Why You Should NOT Do 1031 Exchange! Instead, Do This!

Hello simple passive cashflow listeners. Welcome to another show. Now we’re going to be answering a very common question , should I be doing a 10 31, exchanging my property for another property? Quick announcements: we are going to be doing the 2022 mastermind retreat, open to past investors, family office members, and select you.

We members out there now to learn more, go to simple passive cashflow.com/ 2022 retreat.

This is going to be January 14th to the 17th. We have a pretty packed weekend. A lot of happy hours on a time for you guys to get together, meet at the bar over a meal, over a long day of masterminding, especially on Sunday, which is the workshop day, and fun stuff like hiking.

We’ll definitely be doing a luau, but really getting the group of mostly accredited investors around the table and interacting and building those organic relationships, which is critical to being a passive investor. Finding where to invest, where to stay away from, tax, legal, infinite banking, and a lot of those more softer conversations about legacy planning, building your family office.

A lot of those are the conversations that’s going to be coming out in Hawaii for those who come. Again, check out the website, simplepassivecashflow.com/ 2022 retreat to you there.

Now what I’ve been up to this past month I’ve been freaked out with Biden changing the regulations on the estate taxes. Now I’ve been looking at ways to get money out of my own personal estate by doing an irrevocable trust. Now, there are a couple ones that I’m looking at either it’s called the HYCET, you have your cake and eat it too, or this BDIT.

No, I’m not an attorney and I’m still learning this stuff, but this is the thing with, high net worth investors is first to go talk it out with other people. Of course you have your estate attorney helping you along the way, but a lot of these ideas, you need to work out with other people in your similar net worth range.

We’ll say a accredited investors, of course, discuss what is going to be the best fit for you. A lot of this stuff can be very expensive, but sometimes it’s just finding them loopholes of the system. It’s what the wealthy do.

Cool idea that I heard lately was making BDIT where you’re making an irrevocable trust . Putting all your investments in it, creating that trust into a suit, a real estate professional status. For some of you super smart people out there who understand that once you’re a real estate professional status.

You’re going to have your passive losses offset your ordinary income by doing a few things on your taxes. But what’s really going on is when your real estate professionals status, all your passive income, passive losses is ordinary income, ordinary losses. So follow me on this. If you have your BDIT trust a real estate professional status.

Therefore shouldn’t all the income and the passive losses coming from it be ordinary income, ordinary losses. Get your head scratching there. Coming over to Hawaii, we’ll have that great conversation with amongst other financial fanatic friends out in Hawaii. And I will talk about brainstorming ideas like this so we can take it to our tax and estate attorneys, professionals to put and implement because to me the best practices come from folks just like ourselves.

And then, be educated and take these ideas and then put them into reality with the right professionals. But again thanks to guys for a listing and hope to see you in Honolulu, Hawaii, January 14th to the 17th and enjoy the show.


All right, so you guys are jumping into a live coaching call here, and this question comes up quite frequently. As most people out there are running around thinking about these 1031 exchanges, which I don’t know why anybody does this stuff because you’re at this 45 day rule where you have to identify properties.

And I don’t know who the heck can find a good deal in 45 days unless they blindly trust real estate agent and they just go into lukewarm crappy deals. But anyway we love 1031 buyers and sellers because they’re desperate and we know we sell it for a stupid price to them because they’re desperate.

But anyway, we have our friend Steve Vollmer here from state of Washington, I’m going to be talking about their situation and we’re going to walk through the pros and cons and how it works for taxes. As I prefaced all this stuff here, I’m not a CPA, not a lawyer, but this is what I did with all my properties.

In 2017, when I sold, seven or eight of my turnkey rentals, I had a capital gain and I had a depreciation recapture, and we’re going to go to these numbers in this example of $200,000. But I had been going into syndication deals that did cost segregation. I had maybe a few hundred thousand or maybe even more of passive losses.

So I just brought over $200,000 to suspended, passive losses, offset the gain. And now I was able to diversify instead of being like trapped into one or two deals, which breaks the Cardinal sin of mine never go into a deal with more than five or 10% of your net worth depending on what your net worth is. Hey Steve are you there?

I’m here.

I really appreciate it and we’ll get into the whole analogy with the hot air balloon. In case you still want to go down this route to at the end, but why don’t you give us some round numbers on what the situation you’re in so you’re going to sell this property. What did you buy it for? And what do you think you can sell it?

Sure. So I bought a couple properties and since I’m Steve Ballmer let’s say that I bought them for about a $1.7 billion sold them for $2.5 billion. Is this really 1.7 million? Or can we go with that 1.7?

Okay. So would you say 2.5 minus 1.7 is the capital gain.

Sorry. What was it again? 2.5 minus 1.7 so we’re talking about a capital gain of 800 grand.

Yup. Now, there were some sales costs, of course, but there’s also about a 200,000 of depreciation that I’ve claimed.

So we have to add on top of that point, do you know? And so that puts us up to $1 million.

It might be a little bit less than this because all the commissions and stuff like that can be deducted too. But let’s just go with a million dollars because this is a great round example. Let’s not try and create any brain damage for ourselves during this recording.


So we have a million dollars of depreciation capture and capital gain that we have to offset, which on the one hand is good job there, Steve. But how are we going to offset this so that it’s not a huge capital gain? A million dollars is a lot of money to offset. Most people are looking at maybe a hundred to a few hundred thousand dollars of capital gain and that’s what I was then in.

But, are these like kind of the true numbers, are you really looking at a capital gain depreciation recapture about million dollars or is it really less?

I hadn’t run them by a CPA.

You don’t need a CPA. This is ain’t rocket science here.

It actually is 200,000 a depreciation and it was 790 as capital gains.

Okay, so let’s just call it a million.

I’ve got 170 in deferred passive losses.

Okay. So that’s on whether 280 or 285 form.

Exactly, I look at it earlier.

For you, those you guys listing what that form is Steve has accumulated passive losses from previous years that he wasn’t able to use. So they stay on his books as suspended, passive losses and they’re very deep within this was an 280 or 285 form. Is that the right one?

Yeah that sounds right.

So most likely your CPA will not give this to you because they want to know when you’re trying to shop around. But you’re entitled to this as a client and you want to know what this is as an investor. If you dump out that bucket, you’re looking at what you had what 200 grand and of 80, under 80 to 85 as suspended, passive losses.

I said 170 but we can be round.

Yeah, let’s go around and let’s just call it 200, you got to fill the gap of 800 grand, not impossible. And it is, this is just one property, right? There’s another?

Yeah, they were two properties that sold as one part of one deal separately.

If you wanted to offset this via cost segregation, by going into syndication deals, of course, this is the big disclaimer: Every deal is different, varying amounts of cost segregation or deals, different ages of properties, different geographic locations, many factors. But for the most part, like in multifamily value add class B, class C, I see whatever investors put in, assuming that there’s prudent, leverage, 80,70% of the value maybe you see 50% to 80% of what you put in as first year losses. I’ve seen it come back over a hundred percent too, there’s this run with 60% just to be conservative.

Oh, wow. Yeah, that was one of the big numbers that I was wondering if I bought into a syndication that did cost segregation with X dollars. What percent of X might I get back in losses?

In theory, you could go invest like 1.2, 1.4 million and knocked this 800 grand out. I wouldn’t suggest that. That’s a little ballsy to just go and you didn’t call me, I guess so. And you’re a high roller there. I was actually behind you in Starbucks, one of these days in Bellevue back at the thing before you bought the Clippers.

But anyway, so yeah, like you could go onto you could deploy that much money and do that. Not recommended, I have people in my mastermind group, they’ve done it because they armed self with the right investor group and go off of referrals and deploy very quickly. Personally, what I see a lot of people do and what I would do is just go in to a few deals at the minimum. Test the relationship out. Unfortunately, that means maybe if you do a hundred grand a few times, that’s 300 grand, that’s not going to get you anywhere $800,000 of passive losses, maybe by investing 300, you get 200,000. Does that kind of make sense? In theory you can, but let’s be real here, right? You don’t take me as I just jumped into the abyss type of guy.

No, I’ve never seen on any of your other coaching calls. You give that advice to anyone.

Have you sold the subject property yet?

You’re going to love this one. All the proceeds are sitting in QI accounts as part of a 1031 exchange.

And these 10 31 guys drive me insane because like a lot of these things, like all these self-directed retirement accounts, these other solo 401k accounts that people tout as all these snake oil type of products. They’re good in the right situation. They’re all tools. Same thing with 10 31 exchanges in the right situation. They make sense. You have until the end of the year to accumulate $800,000 of passive losses.

Yeah. That’s the challenge.

This is just for the viewers, right? I don’t want you to get down on yourself, but if you would’ve done it, like the way I would have preferred, it was like, all right, let’s wait until like January, February of 2022 and that way we have all of the remaining of this year and next year to build up 800 grand of passive activity losses.

How do you turn that kind of a sale? So it turns out that it was actually in about January that I went to my real estate agent and said, “Hey, I’d love to talk about what these would be valued with” and by the time that conversation resolved and as a buyer was found and three or four months dragged out. We got to June before closing actually.

You haven’t sold this thing have you yet?

Yeah, I have started the process in January, but it took six months to sell. So you were trying to time it a sale to land in January. How would that even be possible? You seems like selling it.

You sell it that you sell at the end of the year, right? Or you delay it or you you lead with, let’s just start off getting passive activity losses as much as we can first. And then we go and sell the asset, ideally in the beginning of the following year.

Okay. So you put it on the market in November, October, so that closing happens in January?

Yeah or you just wait until middle of quarter one. If you wanted to do this the smart way, you don’t do this until you’re at the end of your quest for $800,000 of passive activity losses.

So you know what it might sell for, and then you build up the passive losses ahead of time?

Yeah. It’s not a guessing game, right? You don’t need CPA to do that. You and I just did that right here. Maybe it’ll come plus or minus 15 grand. But go get close to $800,000 then let’s get our calculator. It’s all water in the rich now, right now. Let’s not worry about it. But in case this happens again, you don’t have another one of these types of properties. Do you just got everything locked down?

No, I had all my real estate portfolio in those two properties.

This is the analogy why I don’t like these 1031 exchanges in it. I don’t like the strategy of putting all your eggs into one basket, like how you have. The obvious thing is you want to diversify, which is why my rule for 5 to 10% at most of your net worth and to any one asset, because things happen, locations changed.

I don’t think would find a nuclear bomb and Tacoma or whatever Pascoe who knows right. Things happen. This is why I like to diversify over a few major markets and stay away from a complete tertiary market portfolio. But nevertheless, it’s like the analogy I use is like a hot air balloon.

So maybe 5, 10 years ago, you got it. You bought the asset, you bought the beginning assets that started this. And the hot air balloon goes up and up. Maybe when you had a hundred, few hundred thousand dollars of capital gain, the hot air balloon was like eight feet up in the ground. You could probably jump out and you’d be okay. The real Steve bomber probably, twist an ankle.

You’re pretty energetic guy.

That’s what I did. Like when I sold my seven rentals, I had a $200,000 capital gain depreciates recapture. So maybe I was 10 feet up in the air but by having all these suspended, passive losses built up in my 280, 285 form, it was I took a bunch of pillows in the ground. I have 300,000- $400,000 of passive activity losses pillows. Then when I jumped out 10 feet out of there, the hot air balloon, I just land on a bunch of pillows in a pool.

In this case, you’re rolled that hot air balloon up. I know you want to call like 70 feet up. Nah, I don’t know 40 feet up there. It’s going to hurt but you’re probably going to live and this is why I like this analogy. Here’s what I really suggest real time, look I’m not a big fan of like easily investing but you got to get going right.

You’re going to get some damn pillows under you, because if you fall out of this hot air balloon at 40 feet up in the air, there’s a good chance that you’re going to die. We know for a fact, you’re going to pay a boatload of both taxes on $800,000 capital gain, most likely 50 cents on every dollar that you don’t put to protect yourself when you fall out.

For the next six months, you need to be running out there and at least trying to go into deals with get a lot of cost segregations that get bonus depreciation to save you 50 cents on every dollar we know for a fact you’re gonna pay for that. Obviously, you don’t go into bad deals with bad people, in a way it makes sense. This is why a lot of my guys will use like conservation easements is another exotic thing that you might want to consider in this situation? Cause you’re screwed. There’s a lot of scrutiny over conservation easements. When you Google it, you’ll get red-flagged all over the place.

A lot of my guys do this. A lot of my doctors, they do this kind of every year, they make $700,000 and they each bring their AGI down to 400 to save. They spend money but to get that tax break and it’s like they spend a dollar to make $4 in a way. And that’s what you might have to do here.

You may have to take an extra chance to save money on taxes, which you know is going to evaporate.

Would it make sense to focus or to go look for development deals or something that would have a higher loss up front? I don’t know if development has a loss of higher loss up front.

Good question. So you cannot take depreciation until your asset makes a dollar. If you’re talking ground up development, you can’t take the depreciation from that until that thing gets built and making money. So that’s typically that might put you in 2020 to 2023.

Or higher value ad plays? If there’s currently a break even but there’s 60% occupancy and they’ve got to do a major reno to convert a motel into apartments.

At the end of the day, essentially, what you’re discussing about is stretching your dollar and getting more leverage on it by going into these crappier more distressed deals, which in theory it works. So to answer your question, yes. Another option might be the opportunity zone funds type of deals and they’re both good ways of mitigating the tax. But personally, I wouldn’t do either hairy deals.

I don’t want to go into hairy deals, especially if you’re an accredited investor already. Like you want capital preservation, you want to be going into good deals and solid locations and opportunity funds. The reason why the government gives you such a perk there is because it’s in a really crappy area so you have to ask yourself. I had another guy in my group

he still a franchise and he hit them both load of capital gains. We’re talking like millions. So he’s desperate. Instead of you looking forward to feet down this, guy’s looking at 200 feet down on the hot air balloon. He’s screwed. He’s going to die, jumps up. So he was looking for all kinds of things.

And I advise some, don’t do the opportunity zone fund thing, because you’re not an operator. You hadn’t really owned properties out of state for goodness sake. I think you, Mr. Steve Ballmer, based on your experience, you said I think you have at the aptitude to do that but this particular guy had no real estate operation experience.

So that’s why I was so strongly against it. Now a year and a half later, the person’s like, this is the pain in the butt there’s a reason to why. So the lesson learned is don’t let the tax tail wag the dog. What do you think of that? Those are options.

It sounds like I got to sit down and do some math and decide whether, like maybe you break a leg jumping, but weight heals and you can run from there versus, if there’s some amount of risk to take upfront. I guess another question would be since the proceeds are currently in 10 31 accounts, if I can find 10 31 deals, if I could like for a third or half that money, then I’m only talking about half the amount of capital gains that I have to pay taxes on.

And going back to the analogy, this is you’re 40 feet up in the air. Let’s just throw 20 feet of pillows in there 10 feet of pillows. It’s better than nothing.

So I could be a little bit of a distressed buyer and a little bit of a smart investor. And then next time I roll things over try to be smart about how I do that.

Or you just get out of that stuff all freaking together, right?

I guess the question is how much pillows to throw under versus how much pain to take now?

If you want take a blended approach, maybe you try and go into a few hundred thousand dollars of syndicated deals and you get like a couple of hundred grand of passive activity losses there.

Maybe you do a 1031 but do 1031 to a smaller property and maybe you do some opportunities zone and some distress stuff. If it were me, I would do the land conservation easements, take the gamble there, the tax gamble on the audit, and also try and do as much syndications as possible.

That makes sense. Plus I love running around outside so land conservation easement sounds like something that would support that community.

There you go. It can feed the ducks. Of course I will say this is recorded in 2021. There’s a lot of scrutiny around this. There are some simple types of arrangements where they’re supposedly less audits, but, we go into this very in detail with my mastermind people along with the right people to work with, which is the most important thing.

If somebody is just listening to this on the YouTube channel and not paying anything. That’s where the danger comes in when you’re just blindly start to jump into these types of things. Maybe here’s what I would do a little bit about your situations Steve.

What I would do is try and go into a few deals, before the end of the year, try and put, maybe you get a couple of hundred thousand dollars of passive losses. And then if you find a good property and the next is your 45 day period over?

No, I’ve got about 20 more days.

You’re screwed man.

Let’s just say you find something or maybe you find something and you’re like, dang it, like this thing sucks, but whatever. I’d rather go onto a crappy investment that paid the government, which some people believe, believe maybe you shelter a little bit there and maybe you throw in 50 grand into a land conservation easement to get that 5X multiplier to get $250,000 of losses and you break it up a third.

Or worst comes to worst maybe you don’t get that property in the middle and you don’t do a 10 31 exchange and you just suck it up 50% on $300,000, $150,000 tax bill. It’s not the end of the world right. That’s how I would do it.

I think I’m seeing a lot of the mom and pop mistakes, come out here.

I will just discuss, people say, oh, can you 10 31 into a syndication? The lawyers will always say, yeah, you can, but they’ll never give you the details of the details as you can go into a deal with what’s called a tenant in common, but it’s nobody does it because it’s super complicated and it’s a real pain in the butt.

No syndicator in their right mind, who is not desperate for money will let you end for less than like a million or 2 million bucks.

Okay, that’s interesting because, my real estate agent that I’ve worked with is setting up a fund and he’s accepting tenant in common to partner alongside the fund. Just the fact that he’s accepting tenant in common, like a little bit of a red flag.

How many deals have he done? What’s this track record with his experience?

He’s been in real estate for about the last 10 years.

That doesn’t mean anything, right?

I know of two or three other large properties that he’s acquired and one that he’s closed. As far as I know, this is one of his larger renovation deals and he’s also offering this on a less of a renovation, more of just buying below market deal in a fly over state.

It’s a wild plan with a really good dumb money investor such as yourself. Let’s just say it’s a good deal, right? I’m actually looking at a 10 unit and Ballard right now. That actually is a good deal.

You found a unit in Ballard that’s a good deal?

Yeah. 10 unit, because Seattle is actually a little distressed at the moment right now.

Let’s just say it is a good deal and you make a bunch of money, but you’re going to be in the same dang predicament when you sell and this is where it’s stop doing the crazy chain. Get off of the stuff. You say you want to move to the more passive thing anyway. And like all these BRRRRs and flips, it’s all ordinary income.

You want to get away from that stuff. That’s like going out partying at 2:00 AM in the morning, every Friday and Saturday you want to get away from that stuff. It’s tiring. It’s not tax efficient.

That’s exactly why I’m looking to get into syndications. I was tired. Being liable for loans and insurance, especially when the property manager sometimes didn’t pay taxes or the post-service slowed down.

And so the property manager that was still using mail and not direct deposit was late to the bank. So yeah, I would love to get into some of these indications exactly. Because I’m looking to be passive. Yeah. Yeah. But I guess to round out this example, Steve is there any, did that kind of capture everything for you?

Just play at all scenarios or anything you’ll want talk through on this tender day? Yeah, I think I’ve been looking for someone to give me a straight answer about how difficult this is going to be to deal with the tax situation and. Cause the, the real estate agent that I was talking to is oh, just 10 31 it and the 10 31, guy’s just send me the property replacement properties.

Here’s some ideas. Yeah. And this is why I fight so hard for you guys. Cause it’s like sophisticated investors don’t do that type of stuff. The people that do the 10 31 exchanges to me are like the really dumb money that like trust fund kids who like inherited. All this money, which I know in your case is not the case.

You actually did a good value to the property and it went up in the right place. But like normally it’s like big families that they pass down a 40 unit or, big assets to their kids paid all paid off. And so I guess the closing question is because my real estate experience has just been through this one agent pretty much he’s.

The deals he’s found in the past have doubled twice over the past 10 years. So I’ve made plenty of money with him. And I’ve got one friend who’s also in real estate. I just don’t have much of a network. I found you because I was two, three weeks ago. And all of a sudden I had money in a forty-five days to do something with it.

I started going through podcasts and you were in interviewed on one of those podcasts. How do you build that out? So do you find deal for, what do I do you make a podcast and started in 2016 where you helped people to get turnkeys? And people think you’re a legit person and they attract them and you have two or three calls with guys like yourself every day, but that’s not practical advice because every makes so podcasts these days.

And it becomes very disingenuous. I think. But I, the only advice I have is don’t go to the local REIA and I know where you’re at, Steve, all these ones are just for broke. Guys are flipping a house, flippers and sharks and wholesalers. It’s not your crowd. It’s not the million-dollar accredited investor.

It’s not the guy for the guys making over 80 grand a year. I was in this case back in 2012 and I felt super out of place. And that’s why I went to out of state turnkeys back in 2012. Yeah. 2012. And it’s, I think this is a point where you got to play the pay to play and this is where, like in 2015, I’ve had 11 rentals and I didn’t start to get into the big stuff.

And so I started to get into these higher level groups and often you have to pay or travel to go and find these other pure passive accredited investors. But sorry for the, I’m not really giving you any advice here, right? Maybe the only other thing is some people say we’ll go to places where rich people hang.

Like the country club or the cigar room, but unfortunately, a lot of those people are just like high paid, like corporate guys or trust fund kids, second generation, third generation wealth, who just invest a little bit differently than folks like you and me who are the people that made their first million dollar in their family.

I guess closing question then is going through your website. There’s lots of, it seems like there’s lots of. Opportunities and educational offerings and meetup things. What’s the difference between a mastermind and a mastermind family office. And it seems like you mentioned potentially doing something, in Portland.

What are those the same? Are they different? I’m a little confused about what all of the networking opportunities related to simple passive cashflow. Yeah, good question. And it’s changed over the years and then probably haven’t updated the website at all. But first, when I first started to do this thing back in two weeks, it doesn’t like 16.

Like it was cool just to meet investors, but then simple passive castle became a thing. We have over 600 investors that have actually thrown in at least 50, a hundred grand into deals thus far. And it has been a huge target on our backs that we are a legit investor group with people would love to infiltrate the group and we’ve had people in the past.

So all the little fun, free things that happy hours, I’ve cut that out. And at this point it’s only people that have invested in past deals. Or in the family office mastermind group. So you got to put up some money to invest, to be in the invited in a way, because I protect the identity and privacy of my group and the members for their own purpose.

And I don’t want a bunch of douchebags coming in and just reading email addresses and phone numbers. I’ll be honest. Cool. I am sure everyone appreciates that. We’ll have to follow up on how to get it. Yeah. But that’s why we do these calls, to get to know each other, build relationships and just see what I can do to help out and see where you’re at and see if you’re a good fit.

Like I kinda ch I see my role as being just that good Stewart that the gatekeepers. Bringing in the right people filtering the right people, especially for mindset, right? There’s some people that are super cheap out there that are just a little weird and they just don’t give back to others and they don’t, they’re not just good community members.

Maybe they’ll get there at some point, but, Yeah. That’s what I wanted, because we joke and laugh about this in all our calls. Our mastermind group calls is who the heck do we talk about this stuff? Our parents still do it. Our coworkers think, we can’t tell our coworkers that we’re gonna pull 50 grand from her 401k, friends and family.

Like I don’t talk to this stuff about my friends either. I’ve always joked that I’ve said Thanksgiving is one of the loneliest times because everybody thinks that like a real estate agent or they just don’t understand. Nobody understands me, but you guys understand me and, figuring out these little hacks for financial freedom, but tax the legal, infinite banking, that’s where it gets all pulled together.

Yeah. It’s like a club for financial fanatics, but yeah. I think that addresses most of the curiosity I had at the start of the call I appreciate the honest feedback. Yeah. And I think thanks for breaking down the 10 31 exchange thing, because I think this is a good call where we finally talk all options. This is a very common question that comes up.

Cool. I appreciate your time.