The role that an intermediary plays in a 1031 and why they are fundamental to it.
- Some of the technicalities the intermediary takes care of in a 1031.
- Why the ‘qualified intermediary’ does not have to be specially trained and tips on finding the best one.
- Hear some examples of when it does not make sense to do a 1031.
- Instances when doing a 1031 is most advantageous for investors.
- How 1031s work for passive investors on a syndicated deal and some of the planning they need to do.
- Why drop and swaps can be problematic for the IRS and individual states.
- Learn more about the Tenant in Common structure and the complications it can create.
- Why 1031s are a popular way for syndicators to bring investors onto the next deal.
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